This discussion and analysis summarizes the significant factors affecting our consolidated operating results, liquidity and capital resources during the three and nine month periods ended October 31, 2008 and November 2, 2007. This discussion and analysis should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements that are included in our Annual Report on Form 10-K for the fiscal year ended February 1, 2008 (the Annual Report), as well as the consolidated financial statements
(unaudited) and notes to the consolidated financial statements (unaudited)
contained in this report.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The following discussion and analysis of the financial condition and results of operations are based on the consolidated financial statements (unaudited) and notes to the consolidated financial statements (unaudited) contained in this report that have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and do not include all the disclosures normally required in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosures of contingent assets and liabilities. We base these estimates on historical results and various other assumptions believed to be reasonable, all of which form the basis for making estimates concerning the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates.

Our significant accounting polices are described in Note 1 to the consolidated financial statements presented in the Annual Report. Our critical accounting policies and estimates are described in Management's Discussion and Analysis of Financial Condition and Results of Operations in the Annual Report. Our significant and critical accounting policies have not changed significantly since the filing of our Annual Report.

EXECUTIVE OVERVIEW

The third quarter of 2008 continued to be a difficult operating environment for our industry due to numerous external factors weighing on home improvement sales. The pressures on the consumer have intensified as unemployment has risen, equity markets have declined, and concerns about the broader economy have grown. These factors, combined with falling home prices and tight credit markets, suggest continued pressure on home improvement consumers in the near term. We continue to see the greatest sales weakness in bigger ticket discretionary products, and the weakness is most pronounced in areas hardest hit by the housing slowdown. In contrast, hurricane preparation and recovery spending had a positive impact on comparable store sales in the third quarter. Also, our outdoor categories benefited from more seasonable weather as compared to last year's drought conditions in many parts of the U.S. However, since the balance of the macro-economic factors that impact our business remains unfavorable, we will continue to take a cautious approach to ensure that we are well positioned to capitalize on opportunities as they develop.

Despite the challenging sales environment and soft demand for discretionary projects, we continue to gain market share, which is a function of our commitment to service and our ability to capitalize on the evolving competitive landscape. According to third-party estimates, we gained unit market share in 13 of our 20 product categories in the third calendar quarter versus the same period last year. We continue to use our rolling 18-month promotional calendar to support our marketing program that highlights basic home improvement projects that consumers are doing to maintain their homes. We remain focused on our Everyday Low Price strategy, which we will continue to emphasize going forward. We strive to balance our cost cutting efforts with our commitment to customer service. Our third quarter customer focus scores show an improvement in customer service and satisfaction, even though we were reducing payroll in response to decreased sales.

OPERATIONS

The following tables set forth the percentage relationship to net sales of each
line item of the consolidated statements of earnings, as well as the percentage
change in dollar amounts from the prior period. These tables should be read in
conjunction with the following discussion and analysis and the consolidated
financial statements (unaudited), including the related notes to the
consolidated financial statements (unaudited).

                                                            Basis
                                                            Point
                                                          Increase /
                                                          (Decrease)   Percentage
                                                              in       Increase /
                                                          Percentage   (Decrease)
                                                            of Net     in Dollar
                                                          Sales from    Amounts
                                                            Prior      from Prior
                                    Three Months Ended      Period       Period
                                    October    November    2008 vs.     2008 vs.
                                    31, 2008   2, 2007       2007         2007
Net sales                             100.00 %   100.00 %        N/A          1.4 %
Gross margin                           33.98      34.27         (29)          0.5
Expenses:
Selling, general and administrative    23.23      21.63          160          8.9
Store opening costs                     0.27       0.36          (9)       (23.5)
Depreciation                            3.29       2.94           35         13.5
Interest - net                          0.56       0.43           13         30.0
Total expenses                         27.35      25.36          199          9.3
Pre-tax earnings                        6.63       8.91        (228)       (24.5)
Income tax provision                    2.47       3.35         (88)       (25.4)
Net earnings                            4.16 %     5.56 %      (140)       (24.0) %

