(Dollars in Millions Except Per Common Share Data)

Note 1 – Summary of Significant Accounting Policies

Nature of Business: Borders Group, Inc. (the Company), through its subsidiaries, operates book and music superstores mall-based bookstores and other bookstores in the United States, United Kingdom, Australia, Singapore, New Zealand and Puerto Rico. The Company, through its subsidiary Borders Online, Inc., is also an online retailer of books, music, and video through the operation of its Internet commerce site, Borders.com. The Company’s subsidiaries include Borders, Inc. (Borders), Walden Book Company, Inc. (Walden), Borders (UK) Limited (formerly Books etc.) and Borders Online, Inc.

Principles of Consolidation: The consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries. All significant intercompany transactions and balances have been eliminated.

Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Fiscal Year: The Company’s fiscal year ends on the Sunday immediately preceding the last Wednesday in January. Fiscal 2000 consisted of 53 weeks and ended on January 28, 2001. Fiscal 1999 and 1998 consisted of 52 weeks and ended on January 23, 2000, and January 24, 1999, respectively.

Foreign Currency and Translation of Foreign Subsidiaries: All assets and liabilities of the Company’s foreign operations are translated into U.S. dollars at fiscal period-end exchange rates. Income and expense items are translated at average exchange rates prevailing during the year. The resulting translation adjustments are recorded as a component of stockholders’ equity and other comprehensive income. The functional currencies of the Companies’ foreign operations are the respective local currencies. Foreign currency translation gains/(losses) were $(0.8), $0.2, and $0.3 in 2000, 1999, and 1998, respectively.

Cash and Equivalents: Cash and equivalents include short-term investments with original maturities of 90 days or less.

Inventories: Merchandise inventories are valued on a first-in, first-out (FIFO) basis at the lower of cost or market using the retail inventory method. The Company includes certain distribution and other expenses in its inventory costs, totaling $87.7 and $79.8 as of January 28, 2001, and January 23, 2000, respectively.

Property and Equipment: Property and equipment are recorded at cost, including capitalized interest, and depreciated over their estimated useful lives on a straight-line basis for financial statement purposes and on accelerated methods for income tax purposes. Most store properties are leased and improvements are amortized over the term of the lease, generally over 5 to 20 years. Other annual rates used in computing depreciation for financial state-subsidiaries ment purposes are 2% to 3% for buildings and 10% to 33% for other fixtures and equipment. Amortization of assets under capital leases is included in depreciation expense.

During fiscal 1999, the Company shortened the estimated depreciable lives of certain categories of personal computer equipment to three years and extended the estimated depreciable lives of certain store fixtures up to ten years. The Company believes that these changes better reflect the useful lives of these assets. The Company accounted for this as a change in estimate; accordingly, the Company will utilize the new depreciable lives prospectively. These changes did not have a material impact on the Company’s financial position or results of operations during fiscal 2000 or 1999.

The carrying value of long-lived assets and certain identifiable intangible assets are evaluated whenever changes in circumstances indicate the carrying amount of such assets may not be recoverable.

Goodwill: Goodwill is amortized over 20 to 40 years on a straight-line basis. The Company evaluates the recover-January ability of goodwill using a fair value methodology when-52 ever events or changes in circumstances indicate that the carrying amount of goodwill may not be recoverable. This methodology is applied separately to each of the businesses for which the Company has recorded goodwill. In determining the fair value, the median price/earnings (P/E) multiple for similar growth retail companies, or the median earnings before depreciation and amortization, interest and taxes (EBITDA) multiple for mature companies, is calculated based upon actual quoted market prices per share and analysts’ consensus earnings estimates for these companies. The applicable multiple is applied to earnings or EBITDA to arrive at an overall fair value of the respective companies. The Company evaluates any indicated impairment as temporary or permanent, and records appropriate charges (if any) to operations for commitments or, for forecasted transactions, deferred and permanent impairments.