EXECUTIVE OVERVIEW

Dillard's, Inc. (the "Company", "we", "us" or "our") operated 317 Dillard's locations and seven clearance centers spanning 29 states as of November 1, 2008 as well as an internet store at www.dillards.com. Our stores are located in fashion-oriented shopping malls and open-air centers and offer a broad selection of fashion apparel and home furnishings. We offer an appealing and attractive assortment of merchandise to our customers at a fair price. We seek to enhance our income by maximizing the sale of this merchandise to our customers. We do this by promoting and advertising our merchandise and by making our stores an attractive and convenient place for our customers to shop.

Fundamentally, our business model is to offer the customer a compelling price/value relationship through the combination of high quality, fashionable products at a competitive price. We seek to deliver a high level of profitability and cash flow.

The oppressive economic environment clearly weighed heavily on our results during the third quarter. We continue to take aggressive action to navigate these challenging times. We announced the closure of 21 under-performing stores during 2008, dramatically reduced capital spending for 2008 and 2009 and are executing appropriate operating expense reduction measures throughout the Company. These efforts are not only designed to weather near-term economic uncertainty but also to position Dillard's well for the long term.

Highlights of the Company's key financial strengths include:

· Dillard's maintains a $1.2 billion revolving credit facility with JP Morgan Chase Bank as the lead agent. The credit agreement expires December 12, 2012 and there are no financial covenants under this facility provided availability exceeds $100 million. Availability on the credit facility following the Company's peak borrowing requirement remained well in excess of $500 million.

· Total maturities of long-term debt in 2009 and 2010 are less than $26 million.

· Dillard's owns approximately 86% of its total store square footage.

· The closure of 21 under-performing stores will result in over $50 million reduction in working capital requirement for 2009.

· Capital expenditures in 2009 are expected to be approximately $120 million compared to approximately $192 million in 2008 primarily as a result of dramatically reduced store opening activity. Dillard's will begin construction of three stores during 2009 with one opening in 2009 and the other two opening in February and March of 2010. Dillard's opened 10 new stores in 2008.

· Dillard's recently announced a strategic staff reduction of approximately 8% of its salaried associates as part of its ongoing efforts to reduce operating expenses. The positions were comprised mainly of salaried managers and support professionals including 60 in the Company's Little Rock, Arkansas headquarters.

· Dillard's expects approximately $100 million in savings in operating expenses (advertising, selling, administrative and general or "S G & A" expenses) in 2008 as a result of recent expense cutting measures. Management estimates additional S G & A savings in 2009 to be approximately $70 million as a result of recent actions including the recently-announced strategic staff reduction.

Noteworthy items for the three months ended November 1, 2008 include:

· Asset impairment and store closing charges of $9.3 million were recorded for one store closed during the quarter, one store closed during November and two stores scheduled to close by the end of fiscal 2008.

· A gain of $7.2 million was recognized related to the sale of the Company's store location at Rivercenter in San Antonio, Texas.

· $4.4 million of hurricane losses and remediation expenses were recognized related to Hurricane Ike which occurred in September of 2008.

· The Company purchased the remaining interest in CDI Contractors, LLC and CDI Contractors, Inc. ("CDI"), a former 50% equity method joint venture investment of the Company that is also a general contractor that constructs stores for the Company.

Trends and Uncertainties

We have identified the following key uncertainties whose fluctuations may have a material effect on our operating results.

· Cash flow - Cash from operating activities is a primary source of liquidity that is adversely affected when the industry faces market driven challenges and new and existing competitors seek areas of growth to expand their businesses.

· Pricing - If our customers do not purchase our merchandise offerings in sufficient quantities, we respond by taking markdowns. If we have to reduce our prices, the cost of goods sold on our income statement will correspondingly rise, thus reducing our income.

· Success of brand - The success of our exclusive brand merchandise as well as merchandise we source from national vendors is dependent upon customer fashion preferences.

