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 August 4, 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 August 29, 2007 was
      58,833,583.














**BORDERS
      GROUP, INC.**





**INDEX**




**Page**Part
                I - Financial InformationItem
                1. Financial Statements
            1Item
                2. Management's Discussion and Analysis of Financial
                Condition and Results of Operations
            9Item
                3. Quantitative and Qualitative Disclosures about Market
                Risk
            23Item
                4. Controls and Procedures
            24Part
                II - Other informationItem
                1. Legal Proceedings
            24Item
                1A. Risk Factors
            24Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            24Item
                3. Defaults Upon Senior Securities
            N/AItem
                4. Submission of Matters to a Vote of Securityholders
            24Item
                4T. Controls and Procedures
            N/AItem
                5. Other Information
            N/AItem
                6. Exhibits
            26Signatures
            27








**BORDERS
      GROUP, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


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


**(UNAUDITED)**





**13****Weeks
                Ended****August
                4,**
              **2007**
            
            **July
                29,**
              **2006**Sales
            
            $
            945.1
            
            $
            856.0Other
                revenue
            
            
            11.6
            
            
            10.3Total revenue
            
            
            956.7
            
            
            866.3Cost
                of merchandise sold, including occupancy costs
            
            
            729.9
            
            
            661.5Gross margin
            
            
            226.8
            
            
            204.8Selling,
                general and administrative expenses
            
            
            254.9
            
            
            223.3Pre-opening
                expense
            
            
            1.7
            
            
            2.3Asset
                impairments and other writedowns
            
            
            0.5
            
            
            2.0Operating loss
            
            
            (30.3
            )
            
            (22.8
            )Interest
                expense
            
            
            11.5
            
            
            7.7Loss before income tax
            
            
            (41.8
            )
            
            (30.5
            )Income
                tax benefit
            
            
            (16.7
            )
            
            (12.1
            )Net loss
            
            $
            (25.1
            )
            $
            (18.4
            )Loss
                per common share data*Diluted:*Loss
                per common share
            
            $
            (0.43
            )
            $
            (0.29
            )Weighted average common shares outstanding (in millions)
            
            
            58.8
            
            
            63.6*Basic:*Loss
                per common share
            
            $
            (0.43
            )
            $
            (0.29
            )Weighted average common shares outstanding (in millions)
            
            
            58.8
            
            
            63.6Dividends
                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)**





**26****Weeks
                Ended****August
                4,**
              **2007**
            
            **July
                29,**
              **2006**Sales
            
            $
            1,821.9
            
            $
            1,716.0Other
                revenue
            
            
            20.6
            
            
            18.1Total revenue
            
            
            1,842.5
            
            
            1,734.1Cost
                of merchandise sold, including occupancy costs
            
            
            1,418.9
            
            
            1,328.6Gross margin
            
            
            423.6
            
            
            405.5Selling,
                general and administrative expenses
            
            
            498.5
            
            
            448.7Pre-opening
                expense
            
            
            3.0
            
            
            4.2Asset
                impairments and other writedowns
            
            
            1.3
            
            
            2.6Operating loss
            
            
            (79.2
            )
            
            (50.0
            )Interest
                expense
            
            
            21.4
            
            
            13.1Loss before income tax
            
            
            (100.6
            )
            
            (63.1
            )Income
                tax benefit
            
            
            (39.6
            )
            
            (24.5
            )Net loss
            
            $
            (61.0
            )
            $
            (38.6
            )Loss
                per common share data*Diluted:*Loss
                per common share
            
            $
            (1.04
            )
            $
            (0.60
            )Weighted average common shares outstanding (in millions)
            
            
            58.7
            
            
            64.0*Basic:*Loss
                per common share
            
            $
            (1.04
            )
            $
            (0.60
            )Weighted
                average common shares outstanding (in millions)89.1
            
            
            58.7
            
            
            64.0Dividends
                declared per common share
            
            $
            0.22
            
            $
            0.20








See
      accompanying Notes to Unaudited Condensed Consolidated Financial
      Statements.





**BORDERS
      GROUP, INC.**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


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


**(UNAUDITED)**








******August
                4,****2007**
            
            ******July
                29,****2006**
            
            **February
                3,****2007****Assets**Current
                assets:Cash and cash equivalents
            
            $
            75.5
            
            $
            89.1
            
            $
            120.4Merchandise inventories
            
            
            1,438.6
            
            
            1,391.7
            
            
            1,452.0Accounts receivable and other current assets
            
            
            146.9
            
            
            166.5
            
            
            151.2Total current assets
            
            
            1,661.0
            
            
            1,647.3
            
            
            1,723.6Property and equipment, net of accumulated depreciation of$1,194.4, $1,023.1 and $1,183.9 at August 4, 2007, July
                29,2006 and February 3, 2007, respectively
            
            
            734.2
            
            
            741.3
            
            
            707.7Other assets
            
            
            64.5
            
            
            63.2
            
            
            65.1Deferred income taxes
            
            
            81.9
            
            
            40.9
            
            
            76.7Goodwill
            
            
            40.3
            
            
            128.3
            
            
            40.3Total assets
            
            $
            2,581.9
            
            $
            2,621.0
            
            $
            2,613.4**Liabilities,
                Minority Interest and Stockholders’ Equity**Current
                liabilities:Short-term borrowings and current portion of long-term
                debt
            
            $
            733.3
            
            $
            560.5
            
            $
            542.6Trade accounts payable
            
            
            540.8
            
            
            544.7
            
            
            631.4Accrued payroll and other liabilities
            
            
            298.6
            
            
            271.4
            
            
            333.1Taxes, including income taxes
            
            
            9.7
            
            
            13.0
            
            
            60.4Deferred income taxes
            
            
            29.1
            
            
            29.8
            
            
            28.4Total current liabilities
            
            
            1,611.5
            
            
            1,419.4
            
            
            1,595.9Long-term debt
            
            
            5.1
            
            
            5.3
            
            
            5.2Other long-term liabilities
            
            
            388.9
            
            
            355.8
            
            
            368.3Total liabilities
            
            
            2,005.5
            
            
            1,780.5
            
            
            1,969.4Minority interest
            
            
            2.1
            
            
            1.4
            
            
            2.0Total liabilities and minority interest
            
            
            2,007.6
            
            
            1,781.9
            
            
            1,971.4Stockholders'
                equity:Common stock; 300,000,000 shares authorized;58,827,986, 62,195,625, and 58,476,306 shares issuedand outstanding at August 4, 2007, July 29, 2006 andFebruary 3, 2007, respectively
            
            
            181.4
            
            
            253.0
            
            
            175.5Accumulated other comprehensive income
            
            
            33.1
            
            
            23.0
            
            
            28.5Retained earnings
            
            
            359.8
            
            
            563.1
            
            
            438.0Total stockholders' equity
            
            
            574.3
            
            
            839.1
            
            
            642.0Total liabilities, minority interest and stockholders'
                equity
            
            $
            2,581.9
            
            $
            2,621.0
            
            $
            2,613.4








See
      accompanying Notes to Unaudited Condensed Consolidated Financial
      Statements.








