SECURITIES AND EXCHANGE COMMISSION





Washington, D.C. 20549





FORM 10 - Q


(Mark
      One)


[X]
            QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
                THESECURITIES EXCHANGE ACT OF 1934For the quarterly period ended November 3, 2007OR[
                ]
            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
                THESECURITIES EXCHANGE ACT OF 1934





For the transition period from ______ to _______.





Commission file number 1-13740





BORDERS
      GROUP, INC.


(Exact
      name of registrant as specified in its charter)





MICHIGAN
            
            38-3294588(State
                or other jurisdiction of
            
            (I.R.S.
                Employerincorporation
                or organization)
            
            Identification
                No.)





100
      Phoenix Drive, Ann Arbor, Michigan 48108


(Address
      of principal executive offices)


(zip
      code)





(734)
      477-1100


(Registrant's
      telephone number, including area code)







Indicate
      by “X” 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  ̈




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):




Large
      accelerated filer x Accelerated
      filer  ̈ Non-accelerated
      filer  ̈




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Act).    Yes  ̈ No x





The
      number of shares of common stock outstanding at November 29, 2007 was
      58,751,655.











i


**BORDERS
      GROUP, INC.**





**INDEX**


Part
                I - Financial Information**Page**Item
                1. Financial Statements
            1Item
                2. Management's Discussion and Analysis ofFinancial Condition and Results ofOperations
            11Item
                3. Quantitative and Qualitative Disclosures aboutMarket Risk
            26Item
                4. Controls and Procedures
            26Part
                II - Other informationItem
                1.   Legal Proceedings
            26Item
                1ARisk Factors
            27Item
                2. Unregistered Sales of Equity Securities and Use ofProceeds
            27Item
                3. Defaults Upon Senior Securities
            N/AItem
                4. Submission of Matters to a Vote ofSecurityholders
            N/AItem
                5. Other Information
            N/AItem
                6. Exhibits
            27Signatures
            28








**BORDERS
      GROUP, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


**(dollars
      in millions except per share data)**


**(UNAUDITED)**





**13****Weeks
                Ended****November
                3,****2007**
            
            **October
                28,****2006**Sales
            
            $
            805.2
            
            $
            764.6Other
                revenue
            
            
            8.4
            
            
            6.4Total revenue
            
            
            813.6
            
            
            771.0Cost
                of merchandise sold, including occupancy costs
            
            
            637.4
            
            
            597.7Gross margin
            
            
            176.2
            
            
            173.3Selling,
                general and administrative expenses
            
            
            229.4
            
            
            217.1Pre-opening
                expense
            
            
            1.6
            
            
            3.3Asset
                impairments and other writedowns
            
            
            1.4
            
            
            0.9Operating loss
            
            
            (56.2
            )
            
            (48.0
            )Interest
                expense
            
            
            12.3
            
            
            8.8Loss before income tax
            
            
            (68.5
            )
            
            (56.8
            )Income
                tax benefit
            
            
            (26.8
            )
            
            (22.4
            )Loss from continuing operations
            
            
            (41.7
            )
            
            (34.4
            )Loss
                from operations of discontinued operations (net of income tax benefit
                of
                $1.4 and $2.7)
            
            
            (2.9
            )
            
            (4.7
            )Loss
                from disposal of discontinued operations (net of income tax benefit
                of
                $4.8 and $0.0)
            
            
            (116.5
            )
            
            -Loss from discontinued operations (net of tax)
            
            
            (119.4
            )
            
            (4.7
            )Net loss
            
            $
            (161.1
            )
            $
            (39.1
            )Loss
                per common share data*Diluted:*Loss from continuing operations per common share
            
            $
            (0.71
            )
            $
            (0.56
            )Loss from discontinued operations per common share
            
            $
            (2.03
            )
            $
            (0.08
            )Net loss per common share
            
            $
            (2.74
            )
            $
            (0.64
            )Weighted average common shares outstanding (in millions)
            
            
            58.8
            
            
            60.9*Basic:*Loss from continuing operations per common share
            
            $
            (0.71
            )
            $
            (0.56
            )Loss from discontinued operations per common share
            
            $
            (2.03
            )
            $
            (0.08
            )Net loss per common share
            
            $
            (2.74
            )
            $
            (0.64
            )Weighted average common shares outstanding (in millions)
            
            
            58.8
            
            
            60.9Dividends
                declared per common share
            
            $
            0.11
            
            $
            0.10








See
      accompanying Notes to Unaudited Condensed Consolidated Financial
      Statements.








**BORDERS
      GROUP, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


**(dollars
      in millions except per share data)**


**(UNAUDITED)**





**39****Weeks
                Ended****November
                3,****2007**
            
            **October
                28,****2006**Sales
            
            $
            2,450.2
            
            $
            2,329.2Other
                revenue
            
            
            23.6
            
            
            20.4Total revenue
            
            
            2,473.8
            
            
            2,349.6Cost
                of merchandise sold, including occupancy costs
            
            
            1,899.5
            
            
            1,785.5Gross margin
            
            
            574.3
            
            
            564.1Selling,
                general and administrative expenses
            
            
            685.5
            
            
            628.9Pre-opening
                expense
            
            
            4.6
            
            
            7.0Asset
                impairments and other writedowns
            
            
            2.7
            
            
            3.5Operating loss
            
            
            (118.5
            )
            
            (75.3
            )Interest
                expense
            
            
            32.5
            
            
            21.0Loss before income tax
            
            
            (151.0
            )
            
            (96.3
            )Income
                tax benefit
            
            
            (60.8
            )
            
            (38.5
            )Loss from continuing operations
            
            
            (90.2
            )
            
            (57.8
            )Loss
                from operations of discontinued operations (net of income tax benefit
                of
                $6.1 and $11.1)
            
            
            (13.2
            )
            
            (19.9
            )Loss
                from disposal of discontinued operations (net of income tax benefit
                of
                $5.8 and $0.0
            
            
            (118.7
            )
            
            -Loss from discontinued operations (net of tax)
            
            
            (131.9
            )
            
            (19.9
            )Net loss
            
            $
            (222.1
            )
            $
            (77.7
            )Loss
                per common share data*Diluted:*Loss from continuing operations per common share
            
            $
            (1.54
            )
            $
            (0.92
            )Loss from discontinued operations per common share
            
            $
            (2.24
            )
            $
            (0.31
            )Net loss per common share
            
            $
            (3.78
            )
            $
            (1.23
            )Weighted average common shares outstanding (in millions)
            
            
            58.7
            
            
            63.0*Basic:*Loss from continuing operations per common share
            
            $
            (1.54
            )
            $
            (0.92
            )Loss from discontinued operations per common share
            
            $
            (2.24
            )
            $
            (0.31
            )Net loss per common share
            
            $
            (3.78
            )
            $
            (1.23
            )Weighted average common shares outstanding (in millions)
            
            
            58.7
            
            
            63.0Dividends
                declared per common share
            
            $
            0.33
            
            $
            0.30








See
      accompanying Notes to Unaudited Condensed Consolidated Financial
      Statements.





**BORDERS
      GROUP, INC.**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


**(dollars
      in millions except per share data)**


**(UNAUDITED)**








**November
                3,**
              **2007**
            
            **October
                28,**
              **2006**
            
            **February
                3,**
              **2007****Assets**Current
                assets:Cash and cash equivalents
            
            $
            65.5
            
            $
            37.6
            
            $
            108.6Merchandise inventories
            
            
            1,650.0
            
            
            1,596.5
            
            
            1,347.3Accounts receivable and other current assets
            
            
            108.2
            
            
            122.4
            
            
            128.7Taxes, including income taxes
            
            
            15.5
            
            
            -
            
            
            -Current assets of discontinued operations
            
            
            -
            
            
            162.1
            
            
            139.0Total current assets
            
            
            1,839.2
            
            
            1,918.6
            
            
            1,723.6Property
                and equipment, net of accumulated depreciation of
              $1,079.9, $973.9 and $1,061.7 at November 3, 2007,
              October 28, 2006 and February 3, 2007, respectively
            
            
            650.7
            
            
            636.5
            
            
            604.2Other assets
            
            
            66.5
            
            
            64.2
            
            
            65.1Deferred income taxes
            
            
            65.9
            
            
            29.0
            
            
            53.7Goodwill
            
            
            40.3
            
            
            40.3
            
            
            40.3Noncurrent assets of discontinued operations
            
            
            -
            
            
            242.5
            
            
            126.5Total assets
            
            $
            2,662.6
            
            $
            2,931.1
            
            $
            2,613.4**Liabilities,
                Minority Interest and Stockholders’ Equity**Current
                liabilities:Short-term borrowings and current portion of long-term
                debt
            
            $
            793.2
            
            $
            572.8
            
            $
            502.0Trade accounts payable
            
            
            812.7
            
            
            838.7
            
            
            592.0Accrued payroll and other liabilities
            
            
            274.7
            
            
            231.7
            
            
            306.9Taxes, including income taxes
            
            
            -
            
            
            0.9
            
            
            61.0Deferred income taxes
            
            
            21.2
            
            
            19.0
            
            
            16.1Current liabilities of discontinued operations
            
            
            -
            
            
            159.9
            
            
            117.9Total current liabilities
            
            
            1,901.8
            
            
            1,823.0
            
            
            1,595.9Long-term debt
            
            
            5.3
            
            
            5.3
            
            
            5.2Other long-term liabilities
            
            
            340.3
            
            
            312.7
            
            
            313.2Noncurrent liabilities of discontinued operations
            
            
            -
            
            
            50.3
            
            
            55.1Total liabilities
            
            
            2,247.4
            
            
            2,191.3
            
            
            1,969.4Minority interest
            
            
            2.2
            
            
            1.4
            
            
            2.0Total liabilities and minority interest
            
            
            2,249.6
            
            
            2,192.7
            
            
            1,971.4Stockholders'
                equity:Common
                stock; 300,000,000 shares authorized;58,751,761, 59,383,890 and 58,476,306 shares issuedand outstanding at November 3, 2007, October 28, 2006 andFebruary 3, 2007, respectively
            
            
            182.1
            
            
            195.3
            
            
            175.5Accumulated other comprehensive income
            
            
            38.6
            
            
            25.1
            
            
            28.5Retained earnings
            
            
            192.3
            
            
            518.0
            
            
            438.0Total stockholders' equity
            
            
            413.0
            
            
            738.4
            
            
            642.0Total liabilities, minority interest and stockholders'
                equity
            
            $
            2,662.6
            
            $
            2,931.1
            
            $
            2,613.4








See
      accompanying Notes to Unaudited Condensed Consolidated Financial
      Statements.








**BORDERS
      GROUP, INC.**


**CONDENSED
      CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY**


**FOR
      THE 39 WEEKS ENDED NOVEMBER 3, 2007**


**(dollars
      in millions except share amounts)**


**(UNAUDITED)**








**Common
                Stock**
            
            **Accumulated**
              **Other**
              **Comprehensive**
            
            **Retained****Shares**
            
            **Amount**
            
            **Income**
            
            **Earnings**
            
            **Total**Balance
                at February 3, 2007
            
            
            58,476,306
            
            $
            175.5
            
            $
            28.5
            
            $
            438.0
            
            $
            642.0Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            (222.1
            )
            
            (222.1
            )Discontinued
                operations currency translation writeoff
            
            
            -
            
            
            -
            
            
            4.1
            
            
            -
            
            
            4.1Currency
                translation adjustment
            
            
            -
            
            
            -
            
            
            6.0
            
            
            -
            
            
            6.0Comprehensive
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (212.0
            )Adoption
                of FIN 48
            
            
            -
            
            
            -
            
            
            -
            
            
            (4.2
            )
            
            (4.2
            )Cash
                dividends declared ($0.33 per
              common
                share)
            
            
            -
            
            
            -
            
            
            -
            
            
            (19.4
            )
            
            (19.4
            )Issuance
                of common stock
            
            
            275,455
            
            
            6.5
            
            
            -
            
            
            -
            
            
            6.5Tax
                benefit of equity compensation
            
            
            -
            
            
            0.1
            
            
            -
            
            
            -
            
            
            0.1Balance
                at November 3, 2007
            
            
            58,751,761
            
            $
            182.1
            
            $
            38.6
            
            $
            192.3
            
            $
            413.0











See
      accompanying Notes to Unaudited Condensed Consolidated Financial
      Statements.








