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 April 29, 2006OR[
                ]
            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 June 2, 2006 was
      64,166,804.











**BORDERS
      GROUP, INC.**





**INDEX**


**Page**Part
                I - Financial InformationItem
                1. Financial Statements
            
            
            1Item
                2. Management's Discussion and Analysis ofFinancial
                Condition and Results ofOperations
            
            
            10Item
                3. Quantitative and Qualitative Disclosures aboutMarket
                Risk
            
            
            20Item
                4. Controls and Procedures
            
            
            20Part
                II - Other informationItem
                1. Legal Proceedings
            
            
            21Item
                1A. Risk Factors
            
            
            21Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            
            
            21Item
                3. Defaults Upon Senior Securities
            
            
            N/AItem
                4. Submission of Matters to a Vote of
            
            
            N/ASecurityholdersItem
                5. Other Information
            
            
            N/AItem
                6. Exhibits
            
            
            22Signatures
            
            
            23











**BORDERS
      GROUP, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


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


**(UNAUDITED)**








**13****Weeks
                Ended****April
                29,**
              **2006**
            
            **April
                23,**
              **2005**Sales
            
            $
            860.0
            
            $
            847.2Other
                revenue
            
            
            7.8
            
            
            10.1Total
                revenue
            
            
            867.8
            
            
            857.3Cost
                of merchandise sold (includes occupancy)
            
            
            667.1
            
            
            640.7Gross
                margin
            
            
            200.7
            
            
            216.6Selling,
                general and administrative expenses
            
            
            225.4
            
            
            221.3Pre-opening
                expense
            
            
            1.9
            
            
            1.2Asset
                impairments and other writedowns
            
            
            0.6
            
            
            0.3Operating
                income (loss)
            
            
            (27.2
            )
            
            (6.2
            )Interest
                expense
            
            
            5.4
            
            
            2.2Income
                (loss) before income tax
            
            
            (32.6
            )
            
            (8.4
            )Income
                tax provision (benefit)
            
            
            (12.4
            )
            
            (3.1
            )Net
                income (loss)
            
            $
            (20.2
            )
            $
            (5.3
            )Earnings
                (loss) per common share data*Diluted:*Income
                (loss) per common share
            
            $
            (0.31
            )
            $
            (0.07
            )Weighted
                average common shares outstanding (in millions)
            
            
            64.4
            
            
            73.2*Basic:*Income
                (loss) per common share
            
            $
            (0.31
            )
            $
            (0.07
            )Weighted
                average common shares outstanding (in millions)
            
            
            64.4
            
            
            73.2Dividends
                declared per common share
            
            $
            0.10
            
            $
            0.09








See
      accompanying Notes to Unaudited Condensed Consolidated Financial
      Statements.





1


**BORDERS
      GROUP, INC.**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


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


**(UNAUDITED)**








**April
                29,**
              **2006**
            
            **April
                23,**
              **2005**
            
            **January
                28,**
              **2006****Assets**Current
                assets:Cash
                and cash equivalents
            
            $
            47.0
            
            $
            94.4
            
            $
            81.6Merchandise
                inventories
            
            
            1,457.9
            
            
            1,335.7
            
            
            1,405.9Accounts
                receivable and other current assets
            
            
            159.5
            
            
            121.1
            
            
            150.3Total
                current assets
            
            
            1,664.4
            
            
            1,551.2
            
            
            1,637.8Property
                and equipment, net of accumulated depreciation of$992.4,
                $943.3 and $966.5 at April 29, 2006, April 23,2005
                and January 28, 2006, respectively
            
            
            717.8
            
            
            648.4
            
            
            703.9Other
                assets
            
            
            78.9
            
            
            86.8
            
            
            79.7Deferred
                income taxes
            
            
            40.5
            
            
            14.6
            
            
            26.3Goodwill
            
            
            125.6
            
            
            130.2
            
            
            124.5Total
                assets
            
            $
            2,627.2
            
            $
            2,431.2
            
            $
            2,572.2**Liabilities,
                Minority Interest and Stockholders’ Equity**Current
                liabilities:Short-term
                borrowings and current portion of long-term debt
            
            $
            437.5
            
            $
            147.0
            
            $
            207.1Trade
                accounts payable
            
            
            616.6
            
            
            562.7
            
            
            660.3Accrued
                payroll and other liabilities
            
            
            271.2
            
            
            261.6
            
            
            293.4Taxes,
                including income taxes
            
            
            24.8
            
            
            59.2
            
            
            135.8Deferred
                income taxes
            
            
            29.4
            
            
            15.0
            
            
            14.5Total
                current liabilities
            
            
            1,379.5
            
            
            1,045.5
            
            
            1,311.1Long-term
                debt
            
            
            5.3
            
            
            55.2
            
            
            5.4Other
                long-term liabilities
            
            
            338.0
            
            
            296.4
            
            
            326.6Total
                liabilities
            
            
            1,722.8
            
            
            1,397.1
            
            
            1,643.1Minority
                interest
            
            
            1.4
            
            
            1.4
            
            
            1.3Total
                liabilities and minority interest
            
            
            1,724.2
            
            
            1,398.5
            
            
            1,644.4Stockholders'
                equity:Common
                stock; 200,000,000 shares authorized;64,386,462,
                72,241,887 and 64,149,397 shares issuedand
                outstanding at April 29, 2006, April 23, 2005 andJanuary
                28, 2006, respectively
            
            
            293.7
            
            
            477.6
            
            
            293.9Accumulated
                other comprehensive income
            
            
            21.5
            
            
            27.9
            
            
            19.4Retained
                earnings
            
            
            587.8
            
            
            527.2
            
            
            614.5Total
                stockholders' equity
            
            
            903.0
            
            
            1,032.7
            
            
            927.8Total
                liabilities, minority interest and stockholders' equity
            
            $
            2,627.2
            
            $
            2,431.2
            
            $
            2,572.2








See
      accompanying Notes to Unaudited Condensed Consolidated Financial
      Statements.





2


**BORDERS
      GROUP, INC.**


**CONDENSED
      CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY**


**FOR
      THE 13 WEEKS ENDED APRIL 29, 2006**


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


**(UNAUDITED)**








**Common
                Stock**
            
            **Accumulated**
              **Other**
              **Comprehensive**
            
            **Retained****Shares**
            
            **Amount**
            
            **Income**
            
            **Earnings**
            
            **Total**Balance
                at January 28, 2006
            
            
            64,149,397
            
            $
            293.9
            
            $
            19.4
            
            $
            614.5
            
            $
            927.8Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            (20.2
            )
            
            (20.2
            )Currency
                translation adjustment
            
            
            -
            
            
            -
            
            
            2.1
            
            
            -
            
            
            2.1Comprehensive
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (18.1
            )Cash
                dividends declared ($0.10 per
              common
                share)
            
            
            -
            
            
            -
            
            
            -
            
            
            (6.5
            )
            
            (6.5
            )Issuance
                of common stock
            
            
            978,548
            
            
            14.7
            
            
            -
            
            
            -
            
            
            14.7Repurchase
                and retirement ofcommon
                stock
            
            
            (741,483
            )
            
            (17.7
            )
            
            -
            
            
            -
            
            
            (17.7
            )Tax
                benefit of equitycompensation
            
            
            -
            
            
            2.8
            
            
            -
            
            
            -
            
            
            2.8Balance
                at April 29, 2006
            
            
            64,386,462
            
            $
            293.7
            
            $
            21.5
            
            $
            587.8
            
            $
            903.0








See
      accompanying Notes to Unaudited Condensed Consolidated Financial
      Statements.