**BORDERS
      GROUP, INC.**


**CONDENSED
      CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY**


**FOR
      THE 26 WEEKS ENDED AUGUST 4, 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
            
            
            -
            
            
            -
            
            
            -
            
            
            (61.0
            )
            
            (61.0
            )Currency
                translation adjustment
            
            
            -
            
            
            -
            
            
            4.6
            
            
            -
            
            
            4.6Comprehensive
                loss
            
            
            
            
            
            
            
            
            
            
            
            -
            
            
            (56.4
            )Adoption
                of FIN 48
            
            
            
            
            
            
            
            
            
            
            
            (4.2
            )
            
            (4.2
            )Cash
                dividends declared ($0.22 per
              common
                share)
            
            
            -
            
            
            -
            
            
            -
            
            
            (13.0
            )
            
            (13.0
            )Issuance
                of common stock
            
            
            351,680
            
            
            5.6
            
            
            -
            
            
            -
            
            
            5.6Tax
                benefit of equity compensation
            
            
            -
            
            
            0.3
            
            
            -
            
            
            -
            
            
            0.3Balance
                at August 4, 2007
            
            
            58,827,986
            
            $
            181.4
            
            $
            33.1
            
            $
            359.8
            
            $
            574.3











See
      accompanying Notes to Unaudited Condensed Consolidated Financial
      Statements.








**BORDERS
      GROUP, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(dollars
      in millions)**


**(UNAUDITED)**








**26
                Weeks Ended****August
                4,**
              **2007**
            
            **July
                29,**
              **2006**Cash
                provided by (used for):OperationsNet loss
            
            $
            (61.0
            )
            $
            (38.6
            )Adjustments to reconcile net loss to operating cash flows:Depreciation
            
            
            56.5
            
            
            61.1Gain on sale of investments
            
            
            -
            
            
            (5.0
            )Loss on disposal of assets
            
            
            1.6
            
            
            3.3Gain on disposal of assets
            
            
            (0.5
            )
            
            -(Increase) decrease in deferred income taxes
            
            
            (2.5
            )
            
            1.2Decrease in other long-term assets
            
            
            0.9
            
            
            0.2Increase (decrease) in other long-term liabilities
            
            
            (2.2
            )
            
            20.9Cash
                provided by (used for) current assets and current
                liabilities:Decrease in inventories
            
            
            23.4
            
            
            19.0Decrease in accounts receivable
            
            
            22.1
            
            
            1.8Increase
                in prepaid expenses
            
            
            (10.5
            )
            
            (11.5
            )Decrease in accounts payable
            
            
            (94.6
            )
            
            (117.6
            )Decrease in taxes payable
            
            
            (44.8
            )
            
            (122.7
            )Decrease in expenses payable and accrued liabilities
            
            
            (34.1
            )
            
            (30.4
            )Net cash used for operations
            
            
            (145.7
            )
            
            (218.3
            )InvestingCapital expenditures
            
            
            (75.9
            )
            
            (87.2
            )Proceeds from sale of assets
            
            
            1.2
            
            
            -Proceeds from sale of investments
            
            
            -
            
            
            21.6Net cash used for investing
            
            
            (74.7
            )
            
            (65.6
            )FinancingRepayment of long-term debt
            
            
            (0.2
            )
            
            -Proceeds from the excess tax benefit of stock option
                exercises
            
            
            0.3
            
            
            2.9Net funding from credit facility
            
            
            183.1
            
            
            345.4Issuance of common stock
            
            
            5.6
            
            
            17.6Payment of cash dividends
            
            
            (13.0
            )
            
            (12.8
            )Repurchase of common stock
            
            
            -
            
            
            (61.4
            )Net cash provided by financing
            
            
            175.8
            
            
            291.7Effect
                of exchange rates on cash and equivalents
            
            
            (0.3
            )
            
            (0.3
            )Net
                increase (decrease) in cash and equivalents
            
            
            (44.9
            )
            
            7.5Cash
                and equivalents at beginning of year
            
            
            120.4
            
            
            81.6Cash
                and equivalents at end of period
            
            $
            75.5
            
            $
            89.1








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
      August
      4, 2007, the Company operated 576 superstores under the Borders name, including
      506 in the United States, 41 in the United Kingdom, 20 in Australia, three
      in
      Puerto Rico, four in New Zealand and one each in Singapore and Ireland. The
      Company also operated 532 mall-based and other bookstores, including stores
      operated under the Waldenbooks, Borders Express and Borders Outlet names, as
      well as Borders-branded airport stores, and 28 bookstores under the Books etc.
      name in the United Kingdom. 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 August 4, 2007, Paperchase operated 102 stores, primarily
      in
      the United Kingdom, and Paperchase shops have been added to nearly 250 domestic
      Borders superstores.





**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. The parties have reached a tentative settlement, subject to the
      execution of a definitive agreement and court approval, 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 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.








**BORDERS
      GROUP, INC.**


**NOTES
      TO UNAUDITED CONDENSED**


**CONSOLIDATED
      FINANCIAL STATEMENTS**


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





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 August 4, 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 $722.8 at
      August 4, 2007, $506.9 at July 29, 2006 and $539.6 at February 3,
      2007.





*Debt
      of Consolidated VIEs:* At
      August 4, 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 August 4, 2007.





As
      of
      August 4, 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. As discussed in “Note 6 - Subsequent
      Event,” the Credit Agreement was amended on August 28, 2007. Under this
      amendment, the fixed charge coverage ratio requirement will not be applicable
      through November 3, 2007, subject to certain conditions. In addition, the
      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.





**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.








**BORDERS
      GROUP, INC.**


**NOTES
      TO UNAUDITED CONDENSED**


**CONSOLIDATED
      FINANCIAL STATEMENTS**


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





As
      of the
      beginning of the year, total unrecognized tax positions, including interest
      and
      penalties and adjusted for the impact of the adoption of FIN 48, totaled $13.8.
      As of August 4, 2007, this balance increased to $14.0. The increase in the
      liability for income taxes associated with uncertain tax positions of $0.2
      represents additional interest, partially offset by audit settlements and
      statute expirations in certain states. 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 2003 through 2006, tax
      returns in certain states for 1996 through 2006, and tax returns in certain
      foreign jurisdictions for 1999 through 2006.




**NOTE
      5- SEGMENT INFORMATION**





The
      Company is organized based upon the following operating segments: domestic
      Borders superstores, Waldenbooks Specialty Retail stores, International stores
      (including Borders, Books etc. and Paperchase stores), and Corporate (consisting
      of certain corporate governance 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. The Company evaluates the performance of its segments and
      allocates resources to them based on operating income and anticipated future
      contribution.








