The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is provided as a supplement to, and should be read in conjunction with, our audited consolidated financial statements, the accompanying notes and the MD&A included in our Annual Report on Form 10-K for the fiscal year ended February 28, 2009, as well as our consolidated financial statements and the accompanying notes included in Item 1 of this Form 10-Q. Note references are to the notes to consolidated financial statements included in Item 1.

In this discussion, "we," "our," "us," "CarMax," "CarMax, Inc." and "the company" refer to CarMax, Inc. and its wholly owned subsidiaries, unless the context requires otherwise. Amounts and percentages may not total due to rounding.

BUSINESS OVERVIEW

General

CarMax is the nation's largest retailer of used vehicles. We pioneered the used car superstore concept, opening our first store in 1993. Our strategy is to better serve the auto retailing market by addressing the major sources of customer dissatisfaction with traditional auto retailers and to maximize operating efficiencies through the use of standardized operating procedures and store formats enhanced by sophisticated, proprietary management information systems. As of May 31, 2009, we operated 100 used car superstores in 46 markets, comprised of 34 mid-sized markets, 11 large markets and 1 small market. We define mid-sized markets as those with television viewing populations generally between 600,000 and 2.5 million people. We also operated six new car franchises. In fiscal 2009, we sold 345,465 used cars, representing 97% of the total 356,549 vehicles we sold at retail.

We believe the CarMax consumer offer is distinctive within the automobile retailing marketplace. Our offer provides customers the opportunity to shop for vehicles the same way they shop for items at other "big box" retailers. Our consumer offer is structured around our four customer benefits: low, no-haggle prices; a broad selection; high quality vehicles; and a customer-friendly sales process. Our website, carmax.com, is a valuable tool for communicating the CarMax consumer offer, a sophisticated search engine and an efficient channel for customers who prefer to conduct their shopping online. We generate revenues, income and cash flows primarily by retailing used vehicles and associated items including vehicle financing, extended service plans ("ESPs") and vehicle repair service.

We also generate revenues, income and cash flows from the sale of vehicles purchased through our appraisal process that do not meet our retail standards. These vehicles are sold through on-site wholesale auctions. Wholesale auctions are generally held on a weekly or bi-weekly basis, and as of May 31, 2009, we conducted auctions at 49 used car superstores. During fiscal 2009, we sold 194,081 wholesale vehicles. On average, the vehicles we wholesale are approximately 10 years old and have more than 100,000 miles. Participation in our wholesale auctions is restricted to licensed automobile dealers, the majority of whom are independent dealers and licensed wholesalers.

CarMax provides financing to qualified retail customers through CarMax Auto Finance ("CAF"), our finance operation, and a number of third-party financing providers. We collect fixed, prenegotiated fees from the majority of the third-party providers, and we periodically test additional providers. CarMax has no recourse liability for the financing provided by these third parties.

We sell ESPs on behalf of unrelated third parties who are the primary obligors. We have no contractual liability to the customer under these third-party service plans. Extended service plan revenue represents commissions from the unrelated third parties.

Over the long term we believe the primary driver for earnings growth will be vehicle unit sales growth, both from new stores and from stores included in our comparable store base. We target a dollar range of gross profit per used unit sold. The gross profit dollar target for an individual vehicle is based on a variety of factors, including its anticipated probability of sale and its mileage relative to its age; however, it is not primarily based on the vehicle's selling price. Our ability to quickly adjust appraisal offers to be consistent with the broader market trade-in trends and our rapid inventory turns reduce our exposure to the inherent continual fluctuation in used vehicle values and contribute to our ability to manage gross profit dollars per unit. We employ a volume-based strategy, and we systematically mark down individual vehicle prices based on proprietary pricing algorithms in order to appropriately balance sales trends, inventory turns and gross profit achievement.

Prior to August 2008, we had planned to open used car superstores at a rate of approximately 15% of our used car superstore base each year. In August 2008, we announced that we would temporarily slow store growth as result of the weak economic and sales environment. In December 2008, following further deterioration in market conditions we announced a temporary suspension of store growth. We believe this suspension will reduce our capital needs and growth-related costs. We expect to resume store growth when economic and capital market conditions improve and we see a sustained recovery in traffic and sales trends. We are still at a relatively early stage in the national rollout of our retail concept, and as of May 31, 2009, we had used car superstores located in markets that comprised approximately 45% of the U.S. population.

In the near term, our principal challenges are related to the recession, which caused a dramatic decline in industry-wide auto sales, and the disruption of the asset-backed securitization market, which historically has been used to provide funding for CAF loan originations.

Fiscal 2010 First Quarter Highlights

††† We believe the weakness in the economy and the stresses on consumer spending caused by the recession have continued to adversely affect industry-wide auto sales in fiscal 2010.

††† Net sales and operating revenues decreased 17% to $1.83 billion from $2.21 billion in the first quarter of fiscal 2009, while net earnings decreased 3% to $28.7 million, or $0.13 per share, from $29.6 million, or $0.13 per share.

††† Total used vehicle revenues declined 15% to $1.55 billion from $1.82 billion in the first quarter of fiscal 2009. Total used vehicle unit sales decreased 13%, reflecting a 17% decrease in comparable store used unit sales, partially offset by sales from newer stores not yet included in the comparable store base. The comparable store sales decline was primarily the result of reduced customer traffic.

††† Total wholesale vehicle revenues declined 29% to $171.5 million from $242.3 million in the prior year quarter. Wholesale vehicle unit sales decreased 25%, primarily reflecting the continued depressed levels of appraisal traffic.

