General

J. C. Penney Company, Inc. is a holding company whose principal operating subsidiary is J. C. Penney Corporation, Inc. (JCP). JCP was incorporated in Delaware in 1924, and J. C. Penney Company, Inc. was incorporated in Delaware in 2002, when the holding company structure was implemented. The holding company has no independent assets or operations and no direct subsidiaries other than JCP. The holding company and its consolidated subsidiaries, including JCP, are collectively referred to in this quarterly report as "JCPenney" or the "Company," unless otherwise indicated.

The Company is a co-obligor (or guarantor, as appropriate) regarding the payment of principal and interest on JCP's outstanding debt securities. The guarantee by the Company of certain of JCP's outstanding debt securities is full and unconditional.

The following discussion, which presents the results of the Company, should be read in conjunction with the Company's consolidated financial statements as of February 2, 2008, and for the year then ended, and related Notes and Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A), all contained in the Company's Annual Report on Form 10-K for the year ended February 2, 2008 (2007 10-K).

This discussion is intended to provide information that will assist the reader in understanding the Company's financial statements, the changes in certain key items in those financial statements from period to period, and the primary factors that accounted for those changes, how operating results affect the financial condition and results of operations of the Company as a whole, as well as how certain accounting principles affect the Company's financial statements. Unless otherwise indicated, this MD&A relates only to results from continuing operations, all references to earnings per share (EPS) are on a diluted basis and all references to years relate to fiscal years rather than to calendar years.

Key Items

††† The difficult economic environment impacting consumers continued to deteriorate in the third quarter of 2008 reflecting a pronounced slowdown in consumer spending levels. Tightening credit availability, the downturn of the housing and real estate market, rising unemployment and volatility in the financial markets are weighing heavily on the consumer. Consequently, consumer confidence is at record lows. The Company's sales have been impacted by lower consumer spending and declining mall traffic. However, despite the challenging environment, the Company continued to focus on managing inventory and controlling expenses. In addition, the Company executed initiatives to deliver a great experience for customers - through newness in merchandise, effective pricing, enhanced customer service and convenience of shopping in stores, catalog and jcp.com.

††† Comparable store inventory decreased approximately 9% as of the end of the third quarter of 2008 compared with last year's third quarter as a result of the Company's significant actions to lower merchandise receipts and increased clearance activity. Merchandise inventory at the end of the third quarter of 2008 was in alignment with sales trends expected for the remainder of the year.

††† SG&A expenses decreased $50 million, or 3.7% in the third quarter of 2008 as compared to the third quarter of 2007, despite the incremental expenses associated with 26 new stores, net of closing and relocations, opened since the third quarter of 2007, but was not leveraged as a percent of sales. SG&A expenses for the third quarter of 2008 were well managed across the organization without compromising the customer experience.

††† The Company has completed its 2008 new store plan to open 35 new and relocated stores. Net of relocations and store closings, gross selling space increased 2.8% in the first nine months of 2008. In the third quarter of 2008, the Company opened 12 new and relocated stores, including 11 in the off-mall format. Additional information on the change in store count and gross selling space is located on page 17. The Company also opened 10 new Sephora inside JCPenney locations during the third quarter of 2008, which brought the total to 91 locations. Sephora inside JCPenney brings an industry-leading beauty concept to JCPenney customers and continues to be one of the strongest areas of the Company's business.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations-(Continued)

Results of Operations

The third quarter of 2008 marked the fifth consecutive quarter in which the Company's results of operations have been impacted by the weakened economic environment. With the challenging economic conditions expected to persist into 2009, the Company continues to execute its Bridge Plan, which is more fully described on page 23. The Company's Bridge Plan strategies capitalize on opportunities to maintain and build market share during this current economic environment and when conditions improve in the future. Specifically, the Company continues to control expenses, manage inventory in alignment with expected sales trends and maintain financial strength.