**13
                Weeks Ended**
            
            **26
                Weeks Ended********August
                4,****2007**
            
            ******July
                29,****2006**
            
            ******August
                4,****2007**
            
            ******July
                29,****2006**SalesBorders
            
            $
            658.6
            
            $
            600.1
            
            $
            1,273.6
            
            $
            1,206.5Waldenbooks
            
            
            116.7
            
            
            126.5
            
            
            224.8
            
            
            253.7International
            
            
            169.8
            
            
            129.4
            
            
            323.5
            
            
            255.8Total
                sales
            
            $
            945.1
            
            $
            856.0
            
            $
            1,821.9
            
            $
            1,716.0Operating
                income (loss)Borders
            
            $
            (2.9
            )
            $
            11.0
            
            $
            (24.9
            )
            $
            12.5Waldenbooks
            
            
            (12.4
            )
            
            (12.6
            )
            
            (26.4
            )
            
            (28.6
            )International
            
            
            (9.8
            )
            
            (16.0
            )
            
            (19.6
            )
            
            (26.3
            )Corporate
            
            
            (5.2
            )
            
            (5.2
            )
            
            (8.3
            )
            
            (7.6
            )Total
                operating income (loss)
            
            $
            (30.3
            )
            $
            (22.8
            )
            $
            (79.2
            )
            $
            (50.0
            )Total
                assetsBorders
            
            
            
            
            
            
            
            $
            1,689.9
            
            $
            1,598.2Waldenbooks
            
            
            
            
            
            
            
            
            315.2
            
            
            356.0International
            
            
            
            
            
            
            
            
            466.5
            
            
            500.7Corporate
            
            
            
            
            
            
            
            
            110.3
            
            
            166.1Total
                assets
            
            
            
            
            
            
            
            $
            2,581.9
            
            $
            2,621.0








**BORDERS
      GROUP, INC.**


**NOTES
      TO UNAUDITED CONDENSED**


**CONSOLIDATED
      FINANCIAL STATEMENTS**


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





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**
            
            **26
                Weeks Ended********August
                4,****2007**
            
            ******July
                29,****2006**
            
            ******August
                4,****2007**
            
            ******July
                29,****2006**Borders
            
            $
            2.7
            
            $
            3.2
            
            $
            5.5
            
            $
            6.3Waldenbooks
            
            
            -
            
            
            1.5
            
            
            -
            
            
            3.0International
            
            
            -
            
            
            -
            
            
            -
            
            
            0.1Total
            
            $
            2.7
            
            $
            4.7
            
            $
            5.5
            
            $
            9.4





**NOTE
      6- SUBSEQUENT EVENT**





The
      Company has a Multicurrency Revolving Credit Agreement, as amended, (the “Credit
      Agreement”), which was amended as of August 28, 2007, and which will expire in
      July 2011. Under
      this amendment, the fixed charge coverage ratio requirement will not be
      applicable through November 3, 2007, subject to certain conditions. In addition,
      the 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.





**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 (UK) Limited, Borders Australia Pty
      Limited and others (individually and collectively, "the Company"), is the second
      largest operator of book, music and movie superstores and the largest operator
      of mall-based bookstores in the world based upon both sales and number of
      stores. At August 4, 2007, the Company operated 576 superstores under the
      Borders name, including 506 in the United States, 41 in the United Kingdom,
      20
      in Australia, three in Puerto Rico, four in New Zealand and one each in
      Singapore and Ireland. The Company also operated 532 mall-based and other
      bookstores, including stores operated under the Waldenbooks, Borders Express
      and
      Borders Outlet names, as well as Borders-branded airport stores, and 28
      bookstores under the Books etc. name in the United Kingdom. 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
      August 4, 2007, Paperchase operated 102 stores, primarily in the United Kingdom,
      and Paperchase shops have been added to nearly 250 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. The first new concept store 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 nearly 20 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 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 International businesses in the United Kingdom, Ireland,
      Australia and New Zealand are being explored. The process is continuing 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.





*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 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 margins. The Company expects to launch its
      e-commerce Web site in early 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. As of August 4, 2007, Berjaya operated three 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 first of which opened in Dubai during the fourth
      quarter of fiscal 2006.





The
      Company, through its subsidiaries, has agreements with Amazon.com, Inc.
      (“Amazon”) to operate Web sites utilizing the Borders.com, Waldenbooks.com,
      Borders.co.uk and Booksetc.co.uk 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.











**Results
      of Operations**





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





**13
                Weeks Ended**
            
            **26
                Weeks Ended****August
                4, 2007**
            
            **July
                29, 2006**
            
            **August
                4, 2007**
            
            **July
                29, 2006**Sales
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %Other
                revenue
            
            
            1.2
            
            
            1.2
            
            
            1.1
            
            
            1.0Total revenue
            
            
            101.2
            
            
            101.2
            
            
            101.1
            
            
            101.0Cost
                of merchandise sold (includes occupancy)
            
            
            77.2
            
            
            77.3
            
            
            77.8
            
            
            77.4Gross margin
            
            
            24.0
            
            
            23.9
            
            
            23.3
            
            
            23.6Selling,
                general and administrative expenses
            
            
            27.0
            
            
            26.1
            
            
            27.4
            
            
            26.1Pre-opening
                expense
            
            
            0.2
            
            
            0.3
            
            
            0.1
            
            
            0.2Asset
                impairments and other writedowns
            
            
            -
            
            
            0.2
            
            
            0.1
            
            
            0.1Operating loss
            
            
            (3.2
            )
            
            (2.7
            )
            
            (4.3
            )
            
            (2.8
            )Interest
                expense
            
            
            1.2
            
            
            0.9
            
            
            1.2
            
            
            0.8Loss before income tax
            
            
            (4.4
            )
            
            (3.6
            )
            
            (5.5
            )
            
            (3.6
            )Income
                tax benefit
            
            
            (1.7
            )
            
            (1.4
            )
            
            (2.2
            )
            
            (1.4
            )Net loss
            
            
            (2.7
            )%
            
            (2.2
            )%
            
            (3.3
            )%
            
            (2.2
            )%








**Consolidated
      Results -- Comparison of the 13 weeks ended August 4, 2007 to the 13 weeks
      ended
      July 29, 2006**





***Sales***





Consolidated
      sales increased $89.1 million, or 10.4%, to $945.1 million in 2007 from $856.0
      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 4.6% in the 13 weeks
      ended August 4, 2007, primarily driven by record sales of the seventh and final
      book in the Harry Potter series, “Harry Potter and the Deathly Hallows.”
Excluding sales of Harry Potter, comparable store sales increased by 0.4% for
      the quarter, driven by positive comparable store sales of children’s and bargain
      books, cafe products and gift and stationery merchandise. Partially offsetting
      these increases were decreased comparable store sales of music. The impact
      of
      price changes on comparable store sales was not significant.





