Applying concepts from our new store designs in the U.S., we opened five new Borders superstores and one new Books etc. store internationally in 2004, giving us 77* overseas locations in the United Kingdom (U.K.), Asia Pacific (Australia, New Zealand and Singapore) and Puerto Rico. We also remodeled our flagship stores on Oxford Street in London and in Glasgow, and teamed with Amazon.com to launch dedicated online shopping sites for Borders and Books etc. customers in the U.K.

We will continue to enlarge our global footprint in 2005, opening 10 to 12 new International locations, primarily in the U.K. and Australia. This total includes the first Borders franchise store, which will open in Malaysia in April 2005. Located in Kuala Lumpur, the store will be operated by Malaysia's Berjaya Group Berhad, a leading property development and management company. If successful, we plan to expand our presence in Malaysia over time, leveraging the infrastructure of our successful operations in Singapore.

Converting Waldenbooks Stores to Borders Express

Our Waldenbooks Specialty Retail segment — which includes Waldenbooks stores, Borders Express, Borders Outlet and Borders airport stores, and our seasonal-format business — had a challenging year in 2004 due to a number of factors, including slowing mall traffic, and a decline in bestsellers, which make up a larger share of our small-format store sales. For the year, sales declined 5.0% to $779.9 million, and net income fell 15% to $41.5 million. We closed 43 under-performing Waldenbooks stores as part of an ongoing consolidation effort.

To strengthen this segment, we tested the conversion of 37 Waldenbooks to redesigned Borders Express stores during the second half of 2004. Sales improvements at these pilot stores were encouraging, especially during the holiday season, and we expect to convert 75 to 100 additional Waldenbooks stores to Borders Express during 2005. We believe the Borders Express concept represents a prime opportunity to increase Borders' brand awareness, and to create advertising and promotional efficiencies across all of our businesses.

Among other bright spots we can build on: Borders Outlet and Borders airport locations both delivered excellent results during 2004, and we will continue to seek new opportunities for growth in 2005 and beyond. We also increased the number of seasonal kiosks we operated in 2004 — led by our popular Day-By-Day Calendar stores — helping to boost holiday sales for the category.

The Gameplan For 2005:
"Leverage Our Enterprise"

While we tend to talk about our business in segments — Borders U.S., Borders International and Waldenbooks — we are also beginning to leverage our global resources more effectively across all our formats and locations. By aligning our resources in this way, Borders Group is not only becoming a more efficient organization, we’re becoming a better one, increasing the value of our total enterprise beyond the mere sum of its parts.

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