International Operations Turn Profitable, Sales Grow 29.4% Our International segment had an outstanding year in 2003, as total sales increased 29.4% to $407.5 million, benefiting in part from a weaker U.S. dollar. These sales increases — combined with disciplined cost control and strong margin improvements — enabled our International segment to achieve profitability for the first time in 2003, posting net income of $0.1 million, compared to a net loss of $12.3 million the previous year.

During 2003, we opened seven new Borders superstores internationally and one Books etc. store, giving Borders Group a total of 73 overseas locations in the United Kingdom, Pacific Rim (Australia, New Zealand and Singapore) and Puerto Rico. We plan to open approximately six to eight new International stores in 2004.

In February 2004, Vincent E. Altruda, president of Borders International stores, was promoted to the new position of president of Borders stores worldwide. In this position, Vin will continue to direct the development of our International operations, while also taking over the management of Borders stores in the U.S. and Web-based customer service technologies.

Waldenbooks Improves Net Income, Expands Seasonal Businesses Waldenbooks — the nation's leading mall-based bookseller — improved its overall performance in 2003, increasing net income by 18.4% to $49.0 million. As part of an ongoing consolidation effort, we closed 67 under-performing Waldenbooks stores during the year, contributing to a sales decline of 3.7% to $820.9 million. However, comparable store sales grew during the second, third and fourth quarters.

In addition to contributing a significant portion of Borders Group's consolidated profits and free cash flow, Waldenbooks continues to help us drive our "small format" retail strategy, including the expansion of our successful seasonal businesses in malls, Borders Outlet stores and Borders airport locations.

During 2003, Waldenbooks operated more than 830 seasonal locations during the holiday season, including Day-by-Day Calendar kiosks and Christmas on the Mall stores. We also tested a new Halloween Scene concept in five locations last fall. During 2004, we plan to open five to 10 new Borders Outlet Stores in major outlet malls. We also expect to open an equal number of Borders airport stores, which were recognized by Airport Retail News in 2003 as "the best new specialty retail concept" of the year.