**BORDERS
      GROUP, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(dollars
      in millions)**


**(UNAUDITED)**





**39
                Weeks Ended****November
                3,**
              **2007**
            
            **October
                28,**
              **2006**Cash
                provided by (used for):Net loss
            
            $
            (222.1
            )
            $
            (77.7
            )Loss from discontinued operations (net of tax)
            
            
            (131.9
            )
            
            (19.9
            )Loss from continuing operations (net of tax)
            
            
            (90.2
            )
            
            (57.8
            )OperationsAdjustments to reconcile loss from continuing operations to
              operating cash flows:Depreciation
            
            
            78.6
            
            
            83.5Gain on sale of investments
            
            
            -
            
            
            (5.0
            )Loss on disposal of assets
            
            
            3.3
            
            
            4.7Increase in deferred income taxes
            
            
            (2.5
            )
            
            (1.9
            )Increase in other long-term assets
            
            
            (1.0
            )
            
            (0.7
            )Increase in other long-term liabilities
            
            
            (0.1
            )
            
            16.4Cash provided by (used for) current assets and current
                liabilities:Increase in merchandise inventories
            
            
            (290.5
            )
            
            (284.8
            )Decrease in accounts receivable
            
            
            21.2
            
            
            7.9Increase in prepaid expenses
            
            
            (2.7
            )
            
            (0.6
            )Increase in trade accounts payable
            
            
            216.0
            
            
            219.7Decrease in taxes payable
            
            
            (64.1
            )
            
            (130.0
            )Decrease in expenses payable and accrued liabilities
            
            
            (33.5
            )
            
            (41.5
            )Net cash used for operations of continuing operations
            
            
            (165.5
            )
            
            (190.1
            )InvestingCapital expenditures
            
            
            (114.7
            )
            
            (130.7
            )Proceeds from the sale of discontinued operations
            
            
            20.4
            
            
            -Proceeds from sale of investments
            
            
            -
            
            
            21.6Net cash used for investing activities of continuing
                operations
            
            
            (94.3
            )
            
            (109.1
            )FinancingProceeds from the excess tax benefit of stock option
                exercises
            
            
            0.1
            
            
            3.2Repayment of long-term debt
            
            
            (0.2
            )
            
            (0.2
            )Net funding from credit facility
            
            
            288.2
            
            
            380.2Issuance of common stock
            
            
            6.5
            
            
            21.9Payment of cash dividends
            
            
            (19.4
            )
            
            (18.8
            )Repurchase of common stock
            
            
            -
            
            
            (123.7
            )Net cash provided by financing activities of continuing
                operations
            
            
            275.2
            
            
            262.6Effect
                of exchange rates on cash and equivalents of continuing
                operations
            
            
            0.2
            
            
            (0.3
            )Net
                cash used for operating activities of discontinued operations
            
            
            (14.1
            )
            
            (5.2
            )Net
                cash used for investing activities of discontinued operations
            
            
            (4.4
            )
            
            (18.4
            )Net
                cash provided by (used for) financing activities of discontinued
                operations
            
            
            (41.9
            )
            
            25.4Effect
                of exchange rates on cash and equivalents of discontinued
                operations
            
            
            1.7
            
            
            -Net
                cash used in discontinued operations
            
            
            (58.7
            )
            
            1.8Net
                decrease in cash and equivalents
            
            
            (43.1
            )
            
            (35.1
            )Cash
                and equivalents at beginning of year
            
            
            108.6
            
            
            72.7Cash
                and equivalents at end of period
            
            $
            65.5
            
            $
            37.6








See
      accompanying Notes to Unaudited Condensed Consolidated Financial
      Statements.












**BORDERS
      GROUP, INC.**


**NOTES
      TO UNAUDITED CONDENSED**


**CONSOLIDATED
      FINANCIAL STATEMENTS**


**(Dollars
      in millions except per 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, included in its Annual Report on Form
      10-K for the fiscal year ended February 3, 2007.





The
      Company’s fiscal year ends on the Saturday closest to the last day of January.
      Fiscal 2007 will consist of 52 weeks, and will end on February 2, 2008.
      References herein to years are to the Company’s fiscal years.





At
      November 3, 2007, the Company operated 538 superstores under the Borders name,
      including 510 in the United States, 20 in Australia, four in New Zealand, three
      in Puerto Rico, and one in Singapore. The Company also operated 521 mall-based
      and other bookstores, including stores operated under the Waldenbooks, Borders
      Express and Borders Outlet names, as well as Borders-branded airport stores. In
      addition, the Company owned and operated United Kingdom-based Paperchase
      Products Limited (“Paperchase”), a designer and retailer of stationery, cards
      and gifts. As of November 3, 2007, Paperchase operated 110 stores, primarily
      in
      the United Kingdom, and Paperchase shops have been added to approximately 320
      domestic Borders superstores.





Until
      September 21, 2007, the Company owned and operated bookstores in the U.K. and
      Ireland. On September 21, 2007, the Company sold these bookstores. See “Note 6 -
      Discontinued Operations” for further discussion of the Company’s disposal of the
      U.K. and Ireland bookstore operations. The amounts disclosed in these Notes
      exclude the amounts related to discontinued operations unless otherwise
      noted.





**NOTE
      2 - COMMITMENTS AND CONTINGENCIES**





*Litigation:* Two
      former employees, individually and on behalf of a purported class consisting
      of
      all current and former employees who work or worked as Inventory Managers or
      Sales Managers in Borders stores in the State of California at any time from
      September 30, 2001 through the trial date, have filed an action against the
      Company in the Superior Court of California for the County of San Francisco.
      The
      Complaint alleges, among other things, that the individual plaintiffs and the
      purported class members were improperly classified as exempt employees and
      that
      the Company violated the California Labor Code and the California Business
      and
      Professions Code by failing to (i) pay required overtime, (ii) provide meal
      periods, rest periods, and accurate itemized wage statements, (iii) keep
      accurate records of employees’ hours of work, and (iv) pay all compensation owed
      at the time of termination of employment to certain members of the purported
      class. The relief sought includes damages, restitution, penalties, injunctive
      relief, interest, costs, and attorneys’ fees and such other relief as the court
      deems proper. In November of 2007, the Superior Court for the State of
      California granted preliminary approval of a settlement pursuant to which the
      Company will pay $3.5 to settle the matter. The Company recorded this charge
      in
      the second quarter of 2007, and categorized this charge as “Selling, general and
      administrative expenses” on its consolidated statements of
      operations. ****





On
      October 29, 2002, Gary Gerlinger, individually and on behalf of all other
      similarly situated consumers in the United States who, during the period from
      August 1, 2001 to the present, purchased books online from either Amazon.com,
      Inc. (“Amazon”) or the Company, instituted an action against the Company and
      Amazon in the United States District Court for the Northern District of
      California. The Complaint alleges that the agreement pursuant to which an
      affiliate of Amazon operates Borders.com as a co-branded site (the “Mirror
      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 obtained by allegedly wrongful
      acts, interest and declaratory relief. On November 1, 2005, the Court granted
      the Company’s Motion to Dismiss all of the remaining claims of the plaintiff.
      The anti-trust claims were dismissed with prejudice, and the unfair competition
      claims were dismissed without prejudice. The plaintiff has appealed the
      decision. The appeal was argued in the Ninth Circuit Court of Appeals on
      November 8, 2007; the Court took it under submission and a decision is










**BORDERS
      GROUP, INC.**


**NOTES
      TO UNAUDITED CONDENSED**


**CONSOLIDATED
      FINANCIAL STATEMENTS**


**(Dollars
      in millions except per share data)**





expected
      within the next few months. The Company has not included any liability in its
      consolidated financial statements in connection with this matter and has
      expensed as incurred all legal costs to date.





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
      and Amazon have been named as defendants in actions filed by a private litigant
      on behalf of the state of Illinois under the state’s False Claims Act relating
      to the failure to collect use taxes on Internet sales in Illinois for periods both
      before and after the implementation of the Web Site Agreement. The Complaints
      seek judgments, jointly and severally, against the defendants for, among other
      things, injunctive relief, treble the amount of damages suffered by the state
      of
      Illinois as a result of the alleged violations of the defendants, penalties,
      costs and expenses, including legal fees. Similar actions previously filed
      against the Company in Tennessee and Nevada have been dismissed.





Although
      an adverse resolution of any of the matters described above could have a
      material adverse effect on the results of the operations of the Company for the
      applicable period or periods, the Company does not believe that these matters
      will have a material 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.





**NOTE
      3 - FINANCING**





*Credit
      Facility:* The
      Company has a Multicurrency Revolving Credit Agreement (the “Credit Agreement”),
      which was amended as of August 28, 2007, and which will expire in July 2011.
      The
      Credit Agreement provides for borrowings of up to $1,125.0 secured by eligible
      inventory and accounts receivable and related assets. Borrowings under the
      Credit Agreement are limited to a specified percentage of eligible inventories
      and accounts receivable and bear interest at a variable base rate plus the
      applicable increment or LIBOR plus the applicable increment at the Company’s
      option. The Credit Agreement (i) includes a fixed charge coverage ratio
      requirement of 1.1 to 1 that is applicable only if outstanding borrowings under
      the facility exceed 90% of permitted borrowings thereunder, (ii) contains
      covenants that limit, among other things, the Company’s ability to incur
      indebtedness, grant liens, make investments, consolidate or merge or dispose
      of
      assets, (iii) prohibits dividend payments and share repurchases that would
      result in borrowings under the facility exceeding 90% of permitted borrowings
      thereunder, and (iv) contains default provisions that are typical for this
      type
      of financing, including a cross default provision relating to other indebtedness
      of more than $25.0. As of November 3, 2007 the Company was in compliance with
      all covenants contained within this agreement. The Company had borrowings
      outstanding under the Credit Agreement (or a prior agreement) of $790.7, $569.2
      and $499.1 at November 3, 2007, October 28, 2006 and February 3, 2007,
      respectively, excluding any borrowings outstanding related to the Company’s
      recently disposed U.K. and Ireland bookstore operations. The U.K. and Ireland
      bookstore operations had borrowings outstanding of $51.1 and $40.5 at October
      28, 2006 and February 3, 2007, respectively. See “Note 6 - Discontinued
      Operations” for further discussion of the Company’s disposal of the U.K. and
      Ireland bookstore operations.





*Debt
      of Consolidated VIEs:* At
      November 3, 2007, the Company is the primary beneficiary of two variable
      interest entities (“VIEs”), due to the Company’s guarantee of the debt of these
      entities. As a result, the Company consolidates these VIEs and has recorded
      property and equipment, net of accumulated depreciation, of $5.0, long-term
      debt
      (including current portion) of $5.3 and minority interest of $0.3 at November
      3,
      2007.





As
      of
      November 3, 2007 the Company was in compliance with its debt covenants. The
      Company currently does not meet the Credit Agreement’s fixed charge coverage
      ratio requirement; however, borrowings under the Credit Agreement have not
      exceeded 90% of permitted borrowings. The August 28, 2007 amendment, subject
      to
      certain conditions, allows for the sale of the majority of the Company’s
      International segment and permits term loan financing should the Company
      determine at a future point to seek such financing. This amendment is intended
      to provide flexibility to the Company in executing its strategic plan and to
      maintain the Company’s compliance with the covenants of the Credit Agreement.











**BORDERS
      GROUP, INC.**


**NOTES
      TO UNAUDITED CONDENSED**


**CONSOLIDATED
      FINANCIAL STATEMENTS**


**(dollars
      in millions except per share data)**





**NOTE
      4 - INCOME TAXES**





The
      Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes -- an Interpretation of FASB Statement No. 109” (FIN 48), as
      amended, as of the beginning of the current fiscal year. Upon adoption, the
      Company recognized an additional $4.2 liability for unrecognized tax positions,
      which was accounted for as a reduction to beginning retained earnings. As of
      the
      beginning of the year, total unrecognized tax positions from continuing
      operations, including interest and penalties and adjusted for the impact of
      the
      adoption of FIN 48, totaled $13.8. As of November 3, 2007, this balance
      increased to $16.7. The increase in the liability for income taxes associated
      with uncertain tax positions of $2.9 relates to the income tax treatment of
      certain foreign transactions. This increase was partially offset by the
      favorable impact of statute expirations. These balances represent the total
      amount of unrecognized tax positions that, if recognized, would favorably affect
      the effective tax rate.





The
      Company recognizes interest and penalties related to uncertain tax positions
      in
      its income tax provision. The adoption of FIN 48 also resulted in the
      reclassification of $7.2 from current taxes payable to non-current accrued
      liabilities, based upon management’s estimate of when these liabilities will be
      settled.