3


**BORDERS
      GROUP, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(dollars
      in millions)**


**(UNAUDITED)**








**13
                Weeks Ended****April
                29,**
              **2006**
            
            **April
                23,**
              **2005**Cash
                provided by (used for):OperationsNet
                income (loss)
            
            $
            (20.2
            )
            $
            (5.3
            )Adjustments
                to reconcile net income (loss) to operating cash flows:Depreciation
            
            
            30.0
            
            
            29.6Loss
                on disposal of assets
            
            
            0.5
            
            
            0.6Decrease
                in deferred income taxes
            
            
            0.9
            
            
            -(Increase)
                decrease in other long-term assets
            
            
            0.9
            
            
            (1.9
            )Increase
                in other long-term liabilities
            
            
            8.6
            
            
            8.8Cash
                provided by (used for) current assets and current
                liabilities:Increase
                in inventories
            
            
            (50.4
            )
            
            (26.5
            )Decrease
                in accounts receivable
            
            
            14.2
            
            
            14.7Increase
                in prepaid expenses
            
            
            (16.4
            )
            
            (16.6
            )Decrease
                in accounts payable
            
            
            (44.3
            )
            
            (53.5
            )Decrease
                in taxes payable
            
            
            (110.8
            )
            
            (57.6
            )Decrease
                in expenses payable and accrued liabilities
            
            
            (29.6
            )
            
            (45.7
            )Net
                cash used for operations
            
            
            (216.6
            )
            
            (153.4
            )InvestingCapital
                expenditures
            
            
            (40.4
            )
            
            (40.8
            )Proceeds
                from sale of investments
            
            
            -
            
            
            95.4Net
                cash provided by (used for) investing
            
            
            (40.4
            )
            
            54.6FinancingNet
                repayment of long-term debt
            
            
            (0.1
            )
            
            -Net
                funding from credit facility
            
            
            228.1
            
            
            3.0Proceeds
                from the excess tax benefit of stock option exercises
            
            
            2.8
            
            
            -Issuance
                of common stock
            
            
            14.7
            
            
            9.1Payment
                of cash dividends
            
            
            (6.5
            )
            
            (6.5
            )Repurchase
                of common stock
            
            
            (17.7
            )
            
            (57.7
            )Net
                cash provided by (used for) financing
            
            
            221.3
            
            
            (52.1
            )Effect
                of exchange rates on cash and equivalents
            
            
            1.1
            
            
            0.5Net
                decrease in cash and equivalents
            
            
            (34.6
            )
            
            (150.4
            )Cash
                and equivalents at beginning of year
            
            
            81.6
            
            
            244.8Cash
                and equivalents at end of period
            
            $
            47.0
            
            $
            94.4








See
      accompanying Notes to Unaudited Condensed Consolidated Financial
      Statements.





23
 4


**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 January 28, 2006.





The
      Company’s fiscal year ends on the Saturday closest to the last day of January.
      Fiscal 2006 will consist of 53 weeks, and will end on February 3, 2007.
      References herein to years are to the Company’s fiscal years.





At
      April
      29, 2006, the Company operated 534 superstores under the Borders name, including
      478 in the United States, 36 in the United Kingdom, 14 in Australia, three
      in
      Puerto Rico, two in New Zealand and one in Singapore. The Company also operated
      665 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 31 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 April 29, 2006, Paperchase
      operated 90 stores, primarily in the United Kingdom, and Paperchase shops have
      been added to nearly 140 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 Company intends to vigorously defend the action. 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.





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.





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 Mirror Site Agreement. The
      Complaints seek judgments, jointly and severally, against




5


**BORDERS
      GROUP, INC.**


**NOTES
      TO UNAUDITED CONDENSED**


**CONSOLIDATED
      FINANCIAL STATEMENTS**


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





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 in October 2005 and will expire in October 2010. The Credit
      Agreement provides for borrowings of up to $700.0 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 an increment
      or LIBOR plus an 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.
      The
      Company had borrowings outstanding under the Credit Agreement (or a prior
      agreement) of $384.2 at April 29, 2006, $137.2 at April 23, 2005 and $153.6
      at
      January 28, 2006.





*Term
      Loan:* On July
      30, 2002, the Company issued $50.0 of senior guaranteed notes (the “Notes”) due
      July 30, 2006 and bearing interest at 6.31% (payable semi-annually). The
      proceeds of the sale of the Notes were used to refinance existing indebtedness
      of the Company and its subsidiaries and for general corporate purposes. The
      note
      purchase agreement relating to the Notes contains covenants which limit, among
      other things, the Company’s ability to incur indebtedness, grant liens, make
      investments, engage in any merger or consolidation, dispose of assets or change
      the nature of its business, and requires the Company to meet certain financial
      measures regarding net worth, total debt coverage and fixed charge coverage.
      In
      July 2004, the note purchase agreement was amended to permit the amendment
      to
      the Credit Agreement described above and to provide for a parity lien to secure
      the Notes on the same collateral as secures borrowings under the Credit
      Agreement.





*Debt
      of Consolidated VIEs:* At April
      29, 2006, 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
      $5.2,
      long-term debt (including current portion) of $5.5 and minority interest of
      $0.3
      at April 29, 2006 .





As
      of
      April 29, 2006 the Company was in compliance with its debt
      covenants.





**NOTE
      4 - STOCK-BASED BENEFIT PLANS**





*2004
      Long-Term Incentive Plan:* The
      Company maintains the 2004 Long-Term Incentive Plan (the “2004 Plan”), pursuant
      to which the Company may grant stock-based awards to employees and non-employee
      directors of the Company, including restricted shares and share units of its
      common stock and options to purchase its common stock. The 2004 Plan was
      approved by shareholders in May 2004, and replaced all prior stock-based benefit
      plans on a go-forward basis. Three million shares were authorized for the grant
      of stock-based awards under the 2004 Plan (plus any shares forfeited or
      cancelled under the 2004 Plan or any prior plan).








6





**BORDERS
      GROUP, INC.**


**NOTES
      TO UNAUDITED CONDENSED**


**CONSOLIDATED
      FINANCIAL STATEMENTS**


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





Under
      the
      2004 Plan, the exercise price of options granted will generally not be less
      than
      the fair value per share of the Company’s common stock at the date of grant. The
      plan provides for vesting periods as determined by the Compensation Committee
      of
      the Company’s Board of Directors.





The
      Company’s senior management personnel are required to use 20%, and may use up to
      100%, of their annual incentive bonuses to purchase restricted shares of the
      Company’s common stock, at a 20% to 40% discount from the fair value of the same
      number of unrestricted shares of common stock. In addition, the Company’s senior
      management personnel may elect to make a one-time purchase of restricted shares.
      Restricted shares of common stock purchased under the 2004 Plan will generally
      be restricted from sale or transfer for at least two and up to four years from
      the date of purchase.





The
      Company recognizes compensation expense for the discount on restricted shares
      of
      common stock purchased under the 2004 Plan (or prior plan). Such discounts
      are
      recognized as expense on a straight-line basis over the period during which
      the
      shares are restricted from sale or transfer.





The
      Company grants performance-based share units of its common stock (“RSUs”) to its
      senior management personnel. RSUs vest in amounts based on the achievement
      of
      performance goals, primarily earnings per share. The Compensation Committee
      of
      the Company’s Board of Directors establishes the RSU’s performance criteria and
      vesting period. The Company also grants time-vested restricted stock to its
      senior management personnel.





The
      Company previously recognized compensation expense for the RSUs granted under
      the 2004 Plan using variable accounting, in accordance with the provisions
      of
      Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
      Employees” (“APB No. 25”). Under variable accounting, estimates of compensation
      costs were recorded and updated each period until the measurement date, based
      on
      changes in the Company’s share price and the estimated vesting period of the
      RSUs. Beginning in 2006, the Company recognizes compensation expense for the
      RSUs in accordance with the provisions of Statement of Financial Accounting
      Standards No. 123 (revised 2004), “Share-Based Payment” (“FAS 123(R)”). In
      accordance with FAS 123(R), the Company records compensation cost based on
      the
      fair market value of the RSUs on the date of grant.