· Sourcing - Our store merchandise selection is dependent upon our ability to acquire compelling products from a number of sources. Our ability to attract and retain compelling vendors as well as in-house design talent combined with adequate and stable availability of materials and production facilities from which we source our merchandise has a significant impact on our merchandise mix and, thus, our ability to sell merchandise at profitable prices.

· Store growth - Although store growth is presently not a near-term goal, such growth is dependent upon a number of factors which could impede our ability to open new stores, such as the identification of suitable markets and locations and the availability of shopping developments, especially in a weakened economic environment.

2008 Guidance

A summary of guidance on key financial measures for 2008, in conformity with
accounting principles generally accepted in the United States of America
("GAAP"), is shown below. See "forward-looking information" below.

                                        2008         2007
(in millions of dollars)           Estimated       Actual

Depreciation and amortization    $       280     $    299
Rental expense                            62           60
Interest and debt expense, net            90           92
Capital expenditures                     192          396

General

Net sales. Net sales include merchandise sales of comparable and non-comparable stores and revenue recognized on CDI contracts. Comparable store sales include sales for those stores which were in operation for a full period in both the current month and the corresponding month for the prior year. Non-comparable store sales include sales in the current fiscal year from stores opened during the previous fiscal year before they are considered comparable stores, sales from new stores opened in the current fiscal year and sales in the previous fiscal year for stores that were closed in the current fiscal year.

Service charges and other income. Service charges and other income include income generated through the long-term marketing and servicing alliance between the Company and GE Consumer Finance ("GE"). Other income relates to rental income, shipping and handling fees and lease income on leased departments.

Cost of sales. Cost of sales includes the cost of merchandise sold (net of purchase discounts), bankcard fees, freight to the distribution centers, employee and promotional discounts, non-specific vendor allowances and direct payroll for salon personnel. Cost of sales also includes CDI contracts costs, which comprise all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs.

Advertising, selling, administrative and general expenses. Advertising, selling, administrative and general expenses include buying, occupancy, selling, distribution, warehousing, store and corporate expenses (including payroll and employee benefits), insurance, employment taxes, advertising, management information systems, legal and other corporate level expenses. Buying expenses consist of payroll, employee benefits and travel for design, buying and merchandising personnel.

Depreciation and amortization. Depreciation and amortization expenses include depreciation and amortization on property and equipment.

Rentals. Rentals include expenses for store leases and data processing and other equipment rentals.

Interest and debt expense, net. Interest and debt expense includes interest, net of interest income, relating to the Company's unsecured notes, mortgage notes, the guaranteed beneficial interests in the Company's subordinated debentures, gains and losses on note repurchases, amortization of financing costs, call premiums and interest on capital lease obligations.

Gain on disposal of assets. Gain on disposal of assets includes the net gain or loss on the sale or disposal of property and equipment and joint ventures.

Asset impairment and store closing charges. Asset impairment and store closing charges consist of write-downs to fair value of under-performing properties and exit costs associated with the closure of certain stores. Exit costs include future rent, taxes and common area maintenance expenses from the time the stores are closed.

Equity in earnings of joint ventures. Equity in earnings of joint ventures includes the Company's portion of the income or loss of the Company's unconsolidated joint ventures.

Critical Accounting Policies and Estimates

The Company's accounting policies are more fully described in Note 1 of Notes to Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the fiscal year ended February 2, 2008. As disclosed in this note, the preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions about future events that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company evaluates its estimates and judgments on an ongoing basis and predicates those estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Since future events and their effects cannot be determined with absolute certainty, actual results will differ from those estimates.

Management of the Company believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in preparation of the condensed consolidated financial statements.