Waldenbooks
      Specialty Retail comparable store sales increased 6.2% in the 13 weeks ended
      August 4, 2007, also driven by record sales of the Harry Potter title. Excluding
      sales of Harry Potter, comparable store sales were flat for the quarter. The
      impact of price changes on comparable store sales was not
      significant.





Comparable
      store sales for International Borders superstores increased 8.2% in the 13
      weeks
      ended August 4, 2007, resulting from Harry Potter. Excluding sales of Harry
      Potter, comparable store sales increased by 5.6% for the quarter, which included
      comparable store sales increases for the U.K., Australia, Singapore and Puerto
      Rico 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 for the
      International segment also includes license fees received from Starbucks Coffee
      Company (U.K.) Limited. Other revenue in the Waldenbooks Specialty Retail
      segment primarily consists of income recognized from unredeemed gift
      cards.










Other
      revenue has increased $1.3 million, or 12.6%, to $11.6 million in 2007 from
      $10.3 million in 2006. This was due to an increase in the International segment,
      partially offset by a decrease in the Waldenbooks Specialty Retail segment.
      Other revenue in the Borders segment remained essentially flat in 2007 as
      compared to 2006. The increase in the International segment was due to increased
      license fees received from Starbucks Coffee Company (U.K.) Limited in 2007,
      due
      to increased store count, and increased revenue from franchisees. The
      Waldenbooks Specialty Retail decrease was due to decreased income recognized
      from unredeemed gift cards in 2007.





***Gross
      margin***





Consolidated
      gross margin increased $22.0 million, or 10.7%, to $226.8 million in 2007 from
      $204.8 million in 2006. As a percentage of sales, consolidated gross margin
      increased 0.1%, to 24.0% in 2007 from 23.9% in 2006. This was due to an increase
      in the International segment, partially offset by a decrease in the Borders
      and
      Waldenbooks Specialty Retail segments’ gross margin as a percentage of sales.
      The increase in the International segment’s gross margin as a percent of sales
      resulted from decreased occupancy costs as a percentage of sales, driven by
      the
      increase in comparable store sales and lower depreciation expense as a
      percentage of sales resulting from fourth quarter 2006 asset impairments. In
      addition, International gross margin as a percentage of sales benefited from
      increased other revenue as a percentage of sales, as well as the correction
      in
      2006 of a prior year error in the reserve for aged non-returnable inventory.
      These improvements were partially offset by increased promotional discounts
      as a
      percentage of sales, mainly related to sales of Harry Potter. The decrease
      in
      the Borders segment was primarily due to increased promotional discounts and
      increased shrinkage, partially offset by decreased distribution costs as a
      percentage of sales, due to the increase in comparable store sales. The decrease
      in the Waldenbooks Specialty Retail segment was also due to increased
      promotional discounts, as well as increased distribution costs, partially offset
      by decreased occupancy costs due to the increase in comparable store 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 $31.6 million,
      or 14.2%, to $254.9 million in 2007 from $223.3 million in 2006. As a percentage
      of sales, SG&A increased 0.9%, to 27.0% in 2007 from 26.1% in 2006. This
      increase primarily resulted from increased SG&A expenses as a percentage of
      sales for the Borders segment, partially offset by decreases as a percentage
      of
      sales in the Waldenbooks Specialty Retail and International segments. SG&A
      in the Borders segment 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 and the investment
      in
      strategic initiatives. In addition, store payroll and advertising increased
      as a
      percentage of sales. Partially offsetting these increases were decreased store
      operating expenses as a percentage of sales. Waldenbooks Specialty Retail
      SG&A decreased due to a decrease in store payroll and operating expenses as
      a percentage of sales, as well as decreased corporate operating expenses as
      a
      percentage of sales, due to decreased depreciation expense resulting from fourth
      quarter 2006 asset impairments. Partially offsetting these decreases were
      increased corporate payroll expense as a percentage of sales, and increased
      advertising expense as a percentage of sales. The decrease in the International
      segment was primarily the result of decreased corporate and store expenses
      as a
      percentage of sales, due to comparable store sales increases. Also contributing
      to the decrease was the correction in 2006 of a prior period error in the
      calculation of transaction currency gains and losses. Partially offsetting
      these
      decreases 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 $3.8 million, or 49.4%, to $11.5 million in 2007
      from
      $7.7 million in 2006. This was primarily a result of increased borrowings to
      fund capital expenditures and inventory investment.





***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. The Company's annual effective tax rate used
      was
      39.0% in 2007 and 2006.





***Net
      loss***





Due
      to
      the factors mentioned above, net loss as a percentage of sales increased to
      2.7%
      in 2007 from 2.2% in 2006, and net loss dollars increased $6.7 million, or
      36.4%, to $25.1 million in 2007 from $18.4 million in 2006.





**Consolidated
      Results -- Comparison of the 26 weeks ended August 4, 2007 to the 26 weeks
      ended
      July 29, 2006**





***Sales***





Consolidated
      sales increased $105.9 million, or 6.2%, to $1,821.9 million in 2007 from
      $1,716.0 million in 2006. This resulted primarily from increased sales in the
      domestic Borders superstores and International segments, partially offset by
      a
      decrease 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 26 weeks
      ended August 4, 2007, primarily driven by record sales of “Harry Potter and the
      Deathly Hallows.” Excluding sales of Harry Potter, comparable store sales
      decreased by 0.8% for the year, driven primarily by negative comparable store
      sales of music, partially offset by positive comparable store sales in the
      cafe
      and gifts and stationary categories. The impact of price changes on comparable
      store sales was not significant.





Waldenbooks
      Specialty Retail comparable store sales increased 2.6% in the 26 weeks ended
      August 4, 2007, primarily driven by Harry Potter. Excluding sales of Harry
      Potter, comparable store sales declined by 0.5% for the year. The impact of
      price changes on comparable store sales was not significant.





Comparable
      store sales for International Borders superstores increased 2.9% in the 26
      weeks
      ended August 4, 2007, also as a result of Harry Potter. Excluding sales of
      Harry
      Potter, comparable store sales increased by 1.5% for the quarter, which included
      comparable store sales increases for the U.K., Australia, Singapore and New
      Zealand 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 for the
      International segment also includes license fees received from Starbucks Coffee
      Company (U.K.) Limited. Other revenue in the Waldenbooks Specialty Retail
      segment primarily consists of income recognized from unredeemed gift
      cards.





Other
      revenue has increased $2.5 million, or 13.8%, to $20.6 million in 2007 from
      $18.1 million in 2006. This was due to an increase in the International segment,
      partially offset by a decrease in the Waldenbooks Specialty Retail segment.
      Other revenue in the Borders segment remained essentially flat in 2007 as
      compared to 2006. The increase in the International segment was due to increased
      license fees received from Starbucks Coffee Company (U.K.) Limited in 2007,
      due
      to increased store count, and increased revenue from franchisees. The
      Waldenbooks Specialty Retail decrease was due to decreased income recognized
      from unredeemed gift cards in 2007.