EBIT margin (1)                         7.19 %     9.34 %      (215)       (22.0) %

                                                            Basis
                                                            Point
                                                          Increase /
                                                          (Decrease)   Percentage
                                                              in       Increase /
                                                          Percentage   (Decrease)
                                                            of Net     in Dollar
                                                          Sales from    Amounts
                                                            Prior      from Prior
                                     Nine Months Ended      Period       Period
                                    October    November    2008 vs.     2008 vs.
                                    31, 2008   2, 2007       2007         2007
Net sales                             100.00 %   100.00 %        N/A          0.9 %
Gross margin                           34.34      34.58         (24)          0.2
Expenses:
Selling, general and administrative    22.13      21.17           96          5.5
Store opening costs                     0.18       0.21          (3)       (11.9)
Depreciation                            2.99       2.63           36         14.8
Interest - net                          0.55       0.39           16         42.4
Total expenses                         25.85      24.40          145          6.9
Pre-tax earnings                        8.49      10.18        (169)       (15.8)
Income tax provision                    3.17       3.85         (68)       (16.7)
Net earnings                            5.32 %     6.33 %      (101)       (15.3) %

EBIT margin (1)                         9.04 %    10.57 %      (153)       (13.7) %

                                            Three Months Ended                      Nine Months Ended
Other metrics:                    October 31, 2008      November 2, 2007     October 31, 2008    November 2,
                                                                                                     2007
Comparable store sales changes
(2)                                           (5.9) %               (4.3) %              (6.5) %        (4.3) %
Customer transactions (in
millions)                                       179                   173                  577            558
Average ticket (3)               $            65.64    $            66.95   $            66.32   $      67.92
At end of period:
Number of stores                              1,616                 1,464
Sales floor square feet (in
millions)                                       183                   166
Average store size selling
square feet (in thousands) (4)                  113                   113

(1) We define EBIT margin as earnings before interest and taxes as a percentage of sales (operating margin).

(2) We define a comparable store as a store that has been open longer than 13 months. A store that is identified for relocation is no longer considered comparable one

month prior to its relocation. The relocated store must then remain open longer than 13 months to be considered comparable.
(3) We define average ticket as net sales divided by number of customer transactions.

(4) We define average store size selling square feet as sales floor square feet divided by the number of stores open at the end of the period.

Net Sales - The increase in sales for both the quarter and nine months ended October 31, 2008 was driven by our store expansion program, which added 152 net new stores during the last four quarters. Although total customer transactions increased 3.4% compared to the third quarter of 2007, average ticket decreased 2.0% to $65.64. Comparable store sales declined 5.9% for the quarter and 6.5% for the first nine months of 2008. Comparable store customer transactions decreased 3.5% compared to the third quarter of 2007 and comparable store average ticket decreased 2.3%. Hurricane preparation and recovery spending had a positive impact on our comparable store sales in the third quarter of 2008 of approximately 100 basis points. In addition, seasonable weather as compared to last year's drought conditions in many parts of the U.S. positively impacted comparable store sales by approximately 50 basis points during the quarter.

The demand for hurricane related products resulted in comparable store sales increases in building materials and outdoor power equipment and an above average comparable store sales change in lumber. Hurricane related demand also resulted in an above average comparable store sales change in our hardware category primarily driven by demand for flashlights and batteries. In addition, favorable comparisons due to last year's drought contributed to a comparable store sales increase in nursery and an above average comparable store sales change in lawn & landscape for the third quarter. Also, consumers' efforts to make their homes more energy-efficient in preparation for winter resulted in an increase in seasonal living comparable store sales, primarily driven by demand for seasonal heating products, as well as an above average comparable store sales change in our rough plumbing category, primarily driven by demand for air filters and programmable thermostats. Finally, the continued willingness of homeowners to take on smaller projects to improve their outdoor space and maintain their homes contributed to the comparable store sales increase in nursery as well as an above average comparable store sales change in paint.