It
      is
      reasonably possible that the liability associated with our unrecognized tax
      positions will increase or decrease within the next twelve months. These changes
      may be the result of ongoing audits or the expiration of statutes of
      limitations. An estimate of the range of the reasonably possibly outcomes cannot
      be made at this time.





A
      number
      of the Company's tax returns remain subject to examination by taxing
      authorities. These include federal tax returns for 200 4 through
      2006, tax returns in certain states for 1996 through 2006, and tax returns
      in
      certain foreign jurisdictions for 1999 through 2006.
























**BORDERS
      GROUP, INC.**


**NOTES
      TO UNAUDITED CONDENSED**


**CONSOLIDATED
      FINANCIAL STATEMENTS**


**(dollars
      in millions except per share data)**





**NOTE
      5- SEGMENT INFORMATION**





The
      Company is organized based upon the following operating segments: domestic
      Borders stores, Waldenbooks Specialty Retail stores (“Waldenbooks”),
      International stores (including Borders and Paperchase stores), and Corporate
      (consisting of certain corporate governance costs and incentive costs). 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 cash flow generated or absorbed by those segments.
      The
      Company evaluates the performance of its segments and allocates resources to
      them based on anticipated future contribution.








**13
                Weeks Ended**
            
            **39
                Weeks Ended********November
                3,**
              **2007**
            
            ******October
                28,**
              **2006**
            
            ******November
                3,**
              **2007**
            
            ******October
                28,**
              **2006**SalesBorders
            
            $
            615.8
            
            $
            583.2
            
            $
            1,889.4
            
            $
            1,789.7Waldenbooks
            
            
            109.7
            
            
            123.8
            
            
            334.5
            
            
            377.5International
            
            
            79.7
            
            
            57.6
            
            
            226.3
            
            
            162.0Total
                sales
            
            $
            805.2
            
            $
            764.6
            
            $
            2,450.2
            
            $
            2,329.2Operating
                lossBorders
            
            $
            (31.9
            )
            $
            (18.5
            )
            $
            (56.8
            )
            $
            (6.0
            )Waldenbooks
            
            
            (20.5
            )
            
            (23.5
            )
            
            (46.9
            )
            
            (52.1
            )International
            
            
            (1.1
            )
            
            (3.4
            )
            
            (3.8
            )
            
            (7.0
            )Corporate
            
            
            (2.7
            )
            
            (2.6
            )
            
            (11.0
            )
            
            (10.2
            )Total
                operating loss
            
            $
            (56.2
            )
            $
            (48.0
            )
            $
            (118.5
            )
            $
            (75.3
            )Total
                assetsBorders
            
            
            
            $
            1,886.5
            
            $
            1,816.8Waldenbooks
            
            
            
            
            365.3
            
            
            428.3International
            
            
            
            
            272.6
            
            
            162.2Corporate
            
            
            
            
            138.2
            
            
            119.2Total
                assets of continuing operations
            
            
            
            $
            2,662.6
            
            $
            2,526.5Discontinued operations
            
            
            
            
            -
            
            
            404.6Total
                assets
            
            
            
            $
            2,662.6
            
            $
            2,931.1





Total
      assets for the Corporate segment include certain corporate headquarters asset
      balances, which have not been allocated to the other segments; however,
      depreciation expense associated with such assets has been allocated to the
      other
      segments as follows:





**13
                Weeks Ended**
            
            **39
                Weeks Ended********November
                3,**
              **2007**
            
            ******October
                28,**
              **2006**
            
            ******November
                3,**
              **2007**
            
            ******October
                28,**
              **2006**Borders
            
            $
            2.8
            
            $
            3.3
            
            $
            8.3
            
            $
            9.6Waldenbooks
            
            
            0.4
            
            
            1.6
            
            
            0.4
            
            
            4.6International
            
            
            -
            
            
            0.1
            
            
            -
            
            
            0.2Total
            
            $
            3.2
            
            $
            5.0
            
            $
            8.7
            
            $
            14.4








**BORDERS
      GROUP, INC.**


**NOTES
      TO UNAUDITED CONDENSED**


**CONSOLIDATED
      FINANCIAL STATEMENTS**


**(dollars
      in millions except per share data)**





**NOTE
      6- DISCONTINUED OPERATIONS**





On
      September 21, 2007, the Company sold its U.K. and Ireland bookstore operations
      to Bookshop Acquisitions Ltd., a corporation formed by Risk Capital Partners,
      a
      private equity firm in the United Kingdom. The consideration for the sale was:
      (i) cash of $20.4; (ii) the potential for up to an additional $20.4 of
      contingent deferred consideration, which will be payable in whole or in part
      only if specified sales levels are achieved by the U.K. and Ireland bookstore
      operations in future years; (iii) a
      19.9%
      equity interest in Bookshop
      Acquisitions Ltd .,
      which
      is expected to be diluted to approximately seventeen percent (17%) ;
      and
      (iv) 7% loan notes of approximately $3.4 which mature in 2017 or sooner upon
      the
      occurrence of certain events.





The
      sale
      agreement included all 41 Borders superstores located in the U.K. and the
      Borders superstore in Ireland, as well as all 28 Books etc. stores. All assets
      and liabilities, with the exception of outstanding lease guarantees relating
      to
      four stores, remained with the entities sold, which are now owned by Risk
      Capital Partners. The maximum potential liability under these lease guarantees
      is approximately $199.2, and the Company has recorded a contingent liability
      of
      approximately $6.1 based upon the likelihood that the Company will be required
      to perform under the guarantees. The Company did not guarantee the remaining
      leases of the U.K. and Ireland operations. Also under the terms of the sale
      agreement, the Company indemnified the U.K. and Ireland operations from the
      tax
      liability, if any, imposed upon it as a result of the forgiveness of the
      portions of intercompany indebtedness owing from the Company. The maximum
      potential liability is approximately $10.5, and the Company has recorded a
      liability of approximately $4.6 based upon the likelihood that the Company
      will
      be required to perform under the indemnification.





The
      Company did not record any amount related to the contingent deferred
      consideration of $20.4. The Company will record this amount once the realization
      of such amount is resolved beyond a reasonable doubt. The Company has attributed
      only a nominal value to its equity interest in Bookshop Acquisitions Ltd. and
      to
      its 7% loan notes.





The
      disposal resulted in a loss of $116.5 and $118.7 for the 13 and 39 weeks ended
      November 3, 2007, respectively.  The operation of the disposed businesses
      resulted in losses of $2.9 and $13.2 for the 13 and 39 weeks ended November
      3,
      2007, respectively, and losses of $4.7 and $19.9 for the 13 and 39 weeks ended
      October 28, 2006, respectively.





The
      financial results of the U.K. and Ireland operations included in discontinued
      operations were as follows:





**13
                Weeks Ended**
            
            **39
                Weeks Ended********November
                3,**
              **2007**
            
            ******October
                28,**
              **2006**
            
            ******November
                3,**
              **2007**
            
            ******October
                28,**
              **2006**Total
                revenue
            
            $
            49.7
            
            $
            89.4
            
            $
            232.1
            
            $
            244.9Loss
                before income tax
            
            
            (4.3
            )
            
            (7.6
            )
            
            (19.3
            )
            
            (31.0
            )Loss
                from operations of discontinued operations (net of income tax benefit
                of
                $1.4, $2.7, $6.1, and $11.1, respectively)
            
            
            (2.9
            )
            
            (4.7
            )
            
            (13.2
            )
            
            (19.9
            )Loss
                on disposal of discontinued operations (net of income tax benefit
                $4.8,
                $0.0, $5.8, and $0.0, respectively)
            
            
            (116.5
            )
            
            -
            
            
            (118.7
            )
            
            -Loss
                from discontinued operations (net of income tax benefit of $6.2,
                $2.7,
                $11.9, and $11.1, respectively)
            
            
            (119.4
            )
            
            (4.7
            )
            
            (131.9
            )
            
            (19.9
            )





**BORDERS
      GROUP, INC.**


**NOTES
      TO UNAUDITED CONDENSED**


**CONSOLIDATED
      FINANCIAL STATEMENTS**


**(dollars
      in millions except per share data)**








******October
                28,**
              **2006**
            
            **February
                3,**
              **2007**Cash
                and cash equivalents
            
            $
            5.1
            
            $
            11.8Merchandise
                inventories
            
            
            120.4
            
            
            104.7Accounts
                receivable and other current assets
            
            
            36.6
            
            
            22.5Current assets of discontinued operations
            
            $
            162.1
            
            $
            139.0Property
                and equipment (net of accumulated depreciation)
            
            $
            140.1
            
            $
            103.5Goodwill
            
            
            89.6
            
            
            -Other
                assets
            
            
            12.8
            
            
            23.0Noncurrent assets of discontinued operations
            
            $
            242.5
            
            $
            126.5Short-term
                borrowings and current portion of long-term debt
            
            $
            51.1
            
            $
            40.6Accounts
                payable
            
            
            65.8
            
            
            39.4Accrued
                payroll and other liabilities
            
            
            36.3
            
            
            26.2Other
                liabilities
            
            
            6.7
            
            
            11.7Current liabilities of discontinued operations
            
            $
            159.9
            
            $
            117.9Long-term
                liabilities
            
            $
            50.3
            
            $
            55.1Noncurrent liabilities of discontinued operations
            
            $
            50.3
            
            $
            55.1





**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 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 November
      3, 2007, the Company operated 538 superstores under the Borders name, including
      510 in the United States, 20 in Australia, four in New Zealand, three in Puerto
      Rico, and one in Singapore. The Company also operated 521 mall-based and other
      bookstores, including stores operated under the Waldenbooks, Borders Express
      and
      Borders Outlet names, as well as Borders-branded airport stores. In addition,
      the Company owned and operated United Kingdom-based Paperchase Products Limited
      (“Paperchase”), a designer and retailer of stationery, cards and gifts. As of
      November 3, 2007, Paperchase operated 110 stores, primarily in the United
      Kingdom, and Paperchase shops have been added to approximately 320 domestic
      Borders superstores.





On
      March 22, 2007, the Company announced a new strategic plan, which consists
      of the following principal components:





*Grow
      comparable store sales and profitability in the domestic
      Borders*  *superstores.* In
      2007, the Company is focusing on improving key retailing practices at its
      domestic superstores, including increasing effectiveness of merchandise
      presentation, improving assortment planning, replenishment and supply chain
      effectiveness, and ensuring consistency of execution across the chain. The
      Company is also continuing development of a new concept store, which began
      in
      2006 and the first of which is scheduled to open in early 2008. The concept
      store will include the implementation of “destination businesses” within certain
      of the Company’s most popular categories, which will help to distinguish the
      Company’s domestic superstores from competitors. The concept store will also
      include a Seattle’s Best Coffee cafe and a Paperchase shop, which continue to be
      drivers of both sales and increased profitability for their categories. In
      addition to the changes to the concept store, the Company has made changes
      to
      its loyalty program, Borders Rewards, which was launched domestically in early
      2006 and has grown to over 22 million members. The Company has modified
      Borders Rewards for 2007 to increase profitability, and will use the program
      to
      drive revenue through partnerships with other organizations, and drive sales
      by
      employing customer data to tailor marketing promotions that meet specific
      customer needs and interests.












*Right-size
      the Waldenbooks Specialty Retail business.* The
      Waldenbooks Specialty Retail segment has experienced negative comparable store
      sales percentages for the past several years, primarily due to the overall
      decrease in mall traffic, sluggish bestsellers and increased competition from
      all channels. The Company is working to aggressively right-size the Waldenbooks
      mall store base, which could result in additional asset impairments and store
      closure costs in the next few years, but will position the Company to improve
      sales, profitability and free cash flow in the long term. The Company will
      retain stable locations that meet acceptable profit and return on investment
      objectives. The Company is also making changes to product mix and formats to
      drive sales and profitability.





*Explore
      strategic alternatives in the International segment.* The
      Company has moderated growth and investment in its International businesses,
      while focusing on improving the profitability of the investments the Company
      has
      already made. As announced in March 2007, strategic alternatives for the
      majority of the Company’s International businesses are being explored. As a
      result of this process and as previously announced, the Company completed the
      sale of its bookstore operations in the United Kingdom and Ireland during the
      third quarter of 2007. The Company is continuing to explore strategic
      alternatives for its bookstore operations in Australia and New Zealand, and
      further disclosures will be made in the future as appropriate. The Company
      believes the Borders brand has global potential, however, and believes that
      future International growth will most likely utilize a franchise business model,
      which the Company has applied successfully in Malaysia and the United Arab
      Emirates, or another similar risk-sharing model. Also remaining as an important
      business in the International segment is Paperchase Products Limited
      (Paperchase). Paperchase operates approximately 110 stores and concession
      departments primarily in the U.K. and nearly 320 departments in Borders stores
      in the U.S. Paperchase will continue to expand its stores and concession models.