***Gross
      margin***





Consolidated
      gross margin increased $18.1 million, or 4.5%, to $423.6 million in 2007 from
      $405.5 million in 2006. As a percentage of sales, consolidated gross margin
      decreased 0.3%, to 23.3% in 2007 from 23.6% in 2006. This was due to a decrease
      in the Borders and Waldenbooks Specialty Retail segments’ gross margin as a
      percentage of sales, partially offset by an increase in the International
      segment. The decrease in the Borders segment was primarily due to increased
      occupancy costs as a percentage of sales, due to occupancy costs increasing
      at
      rates higher than comparable store sales, as well as increased promotional
      discounts related to Harry Potter. Partially offsetting these items were
      decreased distribution costs as a percentage of sales, due to the increase
      in
      comparable store sales. The decrease in the Waldenbooks Specialty Retail segment
      was due to increased promotional discounts and increased distribution costs,
      partially offset by decreased occupancy costs due to the increase in comparable
      store sales. The increase in the International segment resulted from decreased
      occupancy costs as a percentage of sales, driven by the increase in comparable
      store sales and lower depreciation expense as a percentage of sales resulting
      from fourth quarter 2006 asset impairments. In addition, International gross
      margin as a percentage of sales improved due to increased other revenue as
      a
      percentage of sales, as well as the correction in 2006 of a prior year error
      in
      the reserve for aged non-returnable inventory.





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 $49.8 million,
      or 11.1%, to $498.5 million in 2007 from $448.7 million in 2006. As a percentage
      of sales, SG&A increased 1.3%, to 27.4% in 2007 from 26.1% in 2006. This
      increase primarily resulted from increased SG&A expenses as a percentage of
      sales for the Borders and Waldenbooks Specialty Retail segments, partially
      offset by a decrease in the International segment. The increase in the Borders
      segment was primarily due to increased corporate payroll and corporate and
      store
      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 advertising increased as a percentage of sales. The increase
      in the Waldenbooks Specialty Retail segment was primarily due to increased
      corporate payroll expense as a percentage of sales, as well as increased
      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. SG&A decreased in the
      International segment due to decreased corporate and store expenses as a
      percentage of sales, due to comparable store sales increases. Also contributing
      to the decrease was the correction in 2006 of a prior period error in the
      calculation of transaction currency gains and losses. Partially offsetting
      these
      decreases 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 $8.3 million, or 63.4%, to $21.4 million in 2007
      from
      $13.1 million in 2006. This was primarily a result of increased borrowings
      to
      fund capital expenditures and inventory investment.





***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. The Company's annual effective tax rate used
      was
      39.0% in 2007 and 2006.










***Net
      loss***





Due
      to
      the factors mentioned above, net loss as a percentage of sales increased to
      3.3%
      in 2007 from 2.2% in 2006, and net loss dollars increased $22.4 million, or
      58.0%, to $61.0 million in 2007 from $38.6 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, Books etc. and Paperchase stores), and Corporate (consisting
      of certain corporate governance and incentive costs). See “Note 5 - Segment
      Information” in the notes to consolidated financial statements for further
      information relating to these segments.





**Domestic
      Borders Superstores**





**13
                Weeks Ended**
            
            **26
                Weeks Ended******(dollar
                amounts in millions)
            
            **August
                4, 2007**
            
            **July
                29, 2006**
            
            **August
                4, 2007**
            
            **July
                29, 2006**Sales
            
            $
            658.6
            
            $
            600.1
            
            $
            1,273.6
            
            $
            1,206.5Other
                revenue
            
            $
            7.3
            
            $
            7.2
            
            $
            12.2
            
            $
            12.3Operating
                income (loss)
            
            $
            (2.9
            )
            $
            11.0
            
            $
            (24.9
            )
            $
            12.5Operating
                income (loss) as % of sales
            
            
            (0.4
            )%
            
            1.8
            %
            
            (2.0
            )%
            
            1.0
            %Store
                openings
            
            
            4
            
            
            2
            
            
            8
            
            
            7Store
                closings
            
            
            -
            
            
            4
            
            
            1
            
            
            4Store
                count
            
            
            506
            
            
            476
            
            
            506
            
            
            476





**Domestic
      Borders Superstores - Comparison of the 13 weeks ended August 4, 2007 to the
      13
      weeks ended July 29, 2006**





***Sales***





Borders'
      sales increased $58.5 million, or 9.7%, to $658.6 million in 2007 from $600.1
      million in 2006. This increase was comprised of comparable store sales increases
      of $27.2 million and non-comparable sales primarily associated with 2007 and
      2006 store openings of $31.3 million.





***Other
      revenue***





Other
      revenue remained essentially flat, increasing $0.1 million, or 1.4%, to $7.3
      million in 2007 from $7.2 million in 2006.





***Gross
      margin***





Gross
      margin as a percentage of sales decreased 0.7%, to 25.8% in 2007 from 26.5%
      in
      2006. This was primarily due to increased promotional discounts, mainly related
      to Harry Potter sales, and shrinkage of 1.3% as a percentage of sales. Partially
      offsetting these items were improved gross margin from sales mix and decreased
      distribution costs as a percentage of sales of 0.6%, due to the increase in
      comparable store sales. Occupancy costs were flat as a percentage of sales.





Gross
      margin dollars increased $10.8 million, or 6.8%, to $170.1 million in 2007
      from
      $159.3 million in 2006, which was primarily due to new store openings and
      increased comparable store sales, partially offset by the decline in the gross
      margin rate discussed above.





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





SG&A
      as a percentage of sales increased 1.8%, to 26.0% in 2007 from 24.2% in 2006,
      primarily due to increased corporate payroll and operating expenses of 1.7%
      as a
      percentage of sales, mainly the result of the settlement of the California
      overtime litigation in 2007 and the investment in strategic initiatives. In
      addition, store payroll increased 0.2% as a percentage of sales and advertising
      increased 0.1% as a percentage of sales. Partially offsetting these increases
      were decreased store operating expenses of 0.2% as a percentage of
      sales.










SG&A
      dollars increased $26.6 million, or 18.4%, to $171.5 million in 2007 from $144.9
      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, and the settlement of the California overtime litigation
      in 2007 of $3.5 million.





***Operating
      income (loss)***





Due
      to
      the factors mentioned above, operating loss as a percentage of sales was 0.4%
      in
      2007 compared to operating income of 1.8% in 2006. Operating loss was $2.9
      million in 2007 compared to operating income of $11.0 million in
      2006.





**Domestic
      Borders Superstores - Comparison of the 26 weeks ended August 4, 2007 to the
      26
      weeks ended July 29, 2006**





***Sales***





Borders'
      sales increased $67.1 million, or 5.6%, to $1,273.6 million in 2007 from
      $1,206.5 million in 2006. This increase was comprised of non-comparable sales
      primarily associated with 2007 and 2006 store openings of $51.3 million and
      comparable store sales increases of $15.8 million.