We experienced mixed results within Specialty Sales during the quarter, due to consumers' hesitancy to take on larger discretionary projects. This contributed to a low double-digit decline in comparable store sales in Installed Sales. Weakness in cabinets and countertops, fashion plumbing, and lighting also led to a low double-digit decline in comparable store Special Order Sales. However, Commercial Business Customer sales continued to perform above our average comparable store sales change. Our focus on the professional tradesperson, property maintenance professional and the repair/remodeler continue to drive solid results in Commercial Business Customer sales.

We continued to experience a wide range of comparable store sales performance from a geographic market perspective in the third quarter. Markets in the western U.S., Florida, and certain areas of the Northeast experienced double-digit declines in comparable store sales during the third quarter. These areas, which include some of the markets most pressured by the weak housing market, reduced our comparable store sales for the quarter by approximately 350 basis points. Contrasting those markets, we continued to see solid sales performance in our Southern Texas and Ohio Valley markets during the third quarter of 2008. Our Southern Texas market has performed well for several quarters, and during the third quarter, we experienced increased demand for hurricane related products which resulted in the strong comparable

store sales performance. These better performing markets had a positive impact on total company comparable store sales of approximately 150 basis points for the quarter.

Gross Margin - The 29 basis point decline in gross margin as a percentage of sales from the third quarter of 2007 was primarily driven by de-leverage of approximately 10 basis points attributable to the mix of items sold, 10 basis points due to higher fuel costs and nine basis points related to distribution fixed costs. In addition, lower vendor rebates due to decreased volumes negatively impacted gross margin by approximately eight basis points during the quarter. De-leverage from these factors was partially offset by leverage of approximately 10 basis points from lower inventory shrink.

The decrease in gross margin as a percentage of sales for the first nine months of 2008 compared to 2007 was primarily driven by our carpet installation promotion and higher fuel costs. These factors were partially offset by the positive impact from lower inventory shrink.

SG&A - The 160 basis point increase in SG&A as a percentage of sales from the third quarter of 2007 was primarily driven by de-leverage of approximately 81 basis points in store payroll. As sales per store declined, additional stores met the base staffing hours threshold, which increased the proportion of fixed to total payroll. The resulting de-leverage in store payroll was partially offset by leverage of 34 basis points in store service expense, due to the shifting of certain tasks from third-party in-store service groups to store employees. The offsetting impact of these two factors resulted in net de-leverage of 47 basis points. We also experienced de-leverage of approximately 46 basis points in insurance expense, 36 basis points in bonus expense, and 20 basis points in fixed expenses, such as rent, property taxes and utilities during the quarter. De-leverage in insurance expense was due to a favorable adjustment to self-insurance reserves in the third quarter of 2007. De-leverage in bonus expense was attributable to higher achievement against performance targets this year. De-leverage in fixed expenses was a result of the comparable store sales decline. In addition, despite the difficult credit environment, we experienced de-leverage in our proprietary credit programs of only 11 basis points, which was in line with our expectations.

The increase in SG&A as a percentage of sales for the first nine months of 2008 compared to 2007 was similarly driven by de-leverage in store payroll and fixed expenses, such as rent, property taxes and utilities, as a result of softer sales, as well as de-leverage in bonus expense. Our expense de-leverage was partially offset by leverage in store service expense.

Store Opening Costs - Store opening costs, which include payroll and supply costs incurred prior to store opening as well as grand opening advertising costs, totaled $31 million and $41 million in the third quarters of 2008 and 2007, respectively. Because store opening costs are expensed as incurred, the timing of expense recognition fluctuates based on the timing of store openings. We opened 39 new stores in the third quarter of 2008, compared to the opening of 40 new stores in the third quarter of 2007. Store opening costs for stores opened during the third quarter of 2008 and 2007 averaged approximately $0.7 million and $0.8 million per store, respectively.

Store opening costs were $70 million and $79 million for the first nine months of 2008 and 2007, respectively. Store opening costs were associated with the opening of 82 new stores in 2008, compared to 81 stores (79 new and two relocated) in 2007. Store opening costs for stores opened during the first nine months of 2008 and 2007 averaged approximately $0.8 million and $0.7 million per store, respectively.