*Leverage
      innovation, technology and strategic alliances to differentiate
      our*  *business.* In
      order to achieve the goals of the strategic plan detailed above, the Company
      plans to enhance its current systems environment. This includes a focus on
      the
      systems supporting the domestic Borders superstore business, including
      merchandising, supply chain and in-store technology enhancements. In addition,
      this effort includes development of a proprietary e-commerce platform, which
      will include both in-store and online e-commerce components. The proprietary
      e-commerce Web site will also allow the Company to engage in key partnerships
      that are expected to build incremental revenues and profits. The Company expects
      to launch its e-commerce Web site in the first quarter of 2008.





**Other
      Information**





The
      Company launched Borders Rewards during the first quarter of 2006. Membership
      in
      Borders Rewards is free, with no enrollment costs or annual fees. Beginning
      April 12, 2007, the Company replaced the program’s previous member benefits with
      Borders Bucks. Members can earn Borders Bucks in increments of $5 for each
      cumulative $150 they spend on qualifying purchases in a calendar year at Borders
      and Waldenbooks stores nationwide. Borders Bucks expire 30 days after receipt
      by
      the member if not redeemed. In addition to the launch of Borders Bucks, the
      Company will be offering Bonus Rewards Events, whereby members get special
      deals
      periodically throughout the year.





The
      Company has signed an agreement with Berjaya Corporation Berhad (“Berjaya”), a
      publicly-listed diversified corporation headquartered in Malaysia, establishing
      a franchise arrangement under which Berjaya will operate Borders stores in
      Malaysia. The Company has also signed an agreement with Al Maya Group (“Al
      Maya”), a diversified corporation headquartered in the United Arab Emirates,
      establishing a franchise agreement under which Al Maya or its affiliates will
      operate Borders stores in the United Arab Emirates and other Gulf Cooperation
      Council (“GCC”) countries.





The
      Company, through its subsidiaries, has agreements with Amazon.com, Inc.
      (“Amazon”) to operate Web sites utilizing the Borders.com and Waldenbooks.com
      URLs (the “Web Sites”). Under these agreements, Amazon is the merchant of record
      for all sales made through the Web 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 Web Sites and retains all payments
      from customers. The Company receives referral fees for products purchased
      through the Web Sites. The agreements contain mutual indemnification provisions,
      including provisions that define between the parties the responsibilities with
      respect to any liabilities for sales, use and similar taxes, including penalties
      and interest, associated with products sold on the Web Sites. Currently, taxes
      are not collected with respect to products sold on the Web Sites except in
      certain states. As previously discussed, the Company plans to launch a
      proprietary e-commerce site in early 2008.





**Discontinued
      Operations**





On
      September 21, 2007, the Company sold its U.K. and Ireland bookstore operations
      to Bookshop Acquisitions Ltd., a corporation formed by Risk Capital Partners,
      a
      private equity firm in the United Kingdom. The consideration for the sale was:
      (i) cash of $20.4 million; (ii) the potential for up to an additional $20.4
      million of contingent deferred consideration, which will be payable in whole
      or
      in part only if specified sales levels are achieved by the U.K. and Ireland
      bookstore operations in future years; (iii) a
      19.9%
      equity interest in Bookshop
      Acquisitions Ltd .,
      which
      is expected to be diluted to approximately seventeen percent (17%) ;
      and
      (iv) 7% loan notes of approximately $3.4 million which mature in 2017 or sooner
      upon the occurrence of certain events.












The
      sale
      agreement included all 41 Borders superstores located in the U.K. and the
      Borders superstore in Ireland, as well as all 28 Books etc. stores. All assets
      and liabilities, with the exception of outstanding lease guarantees relating
      to
      four stores, remained with the entities sold, which are now owned by Risk
      Capital Partners. The maximum potential liability under these lease guarantees
      is approximately $199.2 million, and the Company has recorded a contingent
      liability of approximately $6.1 million based upon the likelihood that the
      Company will be required to perform under the guarantees. The Company did not
      guarantee the remaining leases of the U.K. and Ireland operations. Also under
      the terms of the sale agreement, the Company indemnified the U.K. and Ireland
      operations from the tax liability, if any, imposed upon it as a result of the
      forgiveness of the portions of intercompany indebtedness owing from the Company.
      The maximum potential liability is approximately $10.5 million, and the Company
      has recorded a liability of approximately $4.6 million based upon the likelihood
      that the Company will be required to perform under the indemnification.





The
      Company did not record any amount related to the contingent deferred
      consideration of $20.4 million. The Company will record this amount once the
      realization of such amount is resolved beyond a reasonable doubt. The Company
      has attributed only a nominal value to its equity interest in Bookshop
      Acquisitions Ltd. and to its 7% loan notes.





The
      disposal resulted in a loss of $116.5 million and $118.7 million for the 13
      and
      39 weeks ended November 3, 2007, respectively.  The operation of the
      disposed businesses resulted in losses of $2.9 million and $13.2 million for
      the
      13 and 39 weeks ended November 3, 2007, respectively, and losses of $4.7 million
      and $19.9 million for the 13 and 39 weeks ended October 28, 2006, 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. All amounts reflect
      the results of the Company’s continuing operations unless otherwise
      noted.





**13
                Weeks Ended**
            
            **39
                Weeks Ended****November
                3, 2007**
            
            **October
                28, 2006**
            
            **November
                3, 2007**
            
            **October
                28, 2006**Sales
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %Other
                revenue
            
            
            1.0
            
            
            0.8
            
            
            1.0
            
            
            0.9Total revenue
            
            
            101.0
            
            
            100.8
            
            
            101.0
            
            
            100.9Cost
                of merchandise sold (includes occupancy)
            
            
            79.1
            
            
            78.1
            
            
            77.6
            
            
            76.7Gross margin
            
            
            21.9
            
            
            22.7
            
            
            23.4
            
            
            24.2Selling,
                general and administrative expenses
            
            
            28.5
            
            
            28.4
            
            
            28.0
            
            
            27.0Pre-opening
                expense
            
            
            0.2
            
            
            0.5
            
            
            0.1
            
            
            0.3Asset
                impairments and other writedowns
            
            
            0.2
            
            
            0.1
            
            
            0.1
            
            
            0.1Operating loss
            
            
            (7.0
            )
            
            (6.3
            )
            
            (4.8
            )
            
            (3.2
            )Interest
                expense
            
            
            1.5
            
            
            1.1
            
            
            1.4
            
            
            0.9Loss before income tax
            
            
            (8.5
            )
            
            (7.4
            )
            
            (6.2
            )
            
            (4.1
            )Income
                tax benefit
            
            
            (3.3
            )
            
            (2.9
            )
            
            (2.5
            )
            
            (1.6
            )Loss from continuing operations
            
            
            (5.2
            )%
            
            (4.5
            )%
            
            (3.7
            )%
            
            (2.5
            )%








**Consolidated
      Results -- Comparison of the 13 weeks ended November 3, 2007 to the 13 weeks
      ended October 28, 2006**





***Sales***





Consolidated
      sales increased $40.6 million, or 5.3%, to $805.2 million in 2007 from $764.6
      million in 2006. This resulted from increased sales in the domestic Borders
      Superstores and International segments, partially offset by decreased sales
      in
      the Waldenbooks Specialty Retail segment.





Comparable
      store sales measures include stores open more than one year, with new stores
      included in the calculation upon their 13th month of operation. Comparable
      store
      sales measures for Waldenbooks Specialty Retail include the Company’s mall-based
      seasonal businesses, and comparable store sales measures for International
      Borders superstores include sales from licensed departments operating within
      the
      superstores. International comparable store sales are calculated in local
      currency.












Comparable
      store sales for domestic Borders superstores increased 1.1% in the 13 weeks
      ended November 3, 2007. The comparable store sales increase for 2007 was due
      primarily to positive comparable store sales in the book category of 3.1%,
      as
      well as increased comparable store sales in Seattle’s Best Coffee cafes and
      Paperchase gifts and stationery shops of 7.4% and 8.4%, respectively. Also,
      on a
      comparable store basis, transactions increased by 2.8% for the quarter.
      Comparable store sales in the music category continued to decline with negative
      comparable store sales of 13.1%. The impact of price changes on comparable
      store
      sales was not significant.





Waldenbooks
      Specialty Retail comparable store sales increased 3.6% in the 13 weeks ended
      November 3, 2007. The comparable store sales increase was primarily due to
      increased transactions of 1.8% and increased transaction size of 1.8%. The
      impact of price changes on comparable store sales was not
      significant.





Comparable
      store sales for International Borders superstores increased 7.8% in 2007. The
      increase was due to primarily to positive comparable store sales in Asia Pacific
      superstores. The impact of price changes on comparable store sales was not
      significant.





***Other
      revenue***





Other
      revenue for the Borders and International segments primarily consists of income
      recognized from unredeemed gift cards, as well as revenue from franchisees.
      Other revenue for the Borders segment also includes wholesale revenue earned
      through sales of merchandise to other retailers, as well as referral fees
      received from Amazon as part of the Web Site agreement. Other revenue in the
      Waldenbooks Specialty Retail segment primarily consists of income recognized
      from unredeemed gift cards.





Other
      revenue has increased $2.0 million, or 31.3%, to $8.4 million in 2007 from
      $6.4
      million in 2006. This was due to an increase in the domestic Borders Superstores
      and International segments, partially offset by a decrease in the Waldenbooks
      Specialty Retail segment. Other revenue in the domestic Borders Superstores
      segment increased primarily due to increased income recognized from unredeemed
      gift cards in 2007, partially offset by decreased wholesale revenue earned
      through sales of merchandise to other retailers. The International increase
      was
      primarily due to was primarily due to increased revenue from franchisees in
      2007. Other revenue in the Waldenbooks Specialty retail segment remained
      essentially flat, decreasing slightly.





***Gross
      margin***





Consolidated
      gross margin increased $2.9 million, or 1.7%, to $176.2 million in 2007 from
      $173.3 million in 2006. As a percentage of sales, consolidated gross margin
      decreased 0.8%, to 21.9% in 2007 from 22.7% in 2006. This was due to a decrease
      in gross margin as a percentage of sales in the domestic Borders Superstores
      segment, partially offset by an increase in the Waldenbooks Specialty Retail
      and
      International segments. The decrease in the Borders segment was primarily the
      result of increased promotional discounts, primarily related to Borders Rewards,
      increased shrinkage, increased occupancy costs and increased distribution costs,
      all as a percentage of sales. The increase in the Waldenbooks Specialty Retail
      segment was primarily due to the leveraging of occupancy costs as a percentage
      of sales, driven by the increase in comparable store sales, as well as decreased
      product and other costs as a percentage of sales primarily due to improved
      inventory return rates. Partially offsetting these improvements were increases
      as a percentage of sales in distribution costs and promotional discounts. The
      increase in the International segment resulted from decreased occupancy costs
      as
      a percentage of sales, driven by the increase in comparable store sales,
      partially offset by increased distribution and other costs as a percentage
      of
      sales.





The
      Company classifies the following items as “Cost of merchandise sold (includes
      occupancy)” 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, which may exclude the costs related to their distribution network
      and
      store occupancy from cost of sales and include those costs in other financial
      statement lines.