***Other
      revenue***





Other
      revenue remained essentially flat, decreasing $0.1 million, or 0.8%, to $12.2
      million in 2007 from $12.3 million in 2006.





***Gross
      margin***





Gross
      margin as a percentage of sales decreased 1.2%, to 24.8% in 2007 from 26.0%
      in
      2006. This was primarily due to increased occupancy costs as a percentage of
      sales of 0.8%, due to occupancy costs increasing at rates higher than comparable
      store sales, as well as increased promotional discounts and other costs of
      0.7%
      as a percentage of sales, mainly related to sales of the Harry Potter series.
      Partially offsetting these items were decreased distribution costs as a
      percentage of sales of 0.3%, due to the increase in comparable store sales.





Gross
      margin dollars increased $1.1 million, or 0.3%, to $315.4 million in 2007 from
      $314.3 million in 2006, which was primarily due to new store openings and
      increased comparable store sales, partially offset by the decline in the gross
      margin rate discussed above.





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





SG&A
      as a percentage of sales increased 1.9%, to 26.5% in 2007 from 24.6% in 2006,
      primarily due to increased corporate payroll and corporate and store operating
      expenses of 1.2% 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 increased 0.6% as a percentage of sales
      and
      advertising increased 0.1% as a percentage of sales.





SG&A
      dollars increased $40.1 million, or 13.5%, to $337.0 million in 2007 from $296.9
      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
      income (loss)***





Due
      to
      the factors mentioned above, operating loss as a percentage of sales was 2.0%
      in
      2007 compared to operating income of 1.0% in 2006. Operating loss was $24.9
      million in 2007 compared to operating income of $12.5 million in
      2006.








**Waldenbooks
      Specialty Retail**





**13
                Weeks Ended**
            
            **26
                Weeks Ended**(dollar
                amounts in millions)
            
            **August
                4, 2007**
            
            **July
                29, 2006**
            
            **August
                4, 2007**
            
            **July
                29, 2006**Sales
            
            $
            116.7
            
            $
            126.5
            
            $
            224.8
            
            $
            253.7Other
                revenue
            
            $
            0.4
            
            $
            0.8
            
            $
            0.9
            
            $
            1.3Operating
                loss
            
            $
            (12.4
            )
            $
            (12.6
            )
            $
            (26.4
            )
            $
            (28.6
            )Operating
                loss as % of sales
            
            
            (10.6
            )%
            
            (10.0
            )%
            
            (11.7
            )%
            
            (11.3
            )%Store
                Openings
            
            
            -
            
            
            -
            
            
            -
            
            
            3Store
                Closings
            
            
            21
            
            
            10
            
            
            32
            
            
            26Store
                Count
            
            
            532
            
            
            655
            
            
            532
            
            
            655





**Waldenbooks
      Specialty Retail - Comparison of the 13 weeks ended August 4, 2007 to the 13
      weeks ended July 29, 2006**





***Sales***





Waldenbooks
      Specialty Retail sales decreased $9.8 million, or 7.7%, to $116.7 million in
      2007 from $126.5 million in 2006. This decrease was comprised of decreased
      non-comparable sales associated with 2007 and 2006 store closings of $16.4
      million, partially offset by increased comparable store sales of $6.6
      million.





***Other
      revenue***





Other
      revenue decreased $0.4 million, or 50.0%, to $0.4 million in 2007 from $0.8
      million in 2006. This was primarily due to decreased income recognized from
      unredeemed gift cards in 2007.





***Gross
      margin***





Gross
      margin as a percentage of sales decreased 1.1%, to 18.9% in 2007 from 20.0%
      in
      2006. This was primarily due to increased promotional discounts and other costs
      of 2.4% as a percentage of sales, mainly related to Harry Potter sales, and
      increased distribution costs of 1.0% as a percentage of sales. Partially
      offsetting these increases were decreased occupancy costs as a percentage of
      sales of 2.3%, primarily due to the increase in comparable store sales.





Gross
      margin dollars decreased $3.1 million, or 12.3%, to $22.1 million in 2007 from
      $25.2 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 decreased 0.3%, to 29.3% in 2007 from 29.6% in
      2006. This was
      primarily due to a decrease in store payroll and operating expenses of 1.1%
      as a
      percentage of sales, driven by the increase in comparable store sales, and
      decreased corporate operating expenses of 1.1% as a percentage of sales, due
      to
      decreased depreciation expense resulting from fourth quarter 2006 asset
      impairments. Partially offsetting these decreases were increased corporate
      payroll expense of 1.5% as a percentage of sales and increased advertising
      expense of 0.4% as a percentage of sales.





SG&A
      dollars decreased $3.3 million, or 8.8%, to $34.2 million in 2007 from $37.5
      million in 2006, primarily due to store closures.





***Operating
      loss***





Due
      to
      the factors mentioned above, operating loss as a percentage of sales was 10.6%
      in 2007 compared to 10.0% in 2006. Operating loss was $12.4 million in 2007
      compared to $12.6 million in 2006.








**Waldenbooks
      Specialty Retail - Comparison of the 26 weeks ended August 4, 2007 to the 26
      weeks ended July 29, 2006**





***Sales***





Waldenbooks
      Specialty Retail sales decreased $28.9 million, or 11.4%, to $224.8 million
      in
      2007 from $253.7 million in 2006. This decrease was comprised of decreased
      non-comparable sales associated with 2007 and 2006 store closings of $34.4
      million, partially offset by increased comparable store sales of $5.5
      million.





***Other
      revenue***





Other
      revenue decreased $0.4 million, or 30.8%, to $0.9 million in 2007 from $1.3
      million in 2006. This was primarily due to decreased income recognized from
      unredeemed gift cards in 2007.





***Gross
      margin***





Gross
      margin as a percentage of sales decreased 0.6%, to 18.8% in 2007 from 19.4%
      in
      2006. This was primarily due to increased promotional discounts and other costs
      of 1.5% as a percentage of sales, mainly related to sales of the seventh and
      final book in the Harry Potter series, and increased distribution costs of
      0.7%
      as a percentage of sales. Partially offsetting these increases were decreased
      occupancy costs as a percentage of sales of 1.6%, primarily due to the increase
      in comparable store sales.





Gross
      margin dollars decreased $6.8 million, or 13.8%, to $42.3 million in 2007 from
      $49.1 million in 2006, primarily due to store closures, the decline in
      comparable store sales and the decrease in gross margin percentage noted
      above.





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





SG&A
      as a percentage of sales increased 0.1%, to 30.4% in 2007 from 30.3% in 2006.
      This was primarily due to increased corporate payroll expense of 1.1% as a
      percentage of sales and increased advertising expense of 0.2% 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 0.3% as a percentage of sales, driven by the increase in comparable store
      sales, and decreased corporate operating expenses of 0.9% as a percentage of
      sales, due to decreased depreciation expense resulting from fourth quarter
      2006
      asset impairments.