Depreciation - The de-leverage in depreciation for the three and nine month periods ended October 31, 2008 was driven by the addition of 152 net new stores over the past four quarters and negative comparable store sales. Property, less accumulated depreciation, totaled $22.6 billion at October 31, 2008, an increase of 8.9% from $20.8 billion at November 2, 2007. At October 31, 2008, we owned 87% of our stores, compared to 86% at November 2, 2007, which includes stores on leased land.

Interest - The de-leverage in interest expense for the three and nine month periods ended October 31, 2008 was primarily due to additional expense as a result of the September 2007 $1.3 billion debt issuance and lower capitalized interest associated with fewer stores under construction.

Income Tax Provision - Our effective income tax rate was 37.3% and 37.4% for the three and nine month periods ended October 31, 2008, respectively, and 37.6% and 37.8% for the three and nine month periods ended November 2, 2007, respectively. Our effective income tax rate was 37.7% for fiscal 2007.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

Our primary sources of liquidity are cash flows from operating activities and our $1.75 billion senior credit facility that expires in June 2012. Net cash provided by operating activities totaled $4.4 billion and $3.8 billion for the nine month periods ended October 31, 2008 and November 2, 2007, respectively. The change in cash flows from operating activities was primarily the result of continued efforts to improve vendor payment terms and a higher proportion of purchases near the end of the period.

The primary component of net cash used in investing activities continues to be opening new stores, investing in existing stores through resets and remerchandising, and investing in our distribution center and information technology infrastructure. Cash acquisitions of property were $2.5 billion and $2.9 billion for the nine month periods ended October 31, 2008 and November 2, 2007, respectively. At October 31, 2008, we operated 1,616 stores in the United States and Canada with 183 million square feet of retail selling space, representing a 10.2% increase over the retail selling space at November 2, 2007.

Net cash used in financing activities was $1.6 billion and $1.0 billion for the nine month periods ended October 31, 2008 and November 2, 2007, respectively. The increase in net cash used was primarily driven by a $2.5 billion decrease in cash flows associated with net borrowing activities as compared to the first nine months of 2007. This change was partially offset by a $2.0 billion decrease in share repurchases under the share repurchase program. The ratio of debt to equity plus debt was 22.9%, 26.0% and 29.3% as of October 31, 2008, November 2, 2007, and February 1, 2008, respectively.

Cash Requirements

Capital Expenditures

Our initial 2008 capital forecast was approximately $4.2 billion, inclusive of approximately $350 million of lease commitments, resulting in a planned net cash outflow of approximately $3.8 billion in 2008. As of the end of the third quarter of 2008, we expect that annual net cash outflow will be approximately $3.6 billion. Approximately 80% of this expected commitment is for store expansion. Expansion plans for 2008 consist of 115 to 120 stores, increasing our total sales floor square footage by 7% to 8% for the year. All of the 2008 projects will be owned, including approximately 30% that will be ground-leased properties.

As of October 31, 2008, we owned and operated 13 regional distribution centers (RDCs). We plan to start operations at our next RDC in Pittston, Pennsylvania in the fourth quarter of 2008. As of October 31, 2008, we also operated 15 flatbed distribution centers (FDCs) for the handling of lumber, building materials and other long-length items. We owned 13 and leased two of these FDCs.

Debt and Capital

On June 30, 2008, we redeemed for cash approximately $19 million principal amount, $14 million carrying amount, of our convertible notes issued in February 2001, which represented all remaining notes outstanding of such issue, at a price equal to the sum of the issuance price plus accrued original issue discount of such notes as of the redemption date ($730.71 per note). From their issuance through the redemption, principal amounts of $986 million, or approximately 98%, of our February 2001 convertible notes were converted from debt to equity. During 2008, prior to the redemption, an insignificant amount was converted from debt to equity. During the first nine months of 2007, principal amounts of $18 million were converted from debt to equity.