Merchandise inventory. Approximately 98% of the inventories are valued at the lower of cost or market using the retail last-in, first-out ("LIFO") inventory method. Under the retail inventory method ("RIM"), the valuation of inventories at cost and the resulting gross margins are calculated by applying a calculated cost to retail ratio to the retail value of inventories. RIM is an averaging method that is widely used in the retail industry due to its practicality. Additionally, it is recognized that the use of RIM will result in valuing inventories at the lower of cost or market if markdowns are currently taken as a reduction of the retail value of inventories. Inherent in the RIM calculation are certain significant management judgments including, among others, merchandise markon, markups, and markdowns, which significantly impact the ending inventory valuation at cost as well as the resulting gross margins. Management believes that the Company's RIM provides an inventory valuation which results in a carrying value at the lower of cost or market. The remaining 2% of the inventories are valued at the lower of cost or market using the specific identified cost method. A 1% change in markdowns would have impacted net loss by approximately $2 million and $8 million for the three and nine months ended November 1, 2008, respectively.

Revenue recognition. The Company recognizes revenue upon the sale of merchandise to its customers, net of anticipated returns. The provision for sales returns is based on historical evidence of our return rate. We recorded an allowance for sales returns of $6.2 million and $7.4 million as of November 1, 2008 and November 3, 2007, respectively. Adjustments to earnings resulting from revisions to estimates on our sales return provision have been insignificant for the three and nine months ended November 1, 2008 and November 3, 2007.

The Company's share of income earned under the long-term marketing and servicing alliance with GE involving the Dillard's branded proprietary credit cards is included as a component of service charges and other income. The Company received income of approximately $81.2 million and $89.2 million from GE during the nine months ended November 1, 2008 and November 3, 2007, respectively. Further pursuant to this agreement, the Company has no continuing involvement other than to honor the proprietary credit cards in its stores. Although not obligated to a specific level of marketing commitment, the Company participates in the marketing of the proprietary credit cards and accepts payments on the proprietary credit cards in its stores as a convenience to customers who prefer to pay in person rather than by mailing their payments to GE.

Profits from CDI construction contracts and construction joint ventures are generally recognized by applying percentages of completion for each period to the total estimated profits for the respective contracts. The length of contract varies but is typically nine to eighteen months. The percentages of completion are determined by relating the actual costs of work performed to date to the current estimated total costs of the respective contracts.

Merchandise vendor allowances. The Company receives concessions from its merchandise vendors through a variety of programs and arrangements, including cooperative advertising, payroll reimbursements and margin maintenance programs.

Cooperative advertising allowances are reported as a reduction of advertising expense in the period in which the advertising occurred. If vendor advertising allowances were substantially reduced or eliminated, the Company would likely consider other methods of advertising as well as the volume and frequency of our product advertising, which could increase or decrease our expenditures. Similarly, we are not able to assess the impact of vendor advertising allowances on creating additional revenues, as such allowances do not directly generate revenue for our stores.

Payroll reimbursements are reported as a reduction of payroll expense in the period in which the reimbursement occurred. All other merchandise vendor allowances are recognized as a reduction of cost purchases when received. Accordingly, a reduction or increase in vendor concessions has an inverse impact on cost of sales and/or selling and administrative expenses. The amounts recognized as a reduction in cost of sales have not varied significantly during the three and nine months ended November 1, 2008 and November 3, 2007.

Insurance accruals. The Company's condensed consolidated balance sheets include liabilities with respect to self-insured workers' compensation (with a self-insured retention of $4 million per claim) and general liability (with a self-insured retention of $1 million per claim) claims. The Company estimates the required liability of such claims, utilizing an actuarial method, based upon various assumptions, which include, but are not limited to, our historical loss experience, projected loss development factors, actual payroll and other data. The required liability is also subject to adjustment in the future based upon the changes in claims experience, including changes in the number of incidents (frequency) and changes in the ultimate cost per incident (severity). As of November 1, 2008 and November 3, 2007, insurance accruals of $56.8 million and $57.0 million, respectively, were recorded in trade accounts payable and accrued expenses and other liabilities. Adjustments to earnings resulting from changes in historical loss trends have been insignificant for the three and nine months ended November 1, 2008 and November 3, 2007.