SG&A
      dollars decreased $8.4 million, or 10.9%, to $68.4 million in 2007 from $76.8
      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 was 11.7%
      in 2007 compared to 11.3% in 2006. Operating loss was $26.4 million in 2007
      compared to $28.6 million in 2006.








**International**





**13
                Weeks Ended**
            
            **26
                Weeks Ended******(dollar
                amounts in millions)
            
            **August
                4, 2007**
            
            **July
                29, 2006**
            
            **August
                4, 2007**
            
            **July
                29, 2006**Sales
            
            $
            169.8
            
            $
            129.4
            
            $
            323.5
            
            $
            255.8Other
                revenue
            
            $
            3.9
            
            $
            2.3
            
            $
            7.5
            
            $
            4.5Operating
                loss
            
            $
            (9.8
            )
            $
            (16.0
            )
            $
            (19.6
            )
            $
            (26.3
            )Operating
                loss as % of sales
            
            
            (5.8
            )%
            
            (12.4
            )%
            
            (6.1
            )%
            
            (10.3
            )%Superstore
                Store Openings
            
            
            -
            
            
            3
            
            
            2
            
            
            4Superstore
                Store Count
            
            
            70
            
            
            59
            
            
            70
            
            
            59Books
                etc. Store Closings
            
            
            2
            
            
            -
            
            
            2
            
            
            1Books
                etc. Store Count
            
            
            28
            
            
            32
            
            
            28
            
            
            32








**International
      - Comparison of the 13 weeks ended August 4, 2007 to the 13 weeks ended July
      29,
      2006**





***Sales***





International
      sales increased $40.4 million, or 31.2%, to $169.8 million in 2007 from $129.4
      million in 2006. Of this increase in sales, $11.2 million was due to the
      translation of foreign currencies to U.S. dollars. The remaining $29.2 million
      was the result of new superstore openings and the increase in comparable store
      sales.








***Other
      revenue***





Other
      revenue increased $1.6 million, or 69.6%, to $3.9 million in 2007 from $2.3
      million in 2006. This was due to increased license fees received from Starbucks
      Coffee Company (U.K.) Limited in 2007, due to increased store count, and
      increased revenue from franchisees.





***Gross
      margin***





Gross
      margin as a percentage of sales increased 4.8%, to 20.4% in 2007 from 15.6%
      in
      2006, primarily the result of decreased occupancy costs as a percentage of
      sales
      of 2.0%, driven by the increase in comparable store sales and lower depreciation
      expense. In the fourth quarter of 2006, the Company impaired a significant
      amount of fixed assets relating to certain U.K. superstores and Books etc.
      stores. Also positively impacting gross margin was increased other revenue
      as a
      percentage of sales of 0.5%, as discussed above, and the correction in 2006
      of a
      prior year error in the reserve for aged non-returnable inventory in Books
      etc.
      and United Kingdom superstores of 3.6% as a percentage of sales. These
      improvements were partially offset by increased promotional discounts and other
      costs of 1.3% as a percentage of sales, mainly related to sales of Harry
      Potter.





Gross
      margin dollars increased $14.3 million, or 70.4%, to $34.6 million in 2007
      from
      $20.3 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 $2.9 million.





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





SG&A
      as a percentage of sales decreased 1.7%, to 25.9% in 2007 from 27.6% in 2006.
      This was primarily the result of decreased corporate and store expenses of
      2.1%
      as a percentage of sales, due to comparable store sales increases. Also
      contributing to the decrease was the correction in 2006 of a prior period error
      in the calculation of transaction currency gains and losses. Partially
      offsetting these decreases were increased advertising costs of 0.4% as a
      percentage of sales.





SG&A
      dollars increased $8.3 million, or 23.2%, to $44.0 million in 2007 from $35.7
      million in 2006. Of this increase, $3.7 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. Partially offsetting these increases was the correction in 2006 of
      a
      prior period error in the calculation of transaction currency gains and
      losses.





***Operating
      loss***





Due
      to
      the factors mentioned above, operating loss as a percentage of sales was 5.8%
      in
      2007 compared to 12.4% in 2006. Operating loss was $9.8 million in 2007 compared
      to $16.0 million in 2006.





**International
      - Comparison of the 26 weeks ended August 4, 2007 to the 26 weeks ended July
      29,
      2006**





***Sales***





International
      sales increased $67.7 million, or 26.5%, to $323.5 million in 2007 from $255.8
      million in 2006. Of this increase in sales, $24.7 million was due to the
      translation of foreign currencies to U.S. dollars. The remaining $43.0 million
      was the result of new superstore openings and the increase in comparable store
      sales.










***Other
      revenue***





Other
      revenue increased $3.0 million, or 66.7%, to $7.5 million in 2007 from $4.5
      million in 2006. This was due to increased license fees received from Starbucks
      Coffee Company (U.K.) Limited in 2007, due to increased store count, and
      increased revenue from franchisees.





***Gross
      margin***





Gross
      margin as a percentage of sales increased 3.9%, to 20.4% in 2007 from 16.5%
      in
      2006, primarily the result of decreased occupancy costs as a percentage of
      sales
      of 1.6%, driven by the increase in comparable store sales and lower depreciation
      expense. In the fourth quarter of 2006, the Company impaired a significant
      amount of fixed assets relating to certain U.K. superstores and Books etc.
      stores. Also positively impacting gross margin was increased other revenue
      as a
      percentage of sales of 0.5%, as discussed above, and the correction in 2006
      of a
      prior year error in the reserve for aged non-returnable inventory in Books
      etc.
      and United Kingdom superstores of 1.8% as a percentage of sales.





Gross
      margin dollars increased $23.8 million, or 56.5%, to $65.9 million in 2007
      from
      $42.1 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 $5.8 million.








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





SG&A
      as a percentage of sales decreased 0.2%, to 26.2% in 2007 from 26.4% in 2006.
      This was primarily the result of decreased store expenses of 0.9% as a
      percentage of sales, due to the increase in comparable store sales, partially
      offset by increased advertising costs of 0.4% as a percentage of sales. Also
      impacting SG&A were increased corporate expenses of 0.3% as a percentage of
      sales, due to increased spending to support the strategic alternatives
      process.





SG&A
      dollars increased $17.4 million, or 25.8%, to $84.8 million in 2007 from $67.4
      million in 2006. Of this increase, $7.3 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. Partially offsetting these increases was the correction in 2006 of
      a
      prior period error in the calculation of transaction currency gains and
      losses.





***Operating
      loss***





Due
      to
      the factors mentioned above, operating loss as a percentage of sales was 6.1%
      in
      2007 compared to 10.3% in 2006. Operating loss was $19.6 million in 2007
      compared to $26.3 million in 2006.