($ in millions)               13 weeks ended            39 weeks ended
                             Nov. 1,     Nov. 3,       Nov. 1,     Nov. 3,
                                2008        2007          2008        2007

Total net sales            $   4,318   $   4,729     $  12,727   $  13,470
Gross margin                   1,664       1,879         4,920       5,360
Operating expenses:
Selling, general and
administrative (SG&A)          1,298       1,348         3,841       3,882
Depreciation and
amortization                     118         110           343         310
Pre-opening                       11          19            26          40
Real estate and other
(income), net                    (18 )        (9 )         (36 )       (31 )
   Total operating
expenses                       1,409       1,468         4,174       4,201
Operating income                 255         411           746       1,159
Net interest expense              56          41           164         110
Bond premiums and                ---          --           ---         12
unamortized costs
Income from continuing
operations before  income                   370                     1,037
taxes                           199                       582
Income tax expense               76         109           223         363
Income from continuing
operations                 $     123   $     261     $     359   $     674

Diluted EPS from
continuing operations      $    0.55   $    1.17     $    1.61   $    2.98

Ratios as a percent of
sales:
Gross margin                   38.5%       39.7%         38.7%       39.8%
SG&A                           30.1%       28.5%         30.2%       28.8%
Total operating expenses       32.6%       31.0%         32.8%       31.2%
Operating income                5.9%        8.7%          5.9%        8.6%

Operating Performance Summary

For the third quarter of 2008, the Company reported income from continuing operations of $123 million, or $0.55 per share, compared with $261 million, or $1.17 per share, for the same 2007 period. Operating income decreased $156 million to $255 million, or 5.9% of sales, for the third quarter of 2008, compared with $411 million, or 8.7% of sales, in last year's third quarter, reflecting a decrease of $215 million in gross margin partially offset by a decrease in total operating expenses of $59 million. Operating income reflected a decline in sales as a result of reduced mall traffic and severely restrained spending patterns on the part of customers. During the third quarter of 2008, the Company reduced SG&A expenses on a dollar basis and continued to reduce inventory levels to align with expected sales demand. For the third quarter and first nine months of 2008, real estate and other included a $10 million, or $0.02 per share, gain on the sale of non-operating real estate. Results for the third quarter and first nine months of 2007 included income tax credits of $32 million and $35 million respectively, or $0.14 and $0.15 per share, respectively.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations-(Continued)

For the first nine months of 2008, income from continuing operations was $359 million, or $1.61 per share, compared with $674 million, or $2.98 per share, for the comparable period in 2007. Operating income was $746 million for the first nine months of 2008 compared with $1,159 million for the same period last year.

Store Growth

The following table compares the number of JCPenney department stores and gross
selling space for third quarter and the first nine months of 2008 and 2007:
                                  13 weeks ended         39 weeks ended
                                Nov. 1,     Nov. 3,     Nov. 1,    Nov. 3,
                                   2008        2007        2008       2007
Number of JCPenney department
stores
Beginning of period              1,083       1,048       1,067      1,033

Stores opened                       12          28          35         50
Closed stores(1)                    (2)         (9)         (9)       (16)

End of period store count        1,093       1,067       1,093      1,067
(1) Includes relocations of 1,
8, 7 and 15 stores,
respectively.

Gross selling space
(square feet in millions)
Beginning of period                109         105         107        103

Stores opened                        1           3           3          5
Closed stores                        -          (1)          -         (1)

End of period gross selling
space                              110         107         110        107




 Total Net Sales
($ in millions)                       13 weeks ended            39 weeks ended
                                     Nov. 1,     Nov. 3,       Nov. 1,     Nov. 3,
                                        2008        2007          2008        2007
Total net sales                    $   4,318   $   4,729     $  12,727   $  13,470
Sales percent (decrease)/increase:
Total net sales                      (8.7)%       (1.1)%        (5.5)%        1.7%
Comparable store sales(1)            (10.1)%      (2.4)%        (7.3)%        1.2%

(1) Comparable store sales include sales from new and relocated stores that have been opened for 12 consecutive full fiscal months. Stores closed for an extended period are not included in comparable store sales calculations, while stores remodeled and minor expansions not requiring store closures remain in the calculations. Beginning in 2008, the Company changed its sales reporting to include online sales, through jcp.com, in comparable store sales. Comparable store sales percent change presented in the table above have been reclassified for all periods presented to include jcp.com sales.