***Selling,
      general and administrative expenses***





Consolidated
      selling, general and administrative expenses (SG&A) increased $12.3 million,
      or 5.7%, to $229.4 million in 2007 from $217.1 million in 2006. As a percentage
      of sales, SG&A increased 0.1%, to 28.5% in 2007 from 28.4% in 2006. This
      increase primarily resulted from increased SG&A expenses as a percentage of
      sales for the domestic Borders Superstores and Waldenbooks Specialty Retail
      segments, partially offset by a decrease in the International segment. Domestic
      Borders superstores SG&A expenses as a percentage of sales increased
      primarily due to increased store payroll expenses as a percentage of sales,
      as
      well as increased corporate payroll and operating expenses as a percentage
      of
      sales. These increases were a result of spending to support strategic
      initiatives, as well as payroll increasing at a higher rate than comparable
      store sales. Partially offsetting these increases were decreased advertising
      and
      store operating expenses as a percentage of sales. The Waldenbooks Specialty
      Retail increase was primarily due to increased corporate payroll and advertising
      costs as a percentage of sales. Partially offsetting these increases were
      decreased store payroll and operating expenses as a percentage of sales,
      resulting from the increase in comparable store sales, and decreased corporate
      operating expenses as a percentage of sales, due to decreased depreciation
      expense resulting from fourth quarter 2006 asset impairments. International
      SG&A expenses as percentage of sales decreased primarily as a result of
      decreased corporate payroll and operating expenses and decreased store payroll
      and operating expenses, all as a percentage of sales. These decreases were
      due
      to the increase in comparable store sales. Also contributing to the decrease
      in
      SG&A as a percentage of sales was decreased advertising expenses as a
      percentage of sales.












The
      Company classifies the following items as “Selling, general and administrative
      expenses” on its consolidated statements of operations: store and administrative
      payroll, rent, depreciation, utilities, supplies and equipment costs, credit
      card and bank processing fees, bad debt, legal and consulting fees, certain
      advertising income and expenses and others.





***Interest
      expense***





Consolidated
      interest expense increased $3.5 million, or 39.8%, to $12.3 million in 2007
      from
      $8.8 million in 2006. This was primarily a result of increased borrowings to
      fund capital expenditures, inventory investment and fiscal 2006 common stock
      repurchases.





***Taxes***





The
      effective tax rate differed for the quarters presented from the federal
      statutory rate primarily as a result of a change in the mix of earnings between
      high and low tax jurisdictions due to the impact of state and foreign income
      taxes. The Company's estimated annual effective tax rate from continuing
      operations was 39.0% in 2007 and 2006.





***Loss
      from continuing operations***





Due
      to
      the factors mentioned above, loss from continuing operations as a percentage
      of
      sales increased to 5.2% in 2007 from 4.5% in 2006, and loss from continuing
      operations dollars increased to $41.7 million in 2007 from $34.4 million in
      2006.





**Consolidated
      Results -- Comparison of the 39 weeks ended November 3, 2007 to the 39 weeks
      ended October 28, 2006**





***Sales***





Consolidated
      sales increased $121.0 million, or 5.2%, to $2,450.2 million in 2007 from
      $2,329.2 million in 2006. This resulted primarily from increased sales in the
      domestic Borders superstores and International segments, partially offset by
      decreased sales in the Waldenbooks Specialty Retail segment.





Comparable
      store sales measures include stores open more than one year, with new stores
      included in the calculation upon their 13th month of operation. Comparable
      store
      sales measures for Waldenbooks Specialty Retail include the Company’s mall-based
      seasonal businesses, and comparable store sales measures for International
      Borders superstores include sales from licensed departments operating within
      the
      superstores. International comparable store sales are calculated in local
      currency.





Comparable
      store sales for domestic Borders superstores increased 1.3% in the 39 weeks
      ended November 3, 2007. The comparable store sales increase for 2007 was due
      primarily to positive comparable store sales in the book category of 3.6%,
      as
      well as increased comparable store sales in Seattle’s Best Coffee cafes and
      Paperchase gifts and stationery shops of 10.2% and 9.3%, respectively. Also,
      on
      a comparable store basis, transactions increased by 1.4% for the quarter.
      Comparable store sales in the music category continued to decline with negative
      comparable store sales of 14.6%. The impact of price changes on comparable
      store
      sales was not significant.





Waldenbooks’
      comparable store sales increased 3.0% in the 39 weeks ended November 3, 2007.
      The comparable store sales increase was driven by increased transaction size
      of
      3.0% while transaction count remained flat. The impact of price changes on
      comparable store sales was not significant.












Comparable
      store sales for International Borders superstores increased 7.2% in 2007. The
      increase was due to primarily to positive comparable store sales in Asia Pacific
      superstores. The impact of price changes on comparable store sales was not
      significant.





***Other
      revenue***





Other
      revenue for the Borders and International segments primarily consists of income
      recognized from unredeemed gift cards, as well as revenue from franchisees.
      Other revenue for the Borders segment also includes wholesale revenue earned
      through sales of merchandise to other retailers, as well as referral fees
      received from Amazon as part of the Web Site agreement. Other revenue in the
      Waldenbooks Specialty Retail segment primarily consists of income recognized
      from unredeemed gift cards.





Other
      revenue has increased $3.2 million, or 15.7%, to $23.6 million in 2007 from
      $20.4 million in 2006. The increase is due to increases in the domestic Borders
      Superstores and International segments, partially offset by a decrease in the
      Waldenbooks Specialty Retail segment. The increase in domestic Borders
      Superstores was primarily due to increased income recognized from unredeemed
      gift cards in 2007. The International increase was primarily due to increased
      revenue from franchisees in 2007. The decrease in Waldenbooks Specialty Retail
      was primarily due to decreased income recognized from unredeemed gift cards.





***Gross
      margin***





Consolidated
      gross margin increased $10.2 million, or 1.8%, to $574.3 million in 2007 from
      $564.1 million in 2006. As a percentage of sales, consolidated gross margin
      decreased 0.8%, to 23.4% in 2007 from 24.2% in 2006. This was due to a decrease
      in gross margin as a percentage of sales for the domestic Borders Superstores
      and Waldenbooks Specialty Retail segments, partially offset by an increase
      in
      the International segment. The decrease in the domestic Borders Superstores
      segment was primarily the result of increased promotional discounts as a
      percentage of sales, primarily related to Borders Rewards, increased shrinkage,
      and increased occupancy costs as a percentage of sales, due to increased
      depreciation and property tax expense. Partially offsetting these increases
      were
      decreased distribution costs as a percentage of sales, driven by the increase
      in
      comparable store sales. The decrease in the Waldenbooks Specialty Retail segment
      was primarily due to increased promotional discounts and other costs as a
      percentage of sales, mainly related to sales of the seventh and final book
      in
      the Harry Potter series and Borders Rewards, and increased distribution costs
      as
      a percentage of sales. Partially offsetting these increases were decreased
      occupancy costs as a percentage of sales, primarily due to the increase in
      comparable store sales, and decreased product costs as a percentage of sales,
      due to improved inventory return rates. The increase in the International
      segment primarily resulted from decreased occupancy costs as a percentage of
      sales, driven by the increase in comparable store sales, partially offset by
      increased distribution costs as a percentage of sales.





The
      Company classifies the following items as “Cost of merchandise sold (includes
      occupancy)” 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, which may exclude the costs related to their distribution network
      and
      store occupancy from cost of sales and include those costs in other financial
      statement lines.





***Selling,
      general and administrative expenses***





Consolidated
      selling, general and administrative expenses (SG&A) increased $56.6 million,
      or 9.0%, to $685.5 million in 2007 from $628.9 million in 2006. As a percentage
      of sales, SG&A increased 1.0%, to 28.0% in 2007 from 27.0% in 2006. This
      increase primarily resulted from increased SG&A expenses as a percentage of
      sales for the domestic Borders Superstores and Waldenbooks Specialty Retail
      segments, partially offset by a decrease in the International segment. Domestic
      Borders Superstores SG&A expenses as a percentage of sales increased
      primarily due to increased corporate payroll and operating expenses as a
      percentage of sales, mainly the result of the settlement of the California
      overtime litigation in 2007, a gain on the sale of investments in 2006, income
      received in 2006 from the Visa Check/MasterMoney Antitrust Litigation
      settlement, and the investment in strategic initiatives. In addition, store
      payroll and operating expenses as a percentage of sales increased while
      advertising costs were flat as a percentage of sales. The Waldenbooks Specialty
      Retail increase was primarily due to increased corporate payroll and advertising
      expense as a percentage of sales. Also impacting the comparison of 2007 to
      2006
      was income received in 2006 from the Visa Check/MasterMoney Antitrust Litigation
      settlement. Partially offsetting these increases were decreased store payroll
      and operating expenses as a percentage of sales, driven by the increase in
      comparable store sales, and decreased corporate operating expenses as a
      percentage of sales, due to decreased depreciation expense resulting from fourth
      quarter 2006 asset impairments. International SG&A expenses as percentage of
      sales decreased primarily as a result of decreased corporate payroll and
      operating expenses as a percentage of sales and decreased store payroll and
      operating expenses as a percentage of sales, driven by the increase in
      comparable store sales. Partially offsetting these items were increased
      advertising costs as a percentage of sales.












The
      Company classifies the following items as “Selling, general and administrative
      expenses” on its consolidated statements of operations: store and administrative
      payroll, rent, depreciation, utilities, supplies and equipment costs, credit
      card and bank processing fees, bad debt, legal and consulting fees, certain
      advertising income and expenses and others.





***Interest
      expense***





Consolidated
      interest expense increased $11.5 million, or 54.8%, to $32.5 million in 2007
      from $21.0 million in 2006. This was primarily a result of increased borrowings
      to fund capital expenditures, inventory investment and fiscal 2006 common stock
      repurchases.





***Taxes***





The
      effective tax rate differed for the quarters presented from the federal
      statutory rate primarily as a result of a change in the mix of earnings between
      high and low tax jurisdictions due to the impact of state and foreign income
      taxes. The Company's estimated annual effective tax rate from continuing
      operations was 39.0% in 2007 and 2006.





***Loss
      from continuing operations***





Due
      to
      the factors mentioned above, loss from continuing operations as a percentage
      of
      sales increased to 3.7% in 2007 from 2.5% in 2006, and loss from continuing
      operations dollars increased to $90.2 million in 2007 from $57.8 million in
      2006.





**Segment
      Results**





The
      Company is organized based upon the following operating segments: domestic
      Borders superstores, Waldenbooks Specialty Retail stores, International stores
      (including Borders and Paperchase stores), and Corporate (consisting of certain
      corporate governance costs and incentive costs). 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 headquarters costs to each
      segment. Interest income and expense are allocated to segments based upon the
      cash flow generated or absorbed by 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.





**Domestic
      Borders Superstores**





**13
                Weeks Ended**
            
            **39
                Weeks Ended******(dollar
                amounts in millions)
            
            **November
                3, 2007**
            
            **October
                28, 2006**
            
            **November
                3, 2007**
            
            **October
                28, 2006**Sales
            
            $
            615.8
            
            $
            583.2
            
            $
            1,889.4
            
            $
            1,789.7Other
                revenue
            
            $
            6.4
            
            $
            5.4
            
            $
            18.6
            
            $
            17.7Operating
                loss
            
            $
            (31.9
            )
            $
            (18.5
            )
            $
            (56.8
            )
            $
            (6.0
            )Operating
                loss as a % of sales
            
            
            (5.2
            )%
            
            (3.2
            )%
            
            (3.0
            )%
            
            (0.3
            )%Store
                openings
            
            
            4
            
            
            11
            
            
            12
            
            
            18Store
                closings
            
            
            -
            
            
            -
            
            
            1
            
            
            4Store
                count
            
            
            510
            
            
            487
            
            
            510
            
            
            487





**Domestic
      Borders Superstores - Comparison of the 13 weeks ended November 3, 2007 to
      the
      13 weeks ended October 28, 2006**





***Sales***





Borders'
      sales increased $32.6 million, or 5.6%, to $615.8 million in 2007 from $583.2
      million in 2006. This increase was comprised of non-comparable sales primarily
      associated with 2007 and 2006 store openings of $26.3 million and comparable
      store sales increases of $6.3 million.












***Other
      revenue***





Other
      revenue increased $1.0 million, or 18.5%, to $6.4 million in 2007 from $5.4
      million in 2006. This increase was primarily due to increased income recognized
      from unredeemed gift cards in 2007, partially offset by decreased wholesale
      revenue earned through sales of merchandise to other retailers.





***Gross
      margin***





Gross
      margin as a percentage of sales decreased 1.5%, to 22.4% in 2007 from 23.9%
      in
      2006. This was primarily due to increased promotional discounts of 1.0% as
      a
      percentage of sales, primarily related to Borders Rewards, increased shrinkage
      of 1.0% as a percentage of sales, increased occupancy costs of 0.4% as a
      percentage of sales, due to increased depreciation and property tax expense,
      as
      well as increased distribution costs of 0.1% as a percentage of sales. These
      items were partially offset by 2006 accruals for Borders Rewards member benefits
      of 1.0% as a percentage of sales. These
      prior year benefits were substantially modified in 2007 and reduced the required
      accrual in the current year.