*Employee
      Stock Purchase Plan:* The
      Company maintained an employee stock purchase plan (the “Employee Plan”), which
      allowed the Company’s associates not eligible under the 2004 Plan to purchase
      shares of the Company’s common stock at a 15% discount from their fair market
      value. The Employee Plan expired as of December 31, 2005.





In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued FAS
      123(R), which is a revision of FAS 123. FAS 123(R) supersedes APB No. 25, and
      amends Statement of Financial Accounting Standards No. 95, “Statement of Cash
      Flows.” Generally, the approach in FAS 123(R) is similar to the approach
      described in FAS 123. However, FAS 123(R) requires all share-based payments
      to
      employees, including grants of employee stock options, restricted stock and
      performance-based shares, to be recognized in the income statement based on
      their fair values. In the first quarter of fiscal 2006, the Company adopted
      FAS
      123(R) using the modified prospective method. Under the modified prospective
      method, compensation cost is recognized for all share-based payments granted
      after the adoption of FAS 123(R) and for all awards granted to employees prior
      to the adoption date of FAS 123(R) that remain unvested on the adoption date.
      Accordingly, no restatements were made to prior periods.





7


**BORDERS
      GROUP, INC.**


**NOTES
      TO UNAUDITED CONDENSED**


**CONSOLIDATED
      FINANCIAL STATEMENTS**


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





Prior
      to
      the adoption of FAS 123(R), the Company applied APB No. 25 in accounting for
      its
      employee stock compensation plans. Accordingly, no compensation expense was
      recognized for its stock option issuances. The following table illustrates
      the
      effect on net income and earnings per share if the Company had applied the
      fair
      value recognition provisions of FAS 123 to stock-based employee compensation:





**13
                Weeks Ended****April
                23,**
              **2005**Net
                income (loss), as reported
            
            $
            (5.3
            )Add:
                Stock-based employee expense included in reported
              net
                income, net of related tax effects
            
            
            -Deduct:
                Total stock-based employee compensation expense
              determined
                under fair value method for all awards, net
              of
                tax
            
            
            0.9Pro
                forma net income (loss)
            
            $
            (6.2
            )Earnings
                (loss) per share:Basic
                -- as reported
            
            $
            (0.07
            )Basic
                -- pro forma
            
            $
            (0.08
            )Diluted
                -- as reported
            
            $
            (0.07
            )Diluted
                -- pro forma
            
            $
            (0.08
            )





A
      summary
      of the information relative to the Company’s stock option plans follows (number
      of shares in thousands):





**All
                Plans**
            
            **Number**
              **of
                Shares**
            
            **Weighted-**
              **Average**
              **Exercise
                Price**
            
            **Aggregate
                Intrinsic****Value**
            
            **Weighted-Average
                Contract****Life**Outstanding
                at January 28, 2006
            
            
            6,365
            
            $
            22.98Granted
            
            
            75
            
            $
            24.61Exercised
            
            
            886
            
            $
            15.91Forfeited
            
            
            220
            
            $
            27.00Outstanding
                at April 29, 2006
            
            
            5,334
            
            $
            24.01
            
            $
            128.1
            
            
            2.3
                yearsBalance
                exercisable atApril
                29, 2006
            
            
            4,756
            
            $
            24.24
            
            $
            115.3
            
            
            2.0
                years





The
      weighted-average fair values of options at their grant date where the exercise
      price equals the market price on the grant date were $6.07 and $6.58 during
      the
      13 weeks ending April 29, 2006 and April 23, 2005 respectively.





The
      Black-Scholes option valuation model was used to calculate the fair market
      value
      of the options at the grant date for the purpose of disclosures required by
      FAS
      123(R). The following assumptions were used in the calculation:





**13
                Weeks Ended****April
                29,**
              **2006**
            
            **April
                23,**
              **2005**Risk-free
                interest rate
            
            
            4.7
            %
            
            3.8
            %Expected
                life
            
            
            5
                years
            
            
            5
                yearsExpected
                volatility
            
            
            25.2
            %
            
            27.6
            %Expected
                dividends
            
            
            1.6
            %
            
            1.3
            %







Under
      FAS 123(R), the Company recognized $0.3, or $0.00 per share net of $0.1 tax
      benefit, of stock-based compensation expense related to stock options and
      employee stock purchases in the thirteen weeks ended April 29, 2006.
      Stock-based compensation expense is included in Selling, General and
      Administrative Expenses. Upon adoption of FAS 123(R), the balance of $0.4 of
      deferred compensation was charged to additional paid-in capital.








8


**BORDERS
      GROUP, INC.**


**NOTES
      TO UNAUDITED CONDENSED**


**CONSOLIDATED
      FINANCIAL STATEMENTS**


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





At
      April
      29, 2006, the Company had approximately $1.1 of total unrecognized compensation
      expense related to stock option plans that will be recognized over the remaining
      weighted average period of 1.1 years. Cash received from stock option exercises
      was approximately $14.7 and the total intrinsic value of options exercised
      was
      approximately $7.6 for the thirteen weeks ended April 29, 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 interest expense related to corporate activities, certain corporate
      governance costs and corporate incentive costs).





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





Total
      assets for the Corporate segment include certain corporate headquarters property
      and equipment, net of accumulated depreciation, of $95.8 and $74.0 at April
      29,
      2006 and April 23, 2005, respectively, whose related depreciation expense has
      been allocated to the Borders, Waldenbooks and International segments.
      Depreciation expense allocated to the Borders segment totaled $3.1 and $2.5
      for
      the 13 weeks ended April 29, 2006 and April 23, 2005, respectively. Depreciation
      expense allocated to the Waldenbooks segment totaled $1.5 and $1.1 for the
      13
      weeks ended April 29, 2006 and April 23, 2005, respectively. Depreciation
      expense allocated to the International segment totaled $0.1 and $0.0 for the
      13
      weeks ended April 29, 2006 and April 23, 2005, respectively.





**13
                Weeks Ended********April
                29,**
              **2006**
            
            ******April
                23,**
              **2005**SalesBorders
            
            $
            606.4
            
            $
            579.4Waldenbooks
            
            
            127.2
            
            
            143.1International
            
            
            126.4
            
            
            124.7Total
                sales
            
            $
            860.0
            
            $
            847.2Net
                income (loss)Borders
            
            $
            3.6
            
            $
            8.0Waldenbooks
            
            
            (3.5
            )
            
            0.5International
            
            
            (9.5
            )
            
            (5.8
            )Corporate
            
            
            (10.8
            )
            
            (8.0
            )Total
                net income (loss)
            
            $
            (20.2
            )
            $
            (5.3
            )Total
                assetsBorders
            
            $
            1,659.4
            
            $
            1,495.4Waldenbooks
            
            
            350.6
            
            
            317.1International
            
            
            499.0
            
            
            465.9Corporate
            
            
            118.2
            
            
            152.8Total
                assets
            
            $
            2,627.2
            
            $
            2,431.2








9


**BORDERS
      GROUP, INC.**


**NOTES
      TO UNAUDITED CONDENSED**


**CONSOLIDATED
      FINANCIAL STATEMENTS**


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





**NOTE
      6- CORRECTION OF PRIOR YEAR ERROR**





In
      the
      first quarter of 2006, the Company corrected an error in the calculation of
      gross margin within its International segment, specifically in Books etc. The
      correction of the error, which relates to fiscal 2005, resulted in a decrease
      in
      Inventory for the Company’s International segment by $1.9, and increased the
      segment’s Cost of sales by the same amount. The after-tax impact of this
      non-cash adjustment was $1.2.