Total net sales decreased $411 million, or 8.7%, to $4,318 million in the third quarter of 2008 from $4,729 million in the third quarter of 2007. Total department store results reflect sales of 26 new stores, net of closings and relocations, opened subsequent to last year's third quarter. In the third quarter of 2008, comparable store sales decreased 10.1% compared with a 2.4% decrease in last year's third quarter.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations-(Continued)

As a result of the pronounced slowdown in consumer spending during the third quarter of 2008, mall traffic continued the downward trend compared to last year. Mall traffic was down mid single digits overall and the Company experienced moderately better traffic trends than mall stores. JCPenney off-mall traffic was also down compared to last year, but continues to have stronger traffic trends than mall stores. Consistent with the difficult retail environment and severely restricted consumer spending, the number of transactions and number of units sold declined for the quarter.

Although consumer spending declined over the quarter, the Company continues its leadership position in apparel with women's and children's apparel and family shoes being the best performing divisions. By contrast, and consistent with both the Company's recent results and those of the industry, fine jewelry and home divisions were the weakest businesses. For the third quarter, jcp.com sales decreased 0.3%, compared to an 11.8% increase in last year's third quarter, mostly as a result of home merchandise lines, which comprise a significantly larger portion of catalog and online sales than in stores.

The Company's private brands, including exclusive brands found only at JCPenney, increased to 53% of total merchandise sales for the third quarter of 2008 from 50% in last year's third quarter. From a regional perspective the best performances were in the northeast and central regions, while consistent with areas where the impact from declining home values has been the greatest, the southeast and southwest regions were the softest.

The initiatives for Back-to-School included private brand and designer exclusive offerings that delivered newness, excitement and convenience for the customer at a time when the customer is more discriminating. Private label launches included Decree®, Xersion™, White Tag™, Dorm Life™, Linden Street™ and designer exclusive launches included Fabulosity™ and LeTigre™. The Company was pleased with customer response to the new brand launches in the third quarter of 2008.

During the third quarter of 2008, the Company opened 10 Sephora inside JCPenney locations. Sephora inside JCPenney continues to report strong results and the Company plans to grow the number of locations by an additional 64 in 2009. At the end of the third quarter, Sephora inside JCPenney locations totaled 91 compared with 47 at the end of the third quarter of 2007.

For the first nine months of 2008, total net sales decreased $743 million, or 5.5%, to $12,727 million compared to $13,470 million in the first nine months of 2007. Comparable store sales decreased 7.3% in the first nine months of 2008 compared to a 1.2% increase in last year's first nine months. Internet sales increased 4.5% for the first nine months of 2008 on top of a 15.4% increase in last year's first nine months.

Merchandise Initiatives
The Company continues to offer new brands to provide compelling merchandise with the combination of style, quality and smart prices that customers desire. Early in October 2008, the Company announced the spring 2009 launch of I "Heart" Ronson™, a complete women's fashion sportswear line designed by Charlotte Ronson, an innovator in the fashion industry, to be sold exclusively at JCPenney.

Also exclusive for JCPenney, the Company announced in mid-October, the launch of Allen B.®, a complete women's fashion sportswear and dress collection by Allen B. Schwartz, a designer with talent in bringing the latest trends to market in record time. I "Heart" Ronson and Allen B. are exciting additions to the growing portfolio of exclusive designer brands, which continue to offer customers coveted designer brands at smart prices.

Late in October 2008, the Company announced the significant enhancement of the longstanding and highly successful career brands Worthington® for women and Stafford® for men, to retain longtime customers and to attract new shoppers. The Company updated the private brands with new categories, fits and fabrics that overlap seasons. The expansion of Stafford and Worthington is complemented with a new in-store visual presentation that highlights the additions to each brand, along with mannequins showcasing head-to-toe looks to assist customers in bringing pieces together in a fashionable way. JCPenney's website, jcp.com, showcases the additions to each brand, along with a variety of Worthington and Stafford 'Solutions' pages offering tips and ideas, as well as customer reviews. Direct mail and online marketing will further support the expanded collections.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations-(Continued)

Building on last year's success, Red Box Gifts will once again be offered as a collection of 60 of the best and brightest gifts featuring unique items - such as a 2 gigabyte mp3 player, Sharper Image digital photo keychain, pet's view camera and the My Sports Gaming System, a 5-in-1 interactive sports game system with wireless remote controls that respond to your movement.