Finite-lived assets. The Company's judgment regarding the existence of impairment indicators is based on market and operational performance. We assess the impairment of long-lived assets, primarily fixed assets, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include the following:

· Significant changes in the manner of our use of assets or the strategy for the overall business;

· Significant negative industry or economic trends; or

· Store closings.

The Company performs an analysis of the anticipated undiscounted future net cash flows of the related finite-lived assets. If the carrying value of the related asset exceeds the undiscounted cash flows, the carrying value is reduced to its fair value. Various factors including future sales growth and profit margins are included in this analysis. To the extent these future projections or the Company's strategies change, the conclusion regarding impairment may differ from the current estimates.

Goodwill. The Company evaluates goodwill annually as of the last day of the fourth quarter and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable from its estimated future cash flows. To the extent these future projections or our strategies change, the conclusion regarding impairment may differ from the current estimates.

Estimates of fair value are primarily determined using projected discounted cash flows and are based on our best estimate of future revenue and operating costs and general market conditions. These estimates are subject to review and approval by senior management. This approach uses significant assumptions, including projected future cash flows, the discount rate reflecting the risk inherent in future cash flows and a terminal growth rate.

Income taxes. Temporary differences arising from differing treatment of income and expense items for tax and financial reporting purposes result in deferred tax assets and liabilities that are recorded on the balance sheet. These balances, as well as income tax expense, are determined through management's estimations, interpretation of tax law for multiple jurisdictions and tax planning. If the Company's actual results differ from estimated results due to changes in tax laws, new store locations or tax planning, the Company's effective tax rate and tax balances could be affected. As such these estimates may require adjustment in the future as additional facts become known or as circumstances change.

FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48"), clarifies the accounting for uncertainty in income tax recognized in an entity's financial statements in accordance with SFAS No. 109. The Company classifies accrued interest and penalties relating to income tax in the financial statements as income tax expense. The total amount of unrecognized tax benefits as of November 1, 2008 was $27.4 million, of which $19.5 million would, if recognized, affect the effective tax rate. The total amount of accrued interest and penalties as of November 1, 2008 was $9.5 million.

The Company is currently being examined by the Internal Revenue Service for the fiscal tax years 2003 through 2005. The Company is also under examination by various state and local taxing jurisdictions for various fiscal years. The tax years that remain subject to examination for major tax jurisdictions are fiscal tax years 2003 and forward, with the exception of fiscal 1997 through 2002 amended state and local tax returns related to the reporting of federal audit adjustments. The Company has taken positions in certain taxing jurisdictions for which it is reasonably possible that the total amounts of unrecognized tax benefits may decrease within the next twelve months. The possible decrease could result from the finalization of the Company's federal and various state income tax audits. The Company's federal income tax audit uncertainties primarily relate to research and development credits, while various state income tax audit uncertainties primarily relate to income from intangibles. The estimated range of the reasonably possible uncertain tax benefit decrease in the next twelve months is between $2 million and $5 million.

Discount rate. The discount rate that the Company utilizes for determining future pension obligations is based on the Citigroup High Grade Corporate Yield Curve on its annual measurement date and is matched to the future expected cash flows of the benefit plans by annual periods. The discount rate had increased to 6.3% as of February 2, 2008 from 5.9% as of February 3, 2007. We believe that these assumptions have been appropriate and that, based on these assumptions, the pension liability of $114 million was appropriately stated as of February 2, 2008; however, actual results may differ materially from those estimated and could have a material impact on our consolidated financial statements. A further 50 basis point change in the discount rate would generate an experience gain or loss of approximately $8.0 million.

Seasonality and Inflation

Our business, like many other retailers, is subject to seasonal influences, with the major portion of sales and income typically realized during the last quarter of each fiscal year due to the holiday season. Because of the seasonality of our business, results from any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year.