Gross
      margin dollars decreased $1.2 million, or 0.9%, to $138.2 million in 2007 from
      $139.4 million in 2006, which was primarily due to the decrease in gross margin
      as a percentage of sales noted above, partially offset by new store openings
      and
      the increase in comparable store sales.





***Selling,
      general and administrative expenses***





SG&A
      as a percentage of sales increased 0.7%, to 27.2% in 2007 from 26.5% in 2006,
      primarily due to increased store payroll expenses of 0.6% as a percentage of
      sales, as well as increased corporate payroll and operating expenses of 0.5%
      as
      a percentage of sales. These increases were a result of spending to support
      strategic initiatives, as well as payroll increasing at a higher rate than
      comparable store sales. Partially offsetting these increases were decreased
      advertising costs of 0.3% as a percentage of sales and decreased store operating
      expenses of 0.1% as a percentage of sales.





SG&A
      dollars increased $12.8 million, or 8.3%, to $167.5 million in 2007 from $154.7
      million in 2006, primarily due to new store openings and the increased store
      payroll and operating expenses required, partially offset by decreased
      advertising costs.





***Operating
      loss***





Due
      to
      the factors mentioned above, operating loss as a percentage of sales increased
      to 5.2% in 2007 from 3.2% in 2006, and operating loss dollars increased to
      $31.9
      million in 2007 from $18.5 million in 2006.





**Domestic
      Borders Superstores - Comparison of the 39 weeks ended November 3, 2007 to
      the
      39 weeks ended October 28, 2006**





***Sales***





Borders'
      sales increased $99.7 million, or 5.6%, to $1,889.4 million in 2007 from
      $1,789.7 million in 2006. This increase was comprised of non-comparable sales
      primarily associated with 2007 and 2006 store openings of $77.6 million and
      comparable store sales increases of $22.1 million.





***Other
      revenue***





Other
      revenue increased $0.9 million, or 5.1%, to $18.6 million in 2007 from $17.7
      million in 2006. This
      increase was primarily due to increased income recognized from unredeemed gift
      cards in 2007.





***Gross
      margin***





Gross
      margin as a percentage of sales decreased 1.3%, to 24.0% in 2007 from 25.3%
      in
      2006. This was primarily due to increased promotional discounts of 0.7% as
      a
      percentage of sales, primarily related to Borders Rewards, increased shrinkage
      of 0.8% as a percentage of sales, and increased occupancy costs of 0.7% as
      a
      percentage of sales, due to increased depreciation and property tax expense.
      Partially offsetting these increases were decreased distribution costs of 0.1%
      as a percentage of sales, driven by the increase in comparable store sales,
      and
      2006 accruals for Borders Rewards member benefits of 0.8% as a percentage of
      sales. These prior year benefits were substantially modified in 2007 and reduced
      the required accrual in the current year.












Gross
      margin dollars decreased $0.1 million, to $453.6 million in 2007 from $453.7
      million in 2006, which was primarily due to the decrease in gross margin as
      a
      percentage of sales noted above, partially offset by new store openings and
      the
      increase in comparable store sales.





***Selling,
      general and administrative expenses***





SG&A
      as a percentage of sales increased 1.5%, to 26.7% in 2007 from 25.2% in 2006,
      primarily due to increased corporate payroll and corporate operating expenses
      of
      1.0% as a percentage of sales, mainly the result of the settlement of the
      California overtime litigation in 2007, a gain on the sale of investments in
      2006, income received in 2006 from the Visa Check/MasterMoney Antitrust
      Litigation settlement, and 2007 investment in strategic initiatives. In
      addition, store payroll and operating expenses increased 0.5% as a percentage
      of
      sales while advertising costs were flat as a percentage of sales.





SG&A
      dollars increased $52.8 million, or 11.7%, to $504.4 million in 2007 from $451.6
      million in 2006, primarily due to new store openings and the increased store
      payroll and operating expenses required, a gain on the sale of investments
      in
      2006 of $5.0 million, income received in 2006 from the Visa Check/MasterMoney
      Antitrust Litigation settlement of $2.6 million, and the settlement of the
      California overtime litigation in 2007 of $3.5 million.





***Operating
      loss***





Due
      to
      the factors mentioned above, operating loss as a percentage of sales increased
      to 3.0% in 2007 from 0.3% in 2006, and operating loss dollars increased to
      $56.8
      million in 2007 from $6.0 million in 2006.





**Waldenbooks
      Specialty Retail**





**13
                Weeks Ended**
            
            **39
                Weeks Ended**(dollar
                amounts in millions)
            
            **November
                3, 2007**
            
            **October
                28, 2006**
            
            **November
                3, 2007**
            
            **October
                28, 2006**Sales
            
            $
            109.7
            
            $
            123.8
            
            $
            334.5
            
            $
            377.5Other
                revenue
            
            $
            0.4
            
            $
            0.5
            
            $
            1.4
            
            $
            1.8Operating
                loss
            
            $
            (20.5
            )
            $
            (23.5
            )
            $
            (46.9
            )
            $
            (52.1
            )Operating
                loss as % of sales
            
            
            (18.7
            )%
            
            (19.0
            )%
            
            (14.0
            )%
            
            (13.8
            )%Store
                Openings
            
            
            1
            
            
            4
            
            
            1
            
            
            7Store
                Closings
            
            
            12
            
            
            7
            
            
            44
            
            
            33Store
                Count
            
            
            521
            
            
            652
            
            
            521
            
            
            652





**Waldenbooks
      Specialty Retail - Comparison of the 13 weeks ended November 3, 2007 to the
      13
      weeks ended October 28, 2006**





***Sales***





Waldenbooks
      Specialty Retail sales decreased $14.1 million, or 11.4%, to $109.7 million
      in
      2007 from $123.8 million in 2006. This decrease was comprised of decreased
      non-comparable sales associated with 2007 and 2006 store closings of $17.9
      million, partially offset by increased comparable store sales of $3.8
      million.





***Other
      revenue***





Other
      revenue remained essentially flat, decreasing $0.1 million, to $0.4 million
      in
      2007 from $0.5 million in 2006.





***Gross
      margin***





Gross
      margin as a percentage of sales increased 0.2%, to 15.5% in 2007 from 15.3%
      in
      2006. This was primarily due to the leveraging of occupancy costs as a
      percentage of sales of 0.7%, driven by the increase in comparable store sales,
      as well as decreased product and other costs of 1.9% as a percentage of sales,
      primarily due to improved inventory return rates. Partially offsetting these
      improvements were increased distribution costs of 1.8% as a percentage of sales,
      primarily due to slightly higher inventory levels, and increased promotional
      discounts of 0.6% as a percentage of sales, primarily related to Borders
      Rewards.





Gross
      margin dollars decreased $2.0 million, or 10.5%, to $17.0 million in 2007 from
      $19.0 million in 2006, primarily due to store closures, partially offset by
      the
      increase in comparable store sales and the increase in gross margin percentage
      noted above.












***Selling,
      general and administrative expenses***





SG&A
      as a percentage of sales increased 0.2%, to 34.1% in 2007 from 33.9% in
      2006. This was
      primarily due to increased corporate payroll expenses of 0.5% as a percentage
      of
      sales and increased advertising costs of 0.6% as a percentage of sales.
      Partially offsetting these increases were decreased store payroll and operating
      expenses of 0.5% as a percentage of sales, resulting from the increase in
      comparable store sales, and decreased corporate operating expenses of 0.4%
      as a
      percentage of sales, due to decreased depreciation expense resulting from fourth
      quarter 2006 asset impairments.





SG&A
      dollars decreased $4.6 million, or 11.0%, to $37.4 million in 2007 from $42.0
      million in 2006, primarily due to store closures.





***Operating
      loss***





Due
      to
      the factors mentioned above, operating loss as a percentage of sales decreased
      to 18.7% in 2007 from 19.0% in 2006, and operating loss dollars decreased to
      $20.5 million in 2007 from $23.5 million in 2006.





**Waldenbooks
      Specialty Retail - Comparison of the 39 weeks ended November 3, 2007 to the
      39
      weeks ended October 28, 2006**





***Sales***





Waldenbooks
      Specialty Retail sales decreased $43.0 million, or 11.4%, to $334.5 million
      in
      2007 from $377.5 million in 2006. This decrease was comprised of decreased
      non-comparable sales associated with 2007 and 2006 store closings of $52.4
      million, partially offset by increased comparable store sales of $9.4
      million.





***Other
      revenue***





Other
      revenue decreased $0.4 million, or 22.2%, to $1.4 million in 2007 from $1.8
      million in 2006. This was primarily due to decreased income recognized from
      unredeemed gift cards.





***Gross
      margin***





Gross
      margin as a percentage of sales decreased 0.3%, to 17.7% in 2007 from 18.0%
      in
      2006. This was primarily due to increased promotional discounts and other costs
      of 1.2% as a percentage of sales, mainly related to sales of the seventh and
      final book in the Harry Potter series and Borders Rewards, and increased
      distribution costs of 1.0% as a percentage of sales, primarily due to slightly
      higher inventory levels. Partially offsetting these increases were decreased
      occupancy costs as a percentage of sales of 1.3%, primarily due to the increase
      in comparable store sales, and decreased product costs of 0.6% as a percentage
      of sales, due to improved inventory return rates.





Gross
      margin dollars decreased $8.8 million, or 12.9%, to $59.3 million in 2007 from
      $68.1 million in 2006, primarily due to store closures and the decrease in
      gross
      margin percentage noted above, partially offset by the increase in comparable
      store sales.





***Selling,
      general and administrative expenses***





SG&A
      as a percentage of sales increased 0.1%, to 31.6% in 2007 from 31.5% in 2006.
      This was primarily due to increased corporate payroll expense of 1.0% as a
      percentage of sales and increased advertising expense of 0.3% as a percentage
      of
      sales. Also impacting the comparison of 2007 to 2006 was income received in
      2006
      from the Visa Check/MasterMoney Antitrust Litigation settlement. Partially
      offsetting these increases were decreased store payroll and operating expenses
      of 0.4% as a percentage of sales, driven by the increase in comparable store
      sales, and decreased corporate operating expenses of 0.8% as a percentage of
      sales, due to decreased depreciation expense resulting from fourth quarter
      2006
      asset impairments.





SG&A
      dollars decreased $13.0 million, or 10.9%, to $105.8 million in 2007 from $118.8
      million in 2006, primarily due to store closures and income received in 2006
      from the Visa Check/MasterMoney Antitrust Litigation settlement of $0.9
      million.












***Operating
      loss***





Due
      to
      the factors mentioned above, operating loss as a percentage of sales increased
      to 14.0% in 2007 from 13.8% in 2006, and operating loss dollars decreased to
      $46.9 million in 2007 from $52.1 million in 2006.





**International**





**13
                Weeks Ended**
            
            **39
                Weeks Ended******(dollar
                amounts in millions)
            
            **November
                3, 2007**
            
            **October
                28, 2006**
            
            **November
                3, 2007**
            
            **October
                28, 2006**Sales
            
            $
            79.7
            
            $
            57.6
            
            $
            226.3
            
            $
            162.0Other
                revenue
            
            $
            1.6
            
            $
            0.5
            
            $
            3.6
            
            $
            0.9Operating
                loss
            
            $
            (1.1
            )
            $
            (3.4
            )
            $
            (3.8
            )
            $
            (7.0
            )Operating
                loss as % of sales
            
            
            (1.4
            )%
            
            (5.9
            )%
            
            (1.7
            )%
            
            (4.3
            )%Superstore
                Store Openings
            
            
            -
            
            
            -
            
            
            2
            
            
            2Superstore
                Store Count
            
            
            28
            
            
            22
            
            
            28
            
            
            22





**International
      - Comparison of the 13 weeks ended November 3, 2007 to the 13 weeks ended
      October 28, 2006**





***Sales***





International
      sales increased $22.1 million, or 38.4%, to $79.7 million in 2007 from $57.6
      million in 2006. Of this increase in sales, $7.0 million was due to the
      translation of foreign currencies to U.S. dollars. The remaining $15.1 million
      was the result of new superstore openings and the increase in comparable store
      sales.





***Other
      revenue***





Other
      revenue increased $1.1 million, or 220.0%, to $1.6 million in 2007 from $0.5
      million in 2006. This was primarily due to increased revenue from franchisees
      in
      2007.





