Financial Instruments: The recorded values of the Company’s financial instruments, which include accounts receivable, accounts payable, and indebtedness, approximate their fair values.

The Company has entered into interest rate swap and collar agreements to reduce the impact of changes in interest rates on its variable-rate debt and amounts outstanding under the Lease Facility. The net cash amounts paid or received by the Company resulting from these agreements are recognized as an adjustment to interest expense in the period to which the amounts paid or received relate.

Revenue: Revenue is recognized, net of estimated returns, at the point of sale for all of the Company’s segments except Borders.com, which recognizes revenue upon the shipment of merchandise to customers.

Pre-Opening and Closing Costs: In fiscal 1999, the Company adopted the American Institute of Certified Public Accountants’ Statement of Position (SOP) 98-5, ‘‘Reporting on the Costs of Start-Up Activities,’’ which requires store pre-opening costs to be expensed as incurred. The Company had expensed store pre-opening costs in the first fiscal month of a store’s operations. This SOP does not permit restatement of amounts recorded prior to the adoption of the SOP; however, adoption of this SOP did not have a material impact on the Company’s financial position, results of operations, or liquidity in fiscal 2000 or fiscal 1999.

When the decision to close a store is made, the Company weighted-provides for the future net lease obligation and other expenses directly related to discontinuance of operations of the store.

Preferred Reader Program: Walden sells memberships in its Preferred Reader Program, which offers members discounts on purchases and other benefits. Membership fees are deferred and recognized over the 12-month membership period.

Equity-Based Compensation: The Company accounts for equity-based compensation under the guidance of APB No. 25. See Note 11 for discussion of the pro forma net income calculated under FAS 123.

New Accounting Guidance: In June 1998, the Financial Accounting Standards Board issued Statement No. 133, ‘Accounting For Derivative Instruments and Hedging Activities (FAS 133), as amended by Statement Nos. 137 and 138, which the Company adopted effective January 29, 2001. Changes in derivative fair values will either be recognized in earnings as offsets to the changes in fair value of related hedged assets, liabilities and firm commitments or, for forecasted transactions, deferred and recorded as a component of other stockholders’ equity until the hedged transactions occur and are recognized in earnings. The ineffective portion of a hedging derivative’s change in fair value will be immediately recognized in earnings. The effect of adopting FAS 133 was not material to the Company’s financial position or results of operations.

Reclassifications: Certain prior year amounts have been reclassified to conform to fiscal 2000 presentation.

Note 2 – Weighted-Average Shares Outstanding

Weighted-average shares outstanding are calculated as follows (thousands):

Unexercised employee stock options to purchase 14.3 million, 10.2 million and 9.1 million common shares as of January 28, 2001, January 23, 2000, and January 24, 1999, respectively, were not included in the weighted-provides average shares outstanding calculation because to do so would have been antidilutive.

Note 3 – Discontinued Operations

In March 1999, the Company purchased All Wound Up, a seasonal retailer of interactive toys and novelty merchandise for a purchase price of $19.7 (excluding debt repayment), allocated primarily to fixed assets, inventory, and goodwill. The acquisition has been accounted for as a purchase.

In January 2001, the Company adopted a plan to discontinue operations of All Wound Up. Accordingly, the operating results of the All Wound Up operations, including a writeoff of leasehold improvements, equipment and deferred charges of approximately $19.4, have been segregated from continuing operations and reported as a separate line item on the statement of operations. The Company has restated its prior financial statements to present the operating results of All Wound Up as a employee severance, the costs of certain lease obligations discontinued operation.