We do not believe that inflation has had a material effect on our results during the periods presented; however, there can be no assurance that our business will not be affected by such factors in the future.

RESULTS OF OPERATIONS

The following table sets forth the results of operations, expressed as a
percentage of net sales, for the periods indicated.

                                                   Three Months Ended                      Nine Months Ended
                                            November 1,          November 3,        November 1,         November 3,
                                                2008                2007                2008               2007

Net sales                                           100.0 %             100.0 %             100.0 %            100.0 %
Service charges and other income                      2.5                 2.5                 2.4                2.3

                                                    102.5               102.5               102.4              102.3

Cost of sales                                        69.4                65.5                68.7               65.9
Advertising, selling, administrative and
general expenses                                     32.5                31.9                30.3               30.1
Depreciation and amortization                         4.5                 4.6                 4.4                4.4
Rentals                                               0.9                 0.9                 0.9                0.8
Interest and debt expense, net                        1.5                 1.4                 1.4                1.3
Gain on disposal of assets                           (0.5 )              (0.7 )              (0.5 )             (0.2 )
Asset impairment and store closing
charges                                               0.6                 0.2                 0.4                0.1

(Loss) income before income taxes and
equity in earnings of joint ventures                 (6.4 )              (1.3 )              (3.2 )             (0.1 )
Income taxes (benefit)                               (2.6 )              (0.4 )              (1.3 )              0.0
Equity in earnings of joint ventures                  0.1                 0.2                 0.0                0.2

Net (loss) income                                    (3.7 )%             (0.7 )%             (1.9 )%             0.1 %

Net Sales

                            November 1,      November 3,
(in thousands of dollars)       2008             2007          $ Change
Net sales:
Three Months                $  1,508,230     $  1,633,443     $ (125,213 )
Nine Months                    4,791,607        5,044,930       (253,323 )

The percent change by category in the Company's merchandise sales for the three and nine months ended November 1, 2008 compared to the three and nine months ended November 3, 2007 is as follows:

                                        % Change
                                         08-07
                                   Three        Nine
                                  Months       Months
Cosmetics                            (9.0 )%      (4.0 )%
Ladies' apparel and accessories      (9.9 )       (4.6 )
Juniors' and children's apparel     (14.4 )      (10.0 )
Men's apparel and accessories        (9.2 )       (5.8 )
Shoes                                (6.5 )       (4.1 )
Home and furniture                   (9.5 )      (10.3 )

The percent change by region in the Company's total merchandise sales for the three and nine months ended November 1, 2008 compared to the three and nine months ended November 3, 2007 is as follows:

% Change
08-07

           Three        Nine
          Months       Months
Eastern     (11.7 )%      (7.6 )%
Central      (8.0 )       (4.0 )
Western      (9.9 )       (6.3 )

Net sales, exclusive of adjustments to the sales reserve and CDI sales, declined 10% in total stores and 9% in comparable stores during the three months ended November 1, 2008 compared to the three months ended November 3, 2007. All product categories experienced sales declines with the most significant declines noted in the juniors' and children's apparel category.

Net sales, exclusive of adjustments to the sales reserve and CDI sales, declined 6% in both total and comparable stores during the nine months ended November 1, 2008 compared to the nine months ended November 3, 2007. All product categories experienced sales declines with the most significant declines noted in the home and furniture and the junior's and children's apparel category.

During the three and nine months ended November 1, 2008, merchandise sales were above the average performance trend in the Central region, were slightly below trend in the Western region and were below trend in the Eastern region.

In response to the current economy, GE Consumer Finance ("GE"), the issuer of Dillard's proprietary credit cards, has informed the Company that they have reduced spending limits and strengthened authorization strategies, which could negatively impact credit sales and income and cash flows derived from the proprietary credit card program.

Service Charges and Other Income
. . .