**Corporate**





**13
                Weeks Ended**
            
            **26
                Weeks Ended**(dollar
                amounts in millions)
            
            **August
                4, 2007**
            
            **July
                29, 2006**
            
            **August
                4, 2007**
            
            **July
                29, 2006**Operating
                loss
            
            $
            (5.2
            )
            $
            (5.2
            )
            $
            (8.3
            )
            $
            (7.6
            )





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





**Corporate
      - Comparison of the 13 weeks ended August 4, 2007 to the 13 weeks ended July
      29,
      2006**





Operating
      loss dollars remained flat in 2007 from $5.2 million in 2006.





**Corporate
      - Comparison of the 26 weeks ended August 4, 2007 to the 26 weeks ended July
      29,
      2006**





Operating
      loss dollars increased $0.7 million to $8.3 million in 2007 from $7.6 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 was $145.7 million and $218.3 million for the 26 weeks
      ended
      August 4, 2007 and July 29, 2006, respectively. Operating cash outflows for
      the
      period represent operating results, an increase in prepaid expenses and
      decreases in accounts payable, taxes payable, expenses payable and accrued
      liabilities, and other long-term liabilities. The current period operating
      cash
      inflows primarily reflect non-cash charges for depreciation and decreases in
      inventories, accounts receivable and other long-term assets. Also affecting
      operating cash was an adjustment to net income resulting from a gain on the
      sale
      of assets, as well as a non-cash increase in deferred income taxes.





Net
      cash
      used for investing was $74.7 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 the proceeds from the
      sale
      of assets of $1.2 million. Net cash used for investing was $65.6 million in
      2006, which primarily resulted from capital expenditures of $87.2 million,
      partially offset by the proceeds from the sale of investments of $21.6 million.





Net
      cash
      provided by financing was $175.8 million in 2007, resulting primarily from
      funding from the credit facility of $183.1 million, as well as proceeds
      from the exercise of employee stock options of $5.6 million and the associated
      excess tax benefit of $0.3 million. Partially offsetting these items were
      the payment of cash dividends on shares of the Company’s common stock of
      $13.0 million and the repayment of long-term debt obligations of
      $0.2 million. Net cash provided by financing was $291.7 million in
      2006.





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 currently
      plans to open approximately 20 domestic Borders superstores and 7 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, and intends to pay
      regular quarterly cash dividends, subject to Board approval, going forward.
      In
      December 2006, the Board of Directors increased the quarterly dividend by 10.0%
      to $0.11 per share. 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 August 4, 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 $722.8 million
      at August 4, 2007, $506.9 million at July 29, 2006 and $539.6 million at
      February 3, 2007.





As
      of
      August 4, 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. As discussed in “Note 6 - Subsequent
      Event,” the Credit Agreement was amended on August 28, 2007. Under this
      amendment, the fixed charge coverage ratio requirement will not be applicable
      through November 3, 2007, subject to certain conditions. In addition, the
      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 August 4,
      2007.





**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 second 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, 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 August 4, 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
      the second quarter of fiscal 2007.





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





There
      were no shares repurchases during the second quarter of fiscal
      2007.





**Item
      4. Submission of Matters to a Vote of Securityholders**





The
      following actions were taken at the Annual Meeting of the Company held on May
      24, 2007, with the votes on such matters being indicated as below:





1.  The
      following individuals were elected to serve as directors for one year terms
      expiring in 2008:





******Name**
            
            ******For**
            
            **Withheld**Donald
                G. Campbell
            
            
            50,691,381
            
            
            725,816Joel
                J. Cohen
            
            
            50,098,120
            
            
            1,319,077George
                L. Jones
            
            
            50,686,652
            
            
            730,546Amy
                B. Lane
            
            
            50,680,110
            
            
            737,087Brian
                T. Light
            
            
            50,692,469
            
            
            724,729Victor
                L. Lund
            
            
            50,677,466
            
            
            739,731Dr.
                Edna Greene Medford
            
            
            50,314,069
            
            
            1,103,129Lawrence
                I. Pollock
            
            
            50,063,683
            
            
            1,353,515Michael
                Weiss
            
            
            50,281,183
            
            
            1,136,015











2.
      Approve an Amendment to the Restated Articles of Incorporation of the Company
      to
      provide for majority voting in uncontested election of directors:





For
            
            
            50,718,030
                SharesAgainst
            
            
            617,510
                SharesAbstain
            
            
            81,658
                SharesBroker
                Non-Votes
            
            
            0
                Shares





3.
      Ratification of the selection of Ernst & Young LLP as the Company’s
      independent registered public accounting firm for fiscal 2007:





For
            
            
            51,334,627
                SharesAgainst
            
            
            56,085
                SharesAbstain
            
            
            26,486
                SharesBroker
                Non-Votes
            
            
            0
                Shares





4.
      Shareholder proposal entitled “Special Shareholder Meetings.”





For
            
            
            31,093,761
                SharesAgainst
            
            
            14,140,617
                SharesAbstain
            
            
            55,353
                SharesBroker
                Non-Votes
            
            
            6,127,467
                Shares





5.
      Shareholder proposal entitled “Separate the Roles of CEO and
      Chairman.”





For
            
            
            17,841,573
                SharesAgainst
            
            
            27,392,929
                SharesAbstain
            
            
            55,229
                SharesBroker
                Non-Votes
            
            
            6,127,467
                Shares








**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 By laws 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.3.6(6)
            Amendment
                No. 1 to Second Amended and Restated Multicurrency Revolving Credit
                Agreement dated as of April 2, 2007, among the Company, its subsidiaries
                named therein and the lenders named therein10.38(7)
            Amendment
                No. 2 to the Second Amended and Restated Multicurrency Revolving
                Credit
                Agreement dated as of July 31, 2006 among Borders Group, Inc. its
                subsidiaries and Parties thereto10.39
            Separation
                Agreement between Mr. Vanzura and the Company31.1
            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).(6)
            Incorporated
                by reference from the Company’s Current Report on Form 8-K dated April 2,
                2007 (File No. 1-13740).(7)
            Incorporated
                by reference from the Company’s Current Report on Form 8-K dated August
                28, 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:
      September 6, 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 By laws 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.3.6(6)
            Amendment
                No. 1 to Second Amended and Restated Multicurrency Revolving Credit
                Agreement dated as of April 2, 2007, among the Company, its subsidiaries
                named therein and the lenders named therein10.38(7)
            Amendment
                No. 2 to the Second Amended and Restated Multicurrency Revolving
                Credit
                Agreement dated as of July 31, 2006 among Borders Group, Inc. its
                subsidiaries and Parties thereto10.39
            Separation
                Agreement between Mr. Vanzura and the Company31.1
            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).(6)
            Incorporated
                by reference from the Company’s Current Report on Form 8-K dated April 2,
                2007 (File No. 1-13740).(7)
            Incorporated
                by reference from the Company’s Current Report on Form 8-K dated August
                28, 2007 (File No. 1-13740).