**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 April 29, 2006, the Company operated 534 superstores under the
      Borders name, including 478 in the United States, 36 in the United Kingdom,
      14
      in Australia, three in Puerto Rico, two in New Zealand and one in Singapore.
      The
      Company also operated 665 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 31 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 April 29, 2006, Paperchase
      operated 90 stores, primarily in the United Kingdom, and Paperchase shops have
      been added to nearly 140 domestic Borders superstores.





The
      Company’s business strategy is to continue its growth and increase its
      profitability through (i) expanding and refining its core domestic superstore
      business, (ii) driving International growth by expanding established markets
      and
      leveraging infrastructure investments, (iii) leveraging strategic alliances
      and
      in-store technologies which enhance the customer experience, and (iv) maximizing
      cash flow and profitability at Waldenbooks Specialty Retail through a
      combination of selective growth and profit initiatives. Specifically, the
      Company has been engaged in an aggressive expansion and remodel program,
      pursuant to which it opened 15 domestic Borders superstores and completed major
      remodels of 100 existing domestic superstores in 2005. In 2006, the Company
      expects to open approximately 35 domestic superstores and complete major
      remodels of approximately 100 existing domestic superstores. Beginning in 2005,
      new stores opened, and the majority of stores remodeled, will feature cafe
      offerings by Seattle’s Best Coffee and gifts and stationery merchandise by
      Paperchase. International store growth over the next several years will focus
      on
      existing markets, primarily in the United Kingdom and Australia, with
      approximately 12 to 14 International store openings planned in 2006. 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 the impact of superstore
      openings. The Company is continuing to implement its plan for the optimization
      of the Waldenbooks Specialty Retail store base in order to improve sales, net
      income and free cash flow. This plan could result in further store closing
      costs
      or asset impairments over the next few years. In addition, Waldenbooks Specialty
      Retail manages the Company’s seasonal businesses and small format stores,
      including those in airports and outlet malls, and selective growth in these
      areas is expected in 2006. The Company’s objectives with respect to these
      initiatives are to continue to grow consolidated sales and earnings per share
      in
      2006 and earn an acceptable return on its investment.





During
      the first quarter of 2006, the Company launched Borders Rewards, a loyalty
      program designed to reward customers who shop at the Company’s stores throughout
      the U.S. Membership in Borders Rewards is free, with no enrollment costs or
      annual fees. Members earn rewards every time they shop, enjoy exclusive savings
      and may earn Personal Shopping Days every month. In addition, five percent
      of
      all qualifying purchases made by members throughout the year go into a personal
      Holiday Savings account, which can be used on holiday purchases made from
      November 15 through January 15. Although Borders Rewards is expected to drive
      long-term sales improvements, initial costs of launching this program
      approximated $7.6 million in the first quarter of 2006.





The
      Company has signed an agreement with Berjaya Corporation Berhad (“Berjaya”), a
      publicly-listed diversified corporation headquartered in Malaysia, to establish
      a franchise arrangement under which Berjaya will operate Borders stores in
      Malaysia. As of April 29, 2006, Berjaya operated two 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, to establish
      a franchise agreement under which Al


10


Maya
      or
      its affiliates will operate Borders stores in the United Arab Emirates and
      other
      Gulf Cooperation Council (“GCC”) countries, the first of which is expected to
      open in Dubai during the fourth quarter of fiscal 2006.





Subject
      to Board approval, the Company plans to provide returns to stockholders through
      quarterly cash dividends and share repurchases by utilizing free cash flow
      generated by the business. In January 2006, the Board of Directors authorized
      an
      increase in the amount of potential share repurchases to $250.0 million. In
      December 2005, the Board of Directors voted to increase the quarterly cash
      dividend by 11.1% to $0.10 per share on the Company’s common stock.





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.





In
      addition, Borders has an agreement with Amazon to allow customers ordering
      certain book, music and movie products through certain of Amazon’s Web sites to
      purchase and pick up the merchandise at Borders stores in the United States
      (“Express In-Store Pick Up”). Under this agreement, the Company is the merchant
      of record for all sales made through this service, and determines all prices
      and
      other terms and conditions applicable to such sales. The Company fulfills all
      products sold through Express In-Store Pick Up. In addition, the Company assumes
      all risk, cost and responsibility related to the sale and fulfillment of all
      products sold. The Company recognizes revenue upon customers’ pick up of the
      merchandise at the store. The Company also pays referral fees to Amazon pursuant
      to this agreement.





**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****April
                29, 2006**
            
            **April
                23, 2005**Sales
            
            
            100.0
            %
            
            100.0
            %Other
                revenue
            
            
            0.9
            
            
            1.2Total
                revenue
            
            
            100.9
            
            
            101.2Cost
                of merchandise sold (includes occupancy)
            
            
            77.6
            
            
            75.6Gross
                margin
            
            
            23.3
            
            
            25.6Selling,
                general and administrative expenses
            
            
            26.2
            
            
            26.2Pre-opening
                expense
            
            
            0.2
            
            
            0.1Asset
                impairments and other writedowns
            
            
            0.1
            
            
            -Operating
                income (loss)
            
            
            (3.2
            )
            
            (0.7
            )Interest
                expense
            
            
            0.6
            
            
            0.3Income
                (loss) before income tax
            
            
            (3.8
            )
            
            (1.0
            )Income
                tax provision (benefit)
            
            
            (1.4
            )
            
            (0.4
            )Net
                income (loss)
            
            
            (2.4
            )%
            
            (0.6)
            %





**Consolidated
      Results - Comparison of the 13 weeks ended April 29, 2006 to the 13 weeks ended
      April 23, 2005**





***Sales***





Consolidated
      sales increased $12.8 million, or 1.5%, to $860.0 million in 2006 from $847.2
      million in 2005. This resulted primarily from increased sales in the Borders
      and
      International segments, partially offset by decreased sales in the Waldenbooks
      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. Domestic Borders
      superstores’ comparable store sales exclude those stores not offering music, of
      which there are 12, representing approximately 2% of total sales. Comparable
      store sales measures for Waldenbooks Specialty Retail include the


11


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 0.7% in 2006. The
      comparable store sales increase was due primarily to the book category, with
      positive comparable stores sales of 1.7% in 2006. This increase was driven
      by
      strong sales of titles in home, bargain, mystery and thrillers, travel and
      religion titles. The cafe and gift and stationery categories also positively
      impacted comparable store sales in remodeled stores, resulting primarily from
      the conversions of cafes to the Seattle’s Best Coffee brand and gift and
      stationery departments to the Paperchase brand. Partially offsetting these
      increases were comparable store sales decreases in the music category of 12.4%.
      The impact of price changes on comparable store sales was not
      significant.





Waldenbooks
      Specialty Retail’s comparable store sales decreased 7.3% in 2006. The comparable
      store sales decrease was primarily due to weaker book bestsellers, which
      impacted Waldenbooks Specialty Retail to a greater degree than Borders
      superstores. The impact of price changes on comparable store sales was not
      significant.





Comparable
      store sales for International Borders superstores increased 0.4% in 2006. The
      increase was primarily due to positive comparable store sales in Asia Pacific
      of
      2.1%. Partially offsetting these increases were negative comparable store sales
      in the United Kingdom of 0.6%, primarily resulting from the slow sales
      environment that persisted following the terrorist bombings in central London
      during the second quarter of 2005, as well as an increased competitive
      environment. 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 wholesale revenue earned
      through sales of merchandise to Berjaya, as part of a franchise agreement under
      which Berjaya opened two Borders stores in Malaysia in 2005. 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 agreements. 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.