Marketing Initiatives
On November 14, 2008, the Company announced the launch of a powerful, integrated marketing campaign that highlights its affordable gift assortment and invites customers to celebrate the joy of giving this holiday season. The Company will target the most effective advertising media such as TV as well as non-traditional media elements, such as in cinema ads and mobile phone marketing, emails, web search and targeted direct mail and catalog. The message will be coordinated across all lines of the business, stores and Direct, with consistent offerings to provide a seamless shopping experience for customers.

Customer Service Initiatives
During 2008, store associates participated in CustomerFIRST, a training program focused on delivering extraordinary customer service and which empowers associates to exceed customers' expectations when they shop at JCPenney. Results of the CustomerFIRST program have been positive. Based on consumer research, customers rank JCPenney number one when asked about customer service, sales associate availability and whether they are treated with respect by sales associates.

In August 2008, the Company launched JCP Rewards, a loyalty reward program that enables customers to earn points and receive members-only benefits by shopping with JCPenney.

As part of the 2008 Red Box Gifts program, dedicated associates - selected based on their excellence in customer service and trained in JCPenney's gift program - will be on hand to assist store customers in finding that special gift.

Gross Margin
Gross margin for the third quarter of 2008 declined by $215 million to $1,664 million compared to $1,879 million in the third quarter of 2007 as a result of higher markdowns from increased clearance activity in response to softer sales and to achieve desired inventory levels. Gross margin as a percent of sales was 38.5% in this year's third quarter, a decline of 120 basis points compared to 39.7% in the same period last year. Through the first nine months of 2008, gross margin decreased 110 basis points to 38.7% of sales, or $4,920 million, compared with 39.8% of sales, or $5,360 million, for the comparable 2007 period.

SG&A Expenses
SG&A expenses were well managed across the entire organization in the third quarter of 2008, decreasing to $1,298 million, compared to $1,348 million for the third quarter of 2007. The Company achieved SG&A expense decrease of $50 million, or 3.7%, despite the addition of 26 net new stores since last year's third quarter. The rollout of the workforce management tool provided a positive impact on associate productivity as well as store payroll expense. SG&A experienced some de-leveraging resulting from the sales decline and, as a percent of sales, increased approximately 160 basis points to 30.1% versus 28.5% in last year's third quarter. SG&A expense has been well controlled throughout the first nine months of 2008, with a decrease of $41 million, to $3,841 million compared to $3,882 million in last year's first nine months.

Depreciation and Amortization Expenses
Depreciation and amortization expenses in the third quarter of 2008 increased to $118 million from $110 million for the same 2007 period reflecting new store openings and store renovations. Depreciation and amortization expenses increased to $343 million, for the first nine months of 2008, compared with $310 million for the same 2007 period.

Pre-Opening Expenses
Pre-opening expenses include costs such as advertising, hiring and training new associates, processing and stocking initial merchandise inventory and rental costs. Pre-opening expenses were $11 million for the third quarter of 2008 and $19 million for the comparable 2007 period and in line with the decreased number of store openings as planned for 2008.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations-(Continued)

Through the first nine months of 2008 and 2007, pre-opening expenses were $26 million and $40 million, respectively. The Company opened 12 stores during the third quarter of 2008 and 28 stores during the third quarter of 2007, which increased the year-to-date total of new stores to 35 and 50 for 2008 and 2007, respectively.

Real Estate and Other (Income)/Expense
Real estate and other consists primarily of ongoing operating income from the Company's real estate subsidiaries. Real estate and other was a net credit of $18 million and $9 million in the third quarters of 2008 and 2007, respectively. In addition to ongoing operating income from real estate subsidiaries, the third quarter of 2008 included net gains of $10 million from the sale of non-operating real estate properties. For the first nine months of 2008 and 2007, Real estate and other was a net credit of $36 million and $31 million, respectively.

Net Interest Expense
Net interest expense consists principally of interest expense on long-term debt, net of interest income earned on cash and cash equivalents. Net interest expense was $56 million for the third quarter of 2008 compared with $41 million for the third quarter of 2007. The increase in net interest expense was due primarily to a decrease in the weighted-average annual interest rate earned on short-term investment balances to 2.04% in the third quarter of 2008 from 5.25% in the third quarter of 2007, combined with a decrease in average outstanding short-term investments. Net interest expense was $164 million for the first nine months of 2008 compared with $110 million for the first nine months of 2007.