***Gross
      margin***





Gross
      margin as a percentage of sales increased 0.4%, to 26.3% in 2007 from 25.9%
      in
      2006, primarily the result of decreased occupancy costs of 1.5% as a percentage
      of sales, driven by the increase in comparable store sales. Partially offsetting
      this decrease were increased distribution and other costs of 1.1% as a
      percentage of sales.





Gross
      margin dollars increased $6.1 million, or 40.9%, to $21.0 million in 2007 from
      $14.9 million in 2006. The increase is due to the improvement in the gross
      margin rate, new superstore openings and the increase in comparable store sales.
      Also contributing to the increase in gross margin dollars was the translation
      of
      foreign currencies to U.S. dollars of $1.8 million.





***Selling,
      general and administrative expenses***





SG&A
      as a percentage of sales decreased 3.0%, to 27.7% in 2007 from 30.7% in 2006.
      This was primarily the result of decreased corporate payroll and operating
      expenses of 2.6% as a percentage of sales, and decreased store payroll and
      operating expenses of 0.2% as a percentage of sales. These decreases were due
      to
      the increase in comparable store sales. Also contributing to the decrease in
      SG&A as a percentage of sales was decreased advertising expenses of 0.2% as
      a percentage of sales.





SG&A
      dollars increased $4.0 million, or 22.5%, to $21.8 million in 2007 from $17.8
      million in 2006. Of this increase, $1.8 million is the result of translation
      of
      foreign currencies to U.S. dollars. The remainder of the increase is due to
      new
      store openings and the increased store payroll and operating expenses required,
      as well as professional fees incurred pursuant to the strategic alternatives
      process relating to the Company’s Asia Pacific operations.





***Operating
      loss***





Due
      to
      the factors mentioned above, operating loss as a percentage of sales improved
      to
      1.4% in 2007 as compared to 5.9% in 2006, and operating loss dollars decreased
      to $1.1 million in 2007 from $3.4 million in 2006.

















**International
      - Comparison of the 39 weeks ended November 3, 2007 to the 39 weeks ended
      October 28, 2006**





***Sales***





International
      sales increased $64.3 million, or 39.7%, to $226.3 million in 2007 from $162.0
      million in 2006. Of this increase in sales, $19.4 million was due to the
      translation of foreign currencies to U.S. dollars. The remaining $44.9 million
      was the result of new superstore openings and the increase in comparable store
      sales.





***Other
      revenue***





Other
      revenue increased $2.7 million, or 300.0%, to $3.6 million in 2007 from $0.9
      million in 2006. This was primarily due to increased revenue from franchisees
      in
      2007.





***Gross
      margin***





Gross
      margin as a percentage of sales increased 1.0%, to 27.1% in 2007 from 26.1%
      in
      2006, primarily the result of decreased occupancy costs of 1.1% as a percentage
      of sales, driven by the increase in comparable store sales. Partially offsetting
      this decrease were increased distribution costs of 0.1% as a percentage of
      sales.





Gross
      margin dollars increased $19.1 million, or 45.2%, to $61.4 million in 2007
      from
      $42.3 million in 2006. The increase is due to the improvement in the gross
      margin rate, new superstore openings and the increase in comparable store sales.
      Also contributing to the increase in gross margin dollars was the translation
      of
      foreign currencies to U.S. dollars of $5.2 million.





***Selling,
      general and administrative expenses***





SG&A
      as a percentage of sales decreased 1.2%, to 28.6% in 2007 from 29.8% in 2006.
      This was primarily the result of decreased corporate payroll and operating
      expenses of 0.8% as a percentage of sales and decreased store payroll and
      operating expenses of 0.5% as a percentage of sales, driven by the increase
      in
      comparable store sales. Partially offsetting these items were increased
      advertising costs of 0.1% as a percentage of sales.





SG&A
      dollars increased $16.0 million, or 33.1%, to $64.3 million in 2007 from $48.3
      million in 2006. Of this increase, $5.1 million is the result of translation
      of
      foreign currencies to U.S. dollars. The remainder of the increase is due to
      new
      store openings and the increased store payroll and operating expenses required,
      as well as professional fees incurred pursuant to the strategic alternatives
      process relating to the Company’s Asia Pacific operations.





***Operating
      loss***





Due
      to
      the factors mentioned above, operating loss as a percentage of sales improved
      to
      1.7% in 2007 as compared to 4.3% in 2006, and operating loss dollars decreased
      to $3.8 million in 2007 from $7.0 million in 2006.





**Corporate**





**13
                Weeks Ended**
            
            **39
                Weeks Ended**(dollar
                amounts in millions)
            
            **November
                3, 2007**
            
            **October
                28, 2006**
            
            **November
                3, 2007**
            
            **October
                28, 2006**Operating
                loss
            
            $
            (2.7
            )
            $
            (2.6
            )
            $
            (11.0
            )
            $
            (10.2
            )





The
      Corporate segment includes various corporate governance and corporate incentive
      costs.





**Corporate
      - Comparison of the 13 weeks ended November 3, 2007 to the 13 weeks ended
      October 28, 2006**





Operating
      loss dollars remained essentially flat, increasing $0.1 million, or 3.8%, to
      $2.7 million in 2007 from $2.6 million in 2006.












**Corporate
      - Comparison of the 39 weeks ended November 3, 2007 to the 39 weeks ended
      October 28, 2006**





Operating
      loss dollars increased $0.8 million, or 7.8%, to $11.0 million in 2007 from
      $10.2 million in 2006. This was primarily due to costs incurred to explore
      financing alternatives in 2007.





**Liquidity
      and Capital Resources**





The
      Company’s principal capital requirements are to fund investment in its strategic
      plan, including the refurbishment of existing stores, the opening of new stores,
      continued investment in new corporate information technology systems such as
      its
      e-commerce Web site, and maintenance spending on stores, distribution centers
      and corporate information technology. Additional capital requirements include
      shareholder returns in the form of dividends.





Net
      cash
      used for operations of continuing operations was $165.5 million and $190.1
      million for the 39 weeks ended November 3, 2007 and October 28, 2006,
      respectively. Operating cash outflows for the period reflect operating results
      from continuing operations and decreases in taxes payable and expenses payable,
      as well an increase in inventories, prepaid expenses, other long-term assets,
      deferred income taxes and other long-term liabilities. The current year
      operating cash inflows primarily reflect non-cash charges for depreciation
      and a
      loss on the disposal of assets related to the remodel program, as well as an
      increase in accounts payable and a decrease in accounts receivable.





Net
      cash
      used for investing of continuing operations was $94.3 million in 2007, which
      primarily funded capital expenditures for new stores, the refurbishment of
      existing stores, the development of the e-commerce Web site, new corporate
      information technology systems, and maintenance spending. These expenditures
      were partially offset by proceeds from the sale of the Company’s U.K. and
      Ireland bookstore operations of $20.4 million. Net cash used for investing
      of
      continuing operations was $109.1 million in 2006, which primarily resulted
      from
      capital expenditures, offset by the sale of investments of $21.6 million.





Net
      cash
      provided by financing of continuing operations in 2007 was $275.2 million,
      resulting from funding from the Company’s credit facility of $288.2 million, as
      well as proceeds from stock option exercises of $6.5 million and the associated
      excess tax benefit of $0.1 million, partially offset by the payment of the
      Company’s quarterly cash dividends of $19.4 million and the repayment of
      long-term debt of $0.2 million. Net cash provided by financing of continuing
      operations in 2006 was $262.6 million, resulting from funding from the Company’s
      credit facility of $380.2 million, as well as proceeds from stock option
      exercises of $21.9 million and the associated excess tax benefit of stock option
      exercises of $3.2 million, partially offset by the repurchase of common stock
      totaling $123.7 million, as well as the payment of the Company’s quarterly cash
      dividends of $18.8 million and the repayment of long-term debt of $0.2 million.




The
      Company expects capital expenditures to be approximately $170.0 million in
      2007, resulting primarily from investment in management information systems
      of
      domestic Borders superstores, in the Company’s new e-commerce strategy, and a
      reduced number of new superstore openings and store refurbishments. In addition,
      capital expenditures will result from maintenance spending for existing stores,
      distribution centers, and management information systems. The Company has opened
      12 domestic and two international Borders superstores in 2007, and plans to
      open
      approximately 8 additional domestic Borders superstores and two additional
      international Borders superstores in 2007, as the majority of these stores
      were
      committed to prior to the Company’s finalizing its strategic plan. Average cash
      requirements for the opening of a prototype Borders Books and Music superstore
      are $2.4 million, representing capital expenditures of $1.2 million,
      inventory requirements (net of related accounts payable) of $1.0 million,
      and $0.2 million of pre-opening costs. Average cash requirements to open a
      new airport or outlet mall store range from $0.3 million to
      $0.8 million, depending on the size and format of the store. Average cash
      requirements for a major remodel of a Borders superstore are between
      $0.1 million and $0.5 million, and average cash requirements for a
      Borders Express conversion are less than $0.1 million. 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,
      financing through the Credit Agreement and other sources of new financing as
      deemed necessary, discussed below. The Company believes funds generated from
      operations, borrowings under the Credit Agreement and from other sources, as
      necessary, will be sufficient to fund its anticipated capital requirements
      for
      the next several years.





In
      January 2006, the Board of Directors authorized $250.0 million of potential
      share repurchases. The Company currently has remaining authorization to
      repurchase approximately $92.8 million. During 2006, 2005, and 2004,
      $148.7 million, $265.9 million, and $177.3 million of common
      stock was repurchased, respectively. Although the Company may in the future
      continue the repurchase of its common stock, its priority for cash utilization
      in 2007 will be to fund investment in its strategic plan, support the dividend
      and to repay debt with the cash flow generated by the Company’s
      operations.












Since
      2004, the Company has paid a regular quarterly dividend. The declaration and
      payment of dividends, if any, is subject to the discretion of the Board and
      to
      certain limitations under the Michigan Business Corporation Act. In addition,
      the Company’s ability to pay dividends is restricted by certain agreements to
      which the Company is a party.





The
      Company has a Multicurrency Revolving Credit Agreement (the “Credit Agreement”),
      which was amended as of August 28, 2007, and which will expire in July 2011.
      The
      Credit Agreement provides for borrowings of up to $1,125.0 million secured
      by
      eligible inventory and accounts receivable and related assets. Borrowings under
      the Credit Agreement are limited to a specified percentage of eligible
      inventories and accounts receivable and bear interest at a variable base rate
      plus the applicable increment or LIBOR plus the applicable increment at the
      Company’s option. The Credit Agreement (i) includes a fixed charge coverage
      ratio requirement of 1.1 to 1 that is applicable only if outstanding borrowings
      under the facility exceed 90% of permitted borrowings thereunder, (ii) contains
      covenants that limit, among other things, the Company’s ability to incur
      indebtedness, grant liens, make investments, consolidate or merge or dispose
      of
      assets, (iii) prohibits dividend payments and share repurchases that would
      result in borrowings under the facility exceeding 90% of permitted borrowings
      thereunder, and (iv) contains default provisions that are typical for this
      type
      of financing, including a cross default provision relating to other indebtedness
      of more than $25.0 million. As of November 3, 2007 the Company was in compliance
      with all covenants contained within this agreement. The Company had borrowings
      outstanding under the Credit Agreement (or a prior agreement) of $790.7 million,
      $569.2 million and $499.1 million at November 3, 2007, October 28, 2006 and
      February 3, 2007, respectively, excluding any borrowings outstanding related
      to
      the Company’s recently disposed U.K. and Ireland bookstore operations. The U.K.
      and Ireland bookstore operations had borrowings outstanding of $51.1 million
      and
      $40.5 million at October 28, 2006 and February 3, 2007, respectively.





As
      of
      November 3, 2007 the Company was in compliance with its debt covenants. The
      Company currently does not meet the Credit Agreement’s fixed charge coverage
      ratio requirement; however, borrowings under the Credit Agreement have not
      exceeded 90% of permitted borrowings. The August 28, 2007 amendment, subject
      to
      certain conditions, allows for the sale of the majority of the Company’s
      International segment and permits term loan financing should the Company
      determine at a future point to seek such financing. This amendment is intended
      to provide flexibility to the Company in executing its strategic plan and to
      maintain the Company’s compliance with the covenants of the Credit Agreement.




**Off-Balance
      Sheet Arrangements**





The
      Company is the primary beneficiary of two variable interest entities (“VIEs”)
      due to the Company’s guarantee of the debt of these entities. As a result, the
      Company consolidates these VIEs and has recorded property and equipment, net
      of
      accumulated depreciation, of $5.0 million, long-term debt (including current
      portion) of $5.3 million and minority interest of $0.3 million at November
      3,
      2007. These amounts have been treated as non-cash items on the consolidated
      statements of cash flows.