Until
      October 2004, Waldenbooks sold memberships in its Preferred Reader Program,
      which offered members discounts on purchases and other benefits. Waldenbooks
      has
      phased out its Preferred Reader Program and is replacing it with other
      promotional programs in order to maximize long-term sales and earnings. The
      Company recognized membership income on a straight-line basis over the 12-month
      term of the membership, and categorized the income as “Other revenue” in the
      Company’s consolidated statements of operations. Discounts on purchases were
      netted against “Sales” in the Company’s consolidated statements of
      operations.





Other
      revenue has decreased $2.3 million, or 22.8%, to $7.8 million in 2006 from
      $10.1
      million in 2005. This is primarily due to a decrease in the Borders, Waldenbooks
      Specialty Retail and International segments. The Borders and International
      decrease was primarily due to higher wholesale revenue earned through sales
      of
      merchandise in 2005, related to the opening of the first franchise store
      operated by Berjaya in April of 2005. The Waldenbooks Specialty Retail decrease
      was due to the change in the Preferred Reader Program.





***Gross
      margin***





Consolidated
      gross margin decreased $15.9 million, or 7.3%, to $200.7 million in 2006 from
      $216.6 million in 2005. As a percentage of sales, consolidated gross margin
      decreased 2.3%, to 23.3% in 2006 from 25.6% in 2005. This was due to a decrease
      in the Borders, Waldenbooks Specialty Retail and International segments’ gross
      margin as a percentage of sales. The decrease in the Borders segment was
      primarily the result of increased promotional discounts, mainly due to the
      Company’s loyalty program, Borders Rewards, as well as decreased wholesale
      revenue and increased supply chain costs. The decrease in the Waldenbooks
      Specialty Retail segment was primarily due to increased promotional discounts,
      primarily due to Borders Rewards, as well as increased occupancy costs due
      to
      the decline in comparable store sales, and decreased other revenue due to the
      change in the Preferred Reader Program. The decrease in the International
      segment resulted from an increase in occupancy costs, as well as the correction
      of a prior year error in the calculation of gross margin in Books
      etc.





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


12


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 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 $4.1
      million, or 1.9%, to $225.4 million in 2006 from $221.3 million in 2005. As
      a
      percentage of sales, SG&A remained flat at 26.2% in 2006, due to increases
      in SG&A expenses for the Waldenbooks Specialty Retail and International
      segments, offset by a decrease in the Borders segment. The Waldenbooks Specialty
      Retail increase was primarily due to increased store payroll costs, primarily
      due to the decline in comparable store sales, and increased corporate operating
      expenses, partially offset by decreased advertising and corporate payroll costs.
      The International increase was primarily the result of increased store operating
      and corporate payroll costs, partially offset by decreased corporate operating
      and advertising expense. Borders SG&A expenses as percentage of sales
      decreased primarily due to decreased corporate payroll and operating expenses
      and decreased store operating expenses, partially offset by increased
      advertising expense and store payroll, both primarily the result of the launch
      of Borders Rewards.





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





***Interest
      expense***





Consolidated
      interest expense increased $3.2 million, or 145.5%, to $5.4 million in 2006
      from
      $2.2 million in 2005. This was primarily a result of increased borrowings to
      fund capital expenditures, inventory investment and corporate stock
      repurchases.





***Taxes***





The
      effective tax rate differed for the quarters presented from the federal
      statutory rate primarily as a result of a change in the mix of earnings between
      high and low tax jurisdictions. The Company's effective tax rate used was 37.9%
      in 2006 compared to 37.0% in 2005. This increase is primarily due to a greater
      portion of earnings being realized in jurisdictions with higher tax
      rates.





***Net
      loss***





Due
      to
      the factors mentioned above, net loss as a percentage of sales increased to
      2.4%
      in 2006 from 0.6% in 2005, and net loss dollars increased to $20.2 million
      in
      2006 from $5.3 million in 2005.





**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 interest expense related to corporate activities, certain corporate
      governance costs and corporate incentive costs). See “Note 5 - Segment
      Information” in the notes to consolidated financial statements for further
      information relating to these segments.





Segment
      data includes charges allocating all corporate headquarters costs to each
      segment. Interest income and expense are allocated to segments based upon the
      cash flow generated or absorbed by those segments. The Company utilizes fixed
      interest rates, approximating the Company’s medium-term borrowing and investing
      rates, in calculating segment interest income and expense.




13




**Domestic
        Borders Superstores**
 **13
                  Weeks Ended****(dollar
                  amounts in millions)**
              
              **April
                  29, 2006**
              
              **April
                  23, 2005**Sales
              
              $
              606.4
              
              $
              579.4Other
                  revenue
              
              $
              5.1
              
              $
              6.4Net
                  income
              
              $
              3.6
              
              $
              8.0Net
                  income as % of sales
              
              
              0.6
              %
              
              1.4
              %Depreciation
                  expense
              
              $
              20.8
              
              $
              21.7Interest
                  income
              
              $
              4.4
              
              $
              2.9Store
                  openings
              
              
              5
              
              
              -Store
                  closings
              
              
              -
              
              
              1Store
                  count
              
              
              478
              
              
              461


**Domestic
      Borders Superstores - Comparison of the 13 weeks ended April 29, 2006 to the
      13
      weeks ended April 23, 2005**





***Sales***





Domestic
      Borders Superstore sales increased $27.0 million, or 4.7%, to $606.4 million
      in
      2006 from $579.4 million in 2005. This increase was comprised of comparable
      store sales increases of $3.7 million, non-comparable store sales increases
      of
      $23.3 million, primarily associated with 2006 and 2005 store
      openings.





***Other
      revenue***





Other
      revenue decreased $1.3 million, or 20.3%, to $5.1 million in 2006 from $6.4
      million in 2005. This was primarily due to higher wholesale revenue earned
      through sales of merchandise in 2005 ,
      related
      to the opening and initial stock of inventory of the first franchise store
      operated by Berjaya in April of 2005 .





***Gross
      margin***





Gross
      margin as a percentage of sales decreased 1.5%, to 25.6% in 2006 from 27.1%
      in
      2005. This was primarily due to increased promotional discounts of 0.6% as
      a
      percentage of sales, mainly related to the Company’s loyalty program, Borders
      Rewards. Also contributing to the decline in gross margin was decreased
      wholesale revenue earned through sales of merchandise to Berjaya of 0.5% as
      a
      percentage of sales, related to the opening and initial stock of inventory
      of
      the first franchise store operated by Berjaya in April of 2005, as well as
      increased supply chain costs of 0.4% as a percentage of sales, primarily related
      to the cost of opening of the Company’s new distribution center in Pennsylvania.





Gross
      margin dollars decreased $2.0 million, or 1.3%, to $155.0 million in 2006 from
      $157.0 million in 2005, which was primarily due to the decrease in gross margin
      percentage noted above, partially offset by new store openings.





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





SG&A
      as a percentage of sales decreased 0.2%, to 25.1% in 2006 from 25.3% in 2005.
      This was primarily due to a decrease of 0.6% in corporate payroll and operating
      expenses as a percentage of sales, due to disciplined cost controls at the
      corporate level, and a decrease of 0.3% in store operating expenses as a
      percentage of sales, due to income received from the Visa Check/MasterMoney
      Antitrust Litigation settlement. The Visa Check/MasterMoney Antitrust Litigation
      was a class action lawsuit brought against Visa and MasterCard related to their
      debit card policies. Partially offsetting this income were increased utility
      costs. In addition, these decreases were partially offset by a 0.4% increase
      in
      advertising expenses as a percentage of sales and a 0.3% increase in store
      payroll as a percentage of sales, primarily related to the launch of the
      Company’s loyalty program, Borders Rewards.