Income Taxes
The Company's effective income tax rate for the third quarter of 2008 was 38.2%, compared with 29.5% in the same period last year. The tax rate for the third quarter of 2007 was favorably impacted by a $32 million credit primarily from the favorable settlement of a federal income tax audit. The Company's effective income tax rate for continuing operations for the first nine months of 2008 was 38.3% compared with 35.0% for the first nine months of 2007.

Discontinued Operations
Discontinued operations reflected net credits of $1 million and $2 million, or $0.01 per share, for the third quarter and first nine months of 2008 and net credits of $7 million, or $0.03 per share, for the first nine months of 2007, and were related primarily to management's ongoing review and true-up of reserves related to previously discontinued operations.

Net Income
Net income, including the effects of discontinued operations was $124 million, or $0.56 per share, for the third quarter of 2008 compared with $261 million, or $1.17 per share, for the same period in 2007. For the first nine months of 2008, net income was $361 million, or $1.62 per share, compared with $681 million, or $3.01 per share, for the first nine months of 2007.

Reclassifications

Certain balance sheet reclassifications were made to prior year amounts to conform to the current period presentation, none of which affected the Company's net income in any period. In prior periods, the balance sheet line item labeled Receivables consisted primarily of income taxes receivable and end-of-period sales transactions involving credit cards awaiting settlement. In order to clarify and more accurately classify these amounts, income taxes receivable of $364 million, as of November 1, 2008, is shown separately on the face of the balance sheet and credit card sales settlements of $105 million as of November 1, 2008 was reclassified to Cash and cash equivalents due to its highly liquid nature. The remaining portion of Receivables of $44 million, as of November 1, 2008, representing other current assets was reclassified to Prepaid expenses and other. To ensure conformity between the reporting periods presented, the Company also made the appropriate reclassifications to the Consolidated Balance Sheets and Consolidated Statements of Cash Flows as of November 3, 2007 and February 2, 2008 as disclosed in Note 1 to the unaudited Interim Consolidated Financial Statements.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations-(Continued)

Liquidity and Capital Resources

The Company ended the third quarter of 2008 with approximately $1.6 billion in cash and cash equivalents, which represented approximately 46% of the $3.5 billion of outstanding long-term debt. As of November 1, 2008, the Company had no current maturities of long-term debt.

In April 2007, the Company closed on its offering of $1.0 billion aggregate principal amount of new senior unsecured notes, consisting of $300 million aggregate principal amount of 5.75% Senior Notes Due 2018 and $700 million aggregate principal amount of 6.375% Senior Notes Due 2036. The Company received proceeds of $980 million from the offering, net of underwriting discounts. A portion of the net proceeds was used for the June 1, 2007 early redemption of the remaining $303 million of JCP's 8.125% Debentures Due 2027. The remaining balance was used for general corporate purposes, including the December 15, 2007 payment at maturity of $100 million of JCP's 6.5% Medium-Term Notes Due 2007 and the August 15, 2008 payment at maturity of $200 million outstanding principal amount of JCP's 7.375% Notes Due 2008.

The Company, JCP and J. C. Penney Purchasing Corporation are parties to a five-year $1.2 billion unsecured revolving credit facility (2005 Credit Agreement) with a syndicate of lenders with JPMorgan Chase Bank, N.A., as administrative agent. As of November 1, 2008, the Company was in compliance with the financial covenants under the 2005 Credit Agreement. No borrowings, other than the issuance of standby and import letters of credit totaling $168 million as of the end of the third quarter of 2008, have been made under the 2005 Credit Agreement. See Note 6 to the unaudited Interim Consolidated Financial Statements for further discussion of the 2005 Credit Agreement.

Cash Flows
The following is a summary of the Company's cash flows from operating, investing
and financing activities for both continuing and discontinued operations:
                                                  39 weeks ended
($ in millions)                                 Nov. 1,      Nov. 3,
                                                   2008         2007
Net cash provided by/(used in):
Continuing operations:
Operating activities                          $     154    $     149
Investing activities                               (725 )       (931 )
. . .