On June 25, 2008, we completed a single open market repurchase of approximately $187 million principal amount, $164 million carrying amount, of our senior convertible notes issued in October 2001 at a price of $875.73 per note. We subsequently redeemed on June 30, 2008 for cash approximately $392 million principal amount, $343 million carrying amount, of our senior convertible notes issued in October 2001, which represented all remaining notes outstanding of such issue, at a price equal to the sum of the issuance price plus accrued original issue discount of such notes as of the redemption date ($875.73 per note). From their issuance through the redemption, an insignificant amount of our senior convertible notes had converted from debt to equity.

During the first nine months of 2008, there were no share repurchases under the share repurchase program. As of October 31, 2008, we had remaining authorization through 2009 under the share repurchase program of $2.2 billion. Our current outlook does not assume any share repurchases for 2008.

Sources of Liquidity

Global financial markets have recently experienced a general decrease in liquidity and credit availability. Despite these events, we believe that net cash provided by operating activities, existing cash and investments, and existing financing arrangements will be adequate for our expansion plans and for other operating requirements over the next 12 months.

The $1.75 billion senior credit facility supports our commercial paper and revolving credit programs. Borrowings made under the senior credit facility are unsecured and are priced at a fixed rate based upon market conditions at the time of funding in accordance with the terms of the senior credit facility. The senior credit facility contains certain restrictive covenants, which include maintenance of a debt leverage ratio as defined by the senior credit facility. We were in compliance with those covenants at October 31, 2008. Eighteen banking institutions are participating in the senior credit facility. As of October 31, 2008, there was $60 million outstanding under the commercial paper program leaving approximately $1.7 billion available under the commercial paper and revolving credit programs, which we believe will continue to be accessible throughout the term of the senior credit facility. The weighted-average interest rate on the outstanding commercial paper was 1.03%. As of November 2, 2007, there were no outstanding borrowings under the senior credit facility or under the commercial paper program.

The Canadian dollar (C$) denominated credit agreement in the amount of C$200 million expires in January 2009. We currently plan to extend the credit agreement or seek alternative C$ denominated financing. The agreement was established for the purpose of funding the construction of retail stores and for working capital and other general corporate purposes in Canada. Borrowings made are unsecured and are priced at a fixed rate based upon market conditions at the time of funding in accordance with the terms of the credit agreement. The credit agreement contains certain restrictive covenants, which include maintenance of a debt leverage ratio as defined by the credit agreement. We were in compliance with those covenants at October 31, 2008. Three banking institutions are participating in the credit agreement. As of October 31, 2008, there was C$200 million or the equivalent of $165 million outstanding under the credit agreement. The weighted-average interest rate on the short-term borrowings was 3.18%. As of November 2, 2007, there were no borrowings outstanding under the credit agreement.

We also have a C$ denominated credit facility in the amount of C$50 million that provides revolving credit support for our Canadian operations. This uncommitted facility provides us with the ability to make unsecured borrowings, which are priced at a fixed rate based upon market conditions at the time of funding in accordance with the terms of the credit facility. As of October 31, 2008, there was C$29 million or the equivalent of $24 million outstanding under the credit facility. The weighted-average interest rate on the short-term borrowings was 2.90%. As of November 2, 2007 there was C$15 million or the equivalent of $16 million outstanding under the credit facility and the weighted-average interest rate on the short-term borrowings was 4.84%.

Our debt ratings at October 31, 2008, were as follows:

Current Debt Ratings  S&P   Moody's  Fitch
Commercial Paper       A1     P1       F1
Senior Debt            A+     A1       A+

The availability of funds through the issuance of commercial paper and new debt could be adversely affected due to a debt rating downgrade or a deterioration of certain financial ratios. We do not expect our credit ratings to be downgraded, but if a downgrade were to occur, it could adversely impact our future borrowing costs and access to capital markets. There are no provisions in any agreements that would require early cash settlement of existing debt or leases as a result of a downgrade in our debt rating or a decrease in our stock price.

We are committed to maintaining strong commercial paper ratings through the management of debt-related ratios.

OFF-BALANCE SHEET ARRANGEMENTS

Other than in connection with executing operating leases, we do not have any off-balance sheet financing that has, or is reasonably likely to have, a . . .