SG&A
      dollars increased $5.5 million, or 3.8%, to $152.0 million in 2006 from $146.5
      million in 2005 primarily due to new store openings and the increased store
      payroll and operating expenses required, as well as increased advertising
      expense to support the launch of the Company’s loyalty program, Borders Rewards,
      partially offset by income received from the Visa Check/MasterMoney Antitrust
      Litigation settlement of $2.6 million.





***Depreciation
      expense***





Depreciation
      expense decreased $0.9 million, or 4.1%, to $20.8 million in 2006 from $21.7
      million in 2005. This was primarily the


14


result
      of
      one of the Company’s distribution centers becoming fully depreciated during the
      fourth quarter of 2005, partially offset by increased depreciation expense
      recognized on new and remodeled stores’ capital expenditures and accelerated
      depreciation related to store remodels. 
 ***Interest
        income***
 
 Interest
        income increased $1.5 million, or 51.7%, to $4.4 million in 2006 from $2.9
        million in 2005. This was due to the generation of increased cash flow, which
        reduced average borrowing levels at fixed internal interest
        rates.




***Net
      income***





Due
      to
      the factors mentioned above, net income as a percentage of sales decreased
      to
      0.6% in 2006 from 1.4% in 2005, and net income dollars decreased $4.4 million,
      or 55.0%, to $3.6 million in 2006 from $8.0 million in 2005.





**Waldenbooks
      Specialty Retail**


**13
                Weeks Ended****(dollar
                amounts in millions)**
            
            **April
                29, 2006**
            
            **April
                23, 2005**Sales
            
            $
            127.2
            
            $
            143.1Other
                revenue
            
            $
            0.5
            
            $
            1.2Net
                income (loss)
            
            $
            (3.5
            )
            $
            0.5Net
                income (loss) as % of sales
            
            
            (2.8
            )%
            
            0.3
            %Depreciation
                expense
            
            $
            4.2
            
            $
            3.4Interest
                income
            
            $
            10.2
            
            $
            10.9Store
                openings
            
            
            3
            
            
            3Store
                closings
            
            
            16
            
            
            6Store
                count
            
            
            665
            
            
            702





**Waldenbooks
      Specialty Retail - Comparison of the 13 weeks ended April 29, 2006 to the 13
      weeks ended April 23, 2005**





***Sales***





Waldenbooks
      Specialty Retail sales decreased $15.9 million, or 11.1%, to $127.2 million
      in
      2006 from $143.1 million in 2005. This decrease was comprised of decreased
      comparable store sales of $9.5 million and decreased non-comparable sales
      associated with 2006 and 2005 store closings of $6.4 million.





***Other
      revenue***





Other
      revenue decreased $0.7 million, or 58.3%, to $0.5 million in 2006 from $1.2
      million in 2005. This was primarily due to the change in the Preferred Reader
      Program.





***Gross
      margin***





Gross
      margin as a percentage of sales decreased 4.2%, to 18.8% in 2006 from 23.0%
      in
      2005. This was primarily due to increased promotional discounts and other costs
      of 2.1% as a percentage of sales, mainly related to the Company’s loyalty
      program, Borders Rewards. Also contributing to the decline in gross margin
      was
      increased occupancy costs as a percentage of sales of 1.7%, primarily due to
      the
      decline in comparable store sales, and a 0.4% decrease in other revenue as
      a
      percentage of sales, due to the change in the Preferred Reader Program.





Gross
      margin dollars decreased $9.0 million, or 27.4%, to $23.9 million in 2006 from
      $32.9 million in 2005, primarily due to store closings and the decrease in
      gross
      margin percentage noted above.





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





SG&A
      as a percentage of sales increased 1.2%, to 30.9% in 2006 from 29.7% in 2005.
      This was primarily due to an increase of 1.1% increase in store payroll as
      a
      percentage of sales, primarily related to the decline in comparable store sales
      and the launch of the Company’s loyalty program, Borders Rewards, and an
      increase in corporate operating expenses of 0.6% as a percentage of sales,
      due
      primarily to the decline in comparable store sales. These increases were
      partially offset by a decrease of 0.3% as a percentage of sales


15


in
      advertising costs, as well as a decrease of 0.2% in corporate payroll expenses,
      due to disciplined cost controls at the corporate level. Store operating
      expenses were flat as a percentage of sales, due to income received from the
      Visa Check/MasterMoney Antitrust Litigation settlement, partially offset by
      increased utility costs. 
 SG&A
        dollars decreased $3.3 million, or 7.7%, to $39.3 million in 2006 from $42.6
        million in 2005, primarily due to decreased health care costs, store closures
        and income received from the Visa Check/MasterMoney Antitrust Litigation
        settlement of $0.9 million.




***Depreciation
      expense***





Depreciation
      expense increased $0.8 million, or 23.5%, to $4.2 million in 2006 from $3.4
      million in 2005. This was primarily due to depreciation recognized on assets
      of
      stores that have been converted to Borders Express during 2005, as well as
      depreciation on Waldenbooks’ new merchandising system, which was put in service
      during the third quarter of 2005, partially offset by lower depreciation
      resulting from prior year asset impairments and store closings.





***Interest
      income***





Interest
      income decreased $0.7 million, or 6.4%, to $10.2 million in 2006 from $10.9
      million in 2005. This was the result of a decline in Waldenbooks Specialty
      Retail’s cash flow, primarily due to the decline in comparable store
      sales.





***Net
      loss***





Due
      to
      the factors mentioned above, net income as a percentage of sales decreased
      to a
      net loss of 2.8% in 2006 from net income of 0.3% in 2005, while net income
      dollars decreased $4.0 million to a net loss of $3.5 million in 2006 from net
      income of $0.5 million in 2005.





**International**


**13
                Weeks Ended****(dollar
                amounts in millions)**
            
            **April
                29, 2006**
            
            **April
                23, 2005**Sales
            
            $
            126.4
            
            $
            124.7Other
                revenue
            
            $
            2.2
            
            $
            2.5Net
                loss
            
            $
            (9.5
            )
            $
            (5.8
            )Net
                loss as % of sales
            
            
            (7.5
            )%
            
            (4.7
            )%Depreciation
                expense
            
            $
            5.0
            
            $
            4.5Interest
                expense
            
            $
            5.2
            
            $
            5.1Superstore
                store openings
            
            
            1
            
            
            4Superstore
                store count
            
            
            56
            
            
            46Books
                etc. store openings
            
            
            -
            
            
            -Books
                etc. store closings
            
            
            2
            
            
            -Books
                etc. store count
            
            
            31
            
            
            35





**International
      - Comparison of the 13 weeks ended April 29, 2006 to the 13 weeks ended April
      23, 2005**





***Sales***





International
      sales increased $1.7 million, or 1.4%, to $126.4 million in 2006 from $124.7
      million in 2005, primarily resulting from new superstore openings and comparable
      store sales increases of 0.4%. Partially offsetting these increases were
      unfavorable exchange rates, which decreased the sales growth percentage 6.3%,
      or
      $7.9 million. The impact of price changes on comparable store sales was not
      significant.





***Other
      revenue***





Other
      revenue decreased $0.3 million, or 12.0%, to $2.2 million in 2006 from $2.5
      million in 2005. This was primarily due to higher wholesale revenue earned
      through sales of merchandise in 2005, related to the opening and initial stock
      of inventory of the first franchise store operated by Berjaya in April of
      2005.