As
      discussed above, the Company guarantees the leases of four stores that it
      previously owned in the U.K. and Ireland. The maximum potential liability under
      these lease guarantees is approximately $199.2 million, and the Company has
      recorded a contingent liability of approximately $6.1 million based upon the
      likelihood that the Company will be required to perform under the guarantees.
      The Company also has indemnified the U.K. and Ireland operations from the tax
      liability, if any, imposed upon it as a result of the forgiveness of the
      portions of intercompany indebtedness owing from the Company. The maximum
      potential liability is approximately $10.5 million, and the Company has recorded
      a liability of approximately $4.6 million based upon the likelihood that the
      Company will be required to perform under the indemnification.








**Significant
      Contractual Obligations**





The
      following table summarizes the Company’s significant contractual obligations,
      excluding interest expense:





**Fiscal
                Year****(dollars
                in millions)**
            
            **2007**
            
            **2008-2009**
            
            **2010-2011**
            
            **2012 and**
              **Thereafter**
            
            **Total**Credit
                Agreement borrowings
            
            $
            790.7
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            790.7Capital
                lease obligations
            
            
            0.1
            
            
            0.1
            
            
            0.1
            
            
            —
            
            
            0.3Operating
                lease obligations
            
            
            94.7
            
            
            636.7
            
            
            562.1
            
            
            1,809.2
            
            
            3,102.7Debt
                of consolidated VIEs
            
            
            0.2
            
            
            0.4
            
            
            0.4
            
            
            4.3
            
            
            5.3Other
                borrowings
            
            
            2.2
            
            
            —
            
            
            —
            
            
            —
            
            
            2.2Total
            
            $
            887.9
            
            $
            637.2
            
            $
            562.6
            
            $
            1,813.5
            
            $
            3,901.2





The
      above
      table excludes amounts relating to the Company’s guarantee of four stores that
      it previously owned in the U.K. and Ireland, as discussed above in Off-Balance
      Sheet Arrangements.





**Seasonality**





The
      Company’s business is highly seasonal, with significantly higher sales and
      substantially all operating income realized during the fourth quarter.




**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. Such
      estimates have been disclosed in the Company's last
      Annual Report on Form
      10-K
      for the fiscal year ended February 3, 2007. There
      have been no significant changes in these estimates during the third quarter
      of
      fiscal 2007.





**New
      Accounting Guidance**





The
      Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes -- an Interpretation of FASB Statement No. 109” (FIN 48), as
      amended, as of the beginning of the current fiscal year. Upon adoption, the
      Company recognized an additional $4.2 million liability for unrecognized tax
      positions, which was accounted for as a reduction to beginning retained
      earnings.





In
      June
      2006, the FASB ratified the Emerging Issues Task Force (“EITF”) consensus on
      EITF Issue No. 06-3, “How Taxes Collected from Customers and Remitted to
      Governmental Authorities Should Be Presented in the Income Statement (That
      Is,
      Gross versus Net Presentation)” (“EITF 06-3”). EITF 06-3 states that the
      classification of taxes as gross or net is an accounting policy decision that
      is
      dependent on the type of tax and that similar taxes are to be presented in
      a
      similar manner. EITF 06-3 is effective for reporting periods beginning after
      December 15, 2006. The Company’s adoption of EITF 06-3 did not have an
      impact on its consolidated financial position or results of operations, as
      the
      Company did not change its classification policy as a result of the adoption
      (i.e.; the Company continues to exclude sales taxes from customers from net
      sales).





In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No. 157, “Fair Value Measurements” (“FAS 157”). FAS 157 provides
      guidance for using fair value to measure assets and liabilities and only applies
      when other standards require or permit the fair value measurement of assets
      and
      liabilities. FAS 157 does not expand the use of fair value measurement.
      FAS 157 is effective for fiscal years beginning after November 15,
      2007. The Company does not expect the adoption of FAS 157 to have a
      material impact on its consolidated financial position or results of
      operations.





In
      February 2007, the FASB issued Statement of Financial Accounting Standards
      No.
      159, “The Fair Value Option for Financial Assets and Financial Liabilities”
(“FAS 159”).  FAS 159 allows companies to elect to measure certain assets
      and liabilities at fair value and is effective for fiscal years beginning after
      November 15, 2007. The Company does not expect the adoption of FAS 159 to
      have a material impact on its consolidated financial position or results of
      operations.












**Related
      Party Transactions**





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





**Forward
      Looking Statements**





This
      report contains forward-looking statements within the meaning of the Private
      Securities Litigation Reform Act of 1995. One can identify these forward-looking
      statements by the use of words such as "projects," "expected," "estimated,"
      "look toward," "continuing," "planning," "returning," "guidance," "goal,"
      "will," "may," "intend," "anticipates," and other words of similar meaning.
      One
      can also identify them by the fact that they do not relate strictly to
      historical or current facts. These statements are likely to address matters
      such
      as the company's future financial performance (including earnings per share
      growth, EBIT margins and inventory turns, liquidity, same-store sales growth,
      and anticipated capital expenditures and depreciation and amortization amounts),
      its strategic plans and expected financing of and benefits relating to such
      plans (including steps to be taken to improve the performance of domestic
      superstores, the exploration of strategic alternatives with respect to certain
      international operations, the downsizing of the Specialty Retail Segment and
      the
      development of a proprietary website) and its intentions with respect to
      dividend payments and share repurchases.





These
      statements are subject to risks and uncertainties that could cause actual
      results and plans to differ materially from those included in the company's
      forward-looking statements. These risks and uncertainties include, but are
      not
      limited to, consumer demand for the company's products, particularly during
      the
      holiday season, which is believed to be related to general economic and
      geopolitical conditions, competition and other factors; the availability of
      adequate capital to fund the company’s operations and to carry out its strategic
      plans; the performance of the company’s information technology systems and the
      development of improvements to the systems necessary to implement the company's
      strategic plan, and, with respect to the exploration of strategic alternatives
      for certain international operations, the ability to attract interested third
      parties.





The
      sections “Forward Looking Statements” in Item 1 and “Risk Factors” in Item 1A of
      the company’s Annual Report on Form 10-K for the fiscal year ended February 3,
      2007 filed with the Securities and Exchange Commission contain more detailed
      discussions of these and other risk factors that could cause actual results
      and
      plans to differ materially from those included in the forward-looking
      statements, and those discussions are incorporated herein by reference. The
      company does not undertake any obligation to update forward-looking
      statements.





**Item
      3. Quantitative and Qualitative Disclosures About Market
      Risk**





The
      Company is exposed to market risk during the normal course of business from
      changes in interest rates and foreign currency exchange rates. The exposure
      to
      these risks is managed though a combination of normal operating and financing
      activities, which may include the use of derivative financial instruments in
      the
      form of interest rate swaps and forward foreign currency exchange
      contracts.





There
      have been no material changes in this Item since the Company’s last Annual
      Report on Form 10-K for the fiscal year ended February 3, 2007.





**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-15(e) and 15d-15(e) under the Securities Exchange Act
      of
      1934, as amended (the “Exchange Act”), as of November 3, 2007 (the “Evaluation
      Date”). Based on such evaluation, such officers have concluded that the
      Company’s controls and procedures were effective to ensure that information
      required to be disclosed in this quarterly report is recorded, processed,
      summarized and reported within the time periods specified in the SEC’s rules and
      forms, and that such information is accumulated and communicated to management,
      including the Company’s Chief Executive Officer (principal executive officer)
      and Chief Financial Officer (principal financial officer), to allow timely
      decisions regarding required disclosure.




*Changes
      in Internal Control:* There
      have been no changes in our internal control over financial reporting that
      occurred in the last fiscal quarter that have materially affected, or are
      reasonably likely to materially affect, our internal control over financial
      reporting.












**Part
      II - Other Information**





**Item
      1. Legal Proceedings**





For
      a
      description of certain legal proceedings affecting the Company, please review
      “Note 2 - Commitments and Contingencies”, on page 6 of this Report, which is
      incorporated herein by reference.





**Item
      1A. Risk Factors**





The
      Company is subject to numerous risks and uncertainties which could adversely
      affect the Company ’s
      business, financial condition, operating results and cash flows. Such risks
      and
      uncertainties have been disclosed in the Company's last
      Annual Report on Form
      10-K
      for the fiscal year ended February 3, 2007. There
      have been no significant changes in these risks
      and
      uncertainties during
      fiscal 2007.





**Item
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds**





There
      were no share repurchases during the third quarter of fiscal 2007.








**Item
      6. Exhibits**





Exhibits:





3.1(1)
            Restated
                Articles of Incorporation of Borders Group, Inc.3.2(2)
            Restated
                bylaws of Borders Group, Inc.3.3(3)
            First
                Amendment to the Restated Bylaws of Borders Group, Inc.3.4(4)
            Amendment
                to the Restated Articles of Incorporation of Borders Group,
                Inc.3.5(5)
            Second
                Amendment to the Restated By laws of Borders Group,
                Inc.31.1
            Statement
                of George L. Jones, President and Chief Executive Officer of Borders
                Group, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of
                200231.2
            Statement
                of Edward W. Wilhelm, Executive Vice President and Chief Financial
                Officer
                of Borders Group, Inc. pursuant to Section 302 of the Sarbanes-Oxley
                Act
                of 200232.1
            Statement
                of George L. Jones, President and Chief Executive Officer of Borders
                Group, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of
                200232.2
            Statement
                of Edward W. Wilhelm, Executive Vice President and Chief Financial
                Officer
                of Borders Group, Inc. pursuant to Section 906 of the Sarbanes-Oxley
                Act
                of 2002(1)
            Incorporated
                by reference from the Company’s Annual Report on Form 10-K dated January
                24, 1999 (File No. 1-13740).(2)
            Incorporated
                by reference from the Company’s Annual Report on Form 10-K dated January
                27, 2002 (File No. 1-13740).(3)
            Incorporated
                by reference from the Company’s Current Report on Form 8-K dated July 13,
                2006 (File No. 1-13740).(4)
            Incorporated
                by reference from the Company’s Current Report on Form 8-K dated May 25,
                2007 (File No. 1-13740).(5)
            Incorporated
                by reference from the Company’s Current Report on Form 8-K dated May 25,
                2007 (File No. 1-13740).














**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 13, 2007        By: /s/
      Edward W. Wilhelm


Edward
      W.
      Wilhelm


Executive
      Vice President and


Chief
      Financial Officer


(Principal
      Financial and


Accounting
      Officer)








**EXHIBIT
      INDEX**


**DESCRIPTION
      OF EXHIBITS**


Exhibits:





3.1(1)
            Restated
                Articles of Incorporation of Borders Group, Inc.3.2(2)
            Restated
                bylaws of Borders Group, Inc.3.3(3)
            First
                Amendment to the Restated Bylaws of Borders Group, Inc.3.4(4)
            Amendment
                to the Restated Articles of Incorporation of Borders Group,
                Inc.3.5(5)
            Second
                Amendment to the Restated By laws of Borders Group,
                Inc.31.1
            Statement
                of George L. Jones, President and Chief Executive Officer of Borders
                Group, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of
                200231.2
            Statement
                of Edward W. Wilhelm, Executive Vice President and Chief Financial
                Officer
                of Borders Group, Inc. pursuant to Section 302 of the Sarbanes-Oxley
                Act
                of 200232.1
            Statement
                of George L. Jones, President and Chief Executive Officer of Borders
                Group, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of
                200232.2
            Statement
                of Edward W. Wilhelm, Executive Vice President and Chief Financial
                Officer
                of Borders Group, Inc. pursuant to Section 906 of the Sarbanes-Oxley
                Act
                of 2002(1)
            Incorporated
                by reference from the Company’s Annual Report on Form 10-K dated January
                24, 1999 (File No. 1-13740).(2)
            Incorporated
                by reference from the Company’s Annual Report on Form 10-K dated January
                27, 2002 (File No. 1-13740).(3)
            Incorporated
                by reference from the Company’s Current Report on Form 8-K dated July 13,
                2006 (File No. 1-13740).(4)
            Incorporated
                by reference from the Company’s Current Report on Form 8-K dated May 25,
                2007 (File No. 1-13740).(5)
            Incorporated
                by reference from the Company’s Current Report on Form 8-K dated May 25,
                2007 (File No. 1-13740).