16


***Gross
      margin***





Gross
      margin as a percentage of sales decreased 4.1%, to 17.3% in 2006 from 21.4%
      in
      2005, primarily the result of an increase in occupancy costs of 1.8% as a
      percentage of sales, mainly due to the decline in comparable store sales in
      the
      United Kingdom. Also contributing to the decline in gross margin was the
      correction of a prior year error in the calculation of gross margin in Books
      etc. of 1.5% as a percentage of sales. Other factors affecting gross margin
      were
      increased product costs as a percentage of sales of 0.6%, primarily due to
      increased promotional discounts in the United Kingdom, and decreased wholesale
      revenue earned through sales of merchandise to Berjaya of 0.2% as a percentage
      of sales, related to the opening and initial stock of inventory of the first
      franchise store operated by Berjaya in April of 2005.




Gross
      margin dollars decreased $4.9 million, or 18.4%, to $21.8 million in 2006 from
      $26.7 million in 2005. Of this decrease, $1.6 million is the result of
      translation of foreign currencies to U.S. dollars. The remainder of the decrease
      is due to the decline in the gross margin rate, partially offset by new
      superstore openings.





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





SG&A
      as a percentage of sales increased 0.8%, to 25.1% in 2006 from 24.3% in 2005.
      This was primarily the result of increased store operating expenses of 0.9%
      as a
      percentage of sales, primarily due to new store openings and negative comparable
      store sales in the United Kingdom, increased corporate payroll of 0.4%,
      primarily due to the decline in comparable store sales in the United Kingdom,
      as
      well as increased spending to support international new store growth. These
      increases were partially offset by decreased corporate operating expenses of
      0.3% as a percentage of sales and decreased advertising costs of 0.2% as a
      percentage of sales.





SG&A
      dollars increased $1.4 million, or 4.6%, to $31.7 million in 2006 from $30.3
      million in 2005. The increase is primarily due to store openings and the
      increased store payroll and operating expenses required. Excluding the result
      of
      translation of foreign currencies to U.S. dollars, SG&A would have increased
      an additional $1.8 million.





***Depreciation
      expense***





Depreciation
      expense increased $0.5 million, or 11.1%, to $5.0 million in 2006 from $4.5
      million in 2005. This was primarily due to depreciation expense recognized
      on
      new stores' capital expenditures.





***Interest
      expense***





Interest
      expense increased 0.1 million, or 2.0%, to $5.2 million in 2006 from $5.1
      million in 2005. This was primarily due to increased borrowings used to fund
      new
      stores’ inventory and capital expenditures.





***Net
      loss***





Due
      to
      the factors mentioned above, net loss as a percentage of sales increased to
      7.5%
      in 2006 from 4.7% in 2005, and net loss dollars increased $3.7 million, or
      63.8%, to $9.5 million in 2006 from $5.8 million in 2005.





**Corporate**


**13
                Weeks Ended**(dollar
                amounts in millions)
            
            **April
                29, 2006**
            
            **April
                23, 2005**Interest
                expense
            
            $
            14.8
            
            $
            10.9Net
                loss
            
            $
            (10.8
            )
            $
            (8.0
            )





The
      Corporate segment includes interest expense related to corporate activities,
      various corporate governance costs and corporate incentive costs.





**Corporate
      - Comparison of the 13 weeks ended April 29, 2006 to the 13 weeks ended April
      23, 2005**





Net
      loss
      dollars increased $2.8 million, or 35.0%, to $10.8 million in 2006 from $8.0
      million in 2005. This was primarily due to increased interest expense for this
      segment primarily resulting from increased borrowings to fund corporate stock
      repurchases. Interest expense represents corporate-level interest costs not
      charged to the Company's other segments.





17


**Liquidity
        and Capital Resources**
 
 The
        Company’s principal capital requirements are to fund the opening of new stores,
        the refurbishment of existing stores, a new full service distribution center,
        and continued investment in new corporate information technology systems.
        Additional capital requirements include the maintenance of existing stores,
        distribution centers, and management information systems, as well as shareholder
        returns in the form of share repurchases and dividends.
 
 Net
        cash
        used for operations was $216.6 million and $153.4 million for the 13 weeks
        ended
        April 29, 2006 and April 23, 2005, respectively. Operating cash outflows
        for the
        period represent operating results, decreases in taxes payable, accounts
        payable, and expenses payable and accrued liabilities as well as increases
        in
        inventories and prepaid expenses. The most significant of these was
        the decrease in taxes payable, which resulted from payment of the Company’s
        estimated 2005 taxes. The current year operating cash inflows primarily reflect
        non-cash charges for depreciation, a loss on disposal of assets related to
        the
        remodel program and a decrease in deferred income taxes, as well as a decrease
        in accounts receivable, other long-term assets, and an increase in other
        long-term liabilities.





Net
      cash
      used for investing was $40.4 million in 2006. Net cash provided by investing
      was
      $54.6 million in 2005, which primarily resulted from the sale of auction rate
      securities of $95.4 million.




In
      fiscal
      2006, capital expenditures were $40.4 million, which primarily funded capital
      expenditures for new stores, the refurbishment of existing stores, new corporate
      information technology systems and maintenance of existing stores, distribution
      centers and management information systems. In 2006, this included the
      remodeling of 28 domestic Borders superstores and the conversion of three
      Waldenbooks stores to Borders Express, as well as the opening of five new
      Borders superstores, as well as one new airport store and two new outlet stores
      operated by the Waldenbooks Specialty Retail segment. In fiscal 2005, capital
      expenditures were $40.8 million, which primarily funded the remodeling of nine
      domestic Borders superstores and the conversion of four Waldenbooks stores
      to
      Borders Express. Additional capital spending in 2005 reflects the opening of
      four new Borders superstores, as well as one new airport store and two new
      outlet stores operated by the Waldenbooks segment.





Net
      cash
      provided by financing in 2006 was $221.3 million, due to funding from the
      Company’s credit facility of $228.1 million, $14.7 million of proceeds from
      stock option exercises and $2.8 million proceeds from the excess tax benefit
      of
      stock option exercises, partially offset by the repurchase of common stock
      totaling $17.7 million, the payment of the Company’s January cash dividend of
      $6.5 million and the repayment of long-term debt of $0.1 million. Net cash
      used
      for financing in 2005 was $52.1 million, resulting from the repurchase of common
      stock totaling $57.7 million, the payment of the Company’s January cash dividend
      of $6.5 million, partially offset by $9.1 million of proceeds from stock option
      exercises and funding from the Company’s credit facility of $3.0 million.





The
      Company expects capital expenditures to approximate $200.0 million in 2006,
      resulting primarily from new superstore openings and a store remodel program,
      through which the Company plans to complete major remodels of approximately
      100
      domestic Borders superstore locations, most of which will include conversion
      to
      Seattle’s Best cafes and Paperchase gifts and stationery shops, and plans to
      convert approximately 15 Waldenbooks stores to Borders Express. In addition,
      capital expenditures will result from International store openings, the new
      distribution center, continued investment in new buying, merchandising and
      warehouse management systems and maintenance spending for new stores,
      distribution centers and management information systems. The Company currently
      plans to open approximately 35 domestic Borders superstores and 12 to 14
      International stores in 2006. 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 $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 to $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 $223.8 million. During the 13 weeks ended April 29,
      2006 and April 23, 2005,


18


$17.7
      million and $57.7 million of common stock was repurchased, respectively. The
      Company plans to continue the repurchase of its common stock throughout fiscal
      2006, subject to the Company’s share price and capital needs and availability. 
 In
        2004,
        the Company began paying a regular quarterly dividend, and intends to pay
        regular quarterly cash dividends, subject to Board approval, going forward.
        In
        December 2005, the Board of Directors increased the quarterly dividend by
        11.1%
        to $0.10 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 in October 2005 and will expire in October 2010. The Credit
        Agreement provides for borrowings of up to $700.0 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 an increment or LIBOR plus an
        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 January
        28,
        2006 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 $384.2 million at April 29, 2006, $137.2 million at
        April
        23, 2005 and $153.6 million at January 28, 2006.





On
      July
      30, 2002, the Company issued $50.0 million of senior guaranteed notes (the
      “Notes”) due July 30, 2006 and bearing interest at 6.31% (payable
      semi-annually). The proceeds of the sale of the Notes were used to refinance
      existing indebtedness of the Company and its subsidiaries and for general
      corporate purposes. The note purchase agreement relating to the Notes contains
      covenants which limit, among other things, the Company’s ability to incur
      indebtedness, grant liens, make investments, engage in any merger or
      consolidation, dispose of assets or change the nature of its business, and
      requires the Company to meet certain financial measures regarding net worth,
      total debt coverage and fixed charge coverage. In July 2004, the note purchase
      agreement was amended to permit the amendment to the Credit Agreement described
      above and to provide for a parity lien to secure the Notes on the same
      collateral as secures borrowings under the Credit Agreement. The Company plans
      to repay the Notes with funds from the Credit Agreement. As of April 29, 2006
      the Company was in compliance with all covenants contained within this
      agreement.





In
      August
      2003, the Company entered into an interest rate swap agreement which effectively
      converted the fixed interest rate on the Company’s Notes to a variable rate
      based on LIBOR. In accordance with the provisions of FAS 133, the Company
      designated this swap agreement as a fair market value hedge. The notional amount
      of the swap agreement is $50.0 million, and the agreement is set to expire
      concurrently with the due date of the Notes.





**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 $5.2 million, long-term debt (including current
      portion) of $5.5 million and minority interest of $0.3 million at April 29,
      2006. These amounts have been treated as non-cash items on the consolidated
      statements of cash flows.





**Seasonality**





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







19


**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 January 28, 2006. There
        have been no significant changes in these estimates during the first quarter
        of
        fiscal 2006.
 
 **New
        Accounting Guidance**
 
 In
        February 2006, the FASB issued Statement of Financial Accounting Standards
        No.
        155, “Accounting for Certain Hybrid Instruments” (“FAS 155”). FAS 155 allows
        financial instruments that have embedded derivatives to be accounted for
        as a
        whole (eliminating the need to bifurcate the derivative from its host) if
        the
        holder elects to account for the whole instrument on a fair value basis.
        This
        statement is effective for all financial instruments acquired or issued after
        the beginning of an entity’s first fiscal year that begins after September 15,
        2006. The Company does not expect the adoption of FAS 155 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
      Quarterly Report on Form 10-Q contains forward-looking statements as defined
      in
      the Private Securities Litigation Reform Act of 1995. Forward-looking statements
      reflect management's current expectations and are inherently uncertain. The
      Company's actual results may differ significantly from management's
      expectations.




**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 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 January 28, 2006.




**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 April 29, 2006 (the “Evaluation
        Date”). Based on such evaluation, such officers have concluded that, as of the
        Evaluation Date, the Company’s disclosure controls and procedures were effective
        in alerting them on a timely basis to material information relating to the
        Company (including its consolidated subsidiaries) required to be included
        in the
        Company’s periodic filings under the Exchange Act. In reaching its conclusion,
        the Company’s Chief Executive Officer and Chief Financial Officer took into
        account the event described in the final paragraph of this Item 4.
  *Changes
        in Internal Control:* During
        the quarter ended April 29, 2006, the Company continued implementation of
        a new
        merchandising system in Waldenbooks, which it began during the third quarter
        of
        2005. The Company believes the controls over the processes affected by the
        implementation are functioning effectively as of April 29, 2006.
  During
        the quarter ended April 29, 2006, the Company discovered an error in the
        calculation of gross margin in the Books etc. division, which is part of
        the
        International segment. The Company has corrected the error, and as of the
        Evaluation Date, does not believe that it resulted from any material weakness
        in
        its internal control over financial reporting. However, the Company is taking
        steps to remediate the procedures which led to the error. In addition, the
        Company is undertaking a review of both its disclosure controls and procedures
        and its internal control over financial reporting specific to the International
        segment to determine whether any changes are required in order to avoid similar
        errors in the future.




20


**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 5 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 January 28, 2006. There
        have been no significant changes in these risks
        and
        uncertainties during
        the first quarter of fiscal 2006.


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





(c)
            The
                table below presents the total number of shares repurchased during
                the
                first quarter of fiscal 2005.





**Fiscal
                Period**
            
            **Total
                Number of Shares (1)**
            
            **Average
                Price Paid per Share**
              **(2)**
            
            **Total
                Number of Shares Purchased as Part of Publicly Announced Plans or
                Programs
                (3)**
            
            **Approximate
                Dollar Value of Shares that May Yet Be Purchased Under the Plans
                or
                Programs**January
                24, 2005
              through
              February
                19, 2005
            
            
            16,248
            
            $
            -
            
            
            -
            
            $
            246,058,387February
                20, 2005
              through
              March
                19, 2005
            
            
            188,886
            
            $
            24.52
            
            
            188,000
            
            $
            241,448,662March
                20, 2004
              through
              April
                29, 2006
            
            
            536,349
            
            $
            24.57
            
            
            531,000
            
            $
            223,793,687Total
            
            
            741,483
            
            $
            24.55
            
            
            719,000
            
            $
            223,793,687





(1)
            During
                the first quarter of 2005, the company retired 22,483 shares which
                were
                acquired pursuant to the Company’s employee benefit
                plans.


(2)
            Average
                price paid per share includes commissions and is rounded to the nearest
                two decimal places.


(3)
            On
                January 11, 2006, the Company announced that the Board of Directors
                authorized an increase in the amount of share repurchases to $250
                million.





21


**Item
      6. Exhibits**





Exhibits:





3.1(1)
            Restated
                Articles of Incorporation of Borders Group, Inc.3.2(2)
            Restated
                bylaws of Borders Group, Inc.10.29
            Revised
                Form of Severance Agreement for Executive Officers (other than Mr.
                Josefowicz).31.1
            Statement
                of Gregory P. Josefowicz, Chairman, 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, Senior Vice President and Chief Financial Officer
                of
                Borders Group,Inc.
                pursuant to Section 302 of the Sarbanes-Oxley Act of
                200232.1
            Statement
                of Gregory P. Josefowicz, Chairman, President and Chief Executive
                Officer
                of Borders Group, Inc. pursuant to Section 906 of the Sarbanes-Oxley
                Act
                of 200232.2
            Statement
                of Edward W. Wilhelm, Senior Vice President and Chief Financial Officer
                of
                Borders Group,Inc.
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002(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).








22


**SIGNATURES**





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





BORDERS
      GROUP, INC.


(REGISTRANT)





Date: June 8, 2006
            By:/s/
              Edward W. WilhelmEdward
                W. WilhelmSenior
                Vice President andChief
                Financial Officer(Principal
                Financial andAccounting
                Officer)


















23


**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.10.29
            Revised
                Form of Severance Agreement for Executive Officers (other than Mr.
                Josefowicz).31.1
            Statement
                of Gregory P. Josefowicz, Chairman, 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, Senior Vice President and Chief Financial Officer
                of
                Borders Group,Inc.
                pursuant to Section 302 of the Sarbanes-Oxley Act of
                200232.1
            Statement
                of Gregory P. Josefowicz, Chairman, President and Chief Executive
                Officer
                of Borders Group, Inc. pursuant to Section 906 of the Sarbanes-Oxley
                Act
                of 200232.2
            Statement
                of Edward W. Wilhelm, Senior Vice President and Chief Financial Officer
                of
                Borders Group,Inc.
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002(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).












24