††† Our total gross profit declined 2% to $276.2 million from $282.7 million in the first quarter of fiscal 2009. The effect of the decline in unit sales was largely offset by an improvement in our total gross profit dollars per retail unit, which increased $347 per unit to $2,911 from $2,564 in the corresponding prior year period.

††† CAF reported a loss of $21.6 million compared with income of $9.8 million in the first quarter of fiscal 2009. Results for both periods were reduced by adjustments related to loans originated in previous fiscal periods. These adjustments totaled $40.4 million in the first quarter of fiscal 2010 and $20.0 million in the prior year quarter. CAF's gain on sales of loans originated and sold declined to $3.1 million compared with $17.1 million in the prior year quarter, reflecting the higher estimated cost of funding in the warehouse facility, a decline in loan origination volume and the use of a higher discount rate assumption.

††† Selling, general and administrative ("SG&A") expenses were reduced to $206.2 million from $243.0 million in the prior year quarter, despite having five more stores open in fiscal 2010. SG&A as a percent of net sales and operating revenues (the "SG&A ratio"), increased to 11.2% from 11.0% in the first quarter of fiscal 2009. In part, the lower SG&A expense resulted from our reductions in growth-related costs, advertising and variable selling expenses. In addition, the current quarter SG&A expenses included the benefit of a favorable litigation settlement that increased net earnings by $0.02 per share, while the prior year's quarter included unrelated accrued litigation costs that reduced net earnings by $0.02 per share.

††† In the first quarter of fiscal 2010, $79.4 million of cash was used in operating activities, while in the first quarter of fiscal 2009, $79.4 million of cash was provided by operating activities. The fiscal 2010 quarter reflected significant cash use for increases in the retained interest in securitized receivables and inventory, while the prior year quarter reflected the generation of cash from a reduction in inventory.

CRITICAL ACCOUNTING POLICIES

For a discussion of our critical accounting policies, see "Critical Accounting Policies" in MD&A included in Item 7 of the Annual Report on Form 10-K for the fiscal year ended February 28, 2009. These policies relate to securitization transactions, revenue recognition, income taxes and defined benefit retirement plan obligations.

RESULTS OF OPERATIONS

NET SALES AND OPERATING REVENUES
                                                       Three Months Ended May 31
   (In millions)                              2009           %          2008           %
   Used vehicle sales                       $ 1,549.3        84.5     $ 1,816.8        82.3
   New vehicle sales                             48.6         2.6          82.1         3.7
   Wholesale vehicle sales                      171.5         9.3         242.3        11.0
   Other sales and revenues:
   Extended service plan revenues                34.6         1.9          36.5         1.7
   Service department sales                      26.6         1.5          24.5         1.1
   Third-party finance fees, net                  3.8         0.2           6.5         0.3
   Total other sales and revenues                65.0         3.5          67.5         3.1
   Total net sales and operating revenues   $ 1,834.3       100.0     $ 2,208.8       100.0

RETAIL VEHICLE SALES CHANGES
                                                                   Three Months Ended May 31
                                                                  2009                  2008
Vehicle units:
Used vehicles                                                          (13 )%                 10 %
New vehicles                                                           (42 )%                (26 )%
Total                                                                  (14 )%                  9 %

Vehicle dollars:
Used vehicles                                                          (15 )%                  6 %
New vehicles                                                           (41 )%                (27 )%
Total                                                                  (16 )%                  4 %

Comparable store used unit sales growth is one of the key drivers of our profitability. A store is included in comparable store retail sales in the store's fourteenth full month of operation.

COMPARABLE STORE RETAIL VEHICLE SALES CHANGES
                                                                   Three Months Ended May 31
                                                                  2009                  2008
Vehicle units:
Used vehicles                                                          (17 )%                  1 %
New vehicles                                                           (42 )%                (18 )%
Total                                                                  (18 )%                  0 %

Vehicle dollars:
Used vehicles                                                          (19 )%                 (3 )%
New vehicles                                                           (41 )%                (20 )%
Total                                                                  (20 )%                 (4 )%

CHANGE IN USED CAR SUPERSTORE BASE
                                                                   Three Months Ended May 31
                                                                   2009                 2008
Used car superstores, beginning of
year                                                                     100                  89
Superstore
openings                                                                   -                   6
Used car superstores, end of
period                                                                   100                  95

Used Vehicle Sales. Our 15% decrease in used vehicle revenues in the first quarter of fiscal 2010 resulted from a 13% decrease in unit sales and a 2% decrease in average retail selling price. The unit sales decline reflected a 17% decrease in comparable store used unit sales, partially offset by sales from newer stores not yet included in the comparable store base. The comparable store sales decline was primarily the result of reduced customer traffic. The slower traffic was partly offset, however, by solid in-store execution, which generated a notable increase in our sales conversion rate compared with the prior year. The higher conversion rate occurred even as we decided to continue our strategy, begun in the fall of 2008, to slow the rate of CAF loan originations. We believe the reduction in the percentage of sales financed by CAF contributed modestly to the decline in comparable store unit sales. The decline in the average retail selling price reflected the combined effects of changes in vehicle acquisition costs and vehicle mix.

New Vehicle Sales. The 41% decline in new vehicle revenues in the first quarter of fiscal 2010 was due to a 42% decrease in unit sales net of a 2% increase in average retail selling price. New vehicle unit sales reflected the extremely soft new car industry sales trends.

Wholesale Vehicle Sales. Vehicles acquired through the appraisal purchase process that do not meet our retail standards are sold at our on-site wholesale auctions. The 29% decrease in wholesale vehicle revenues in the first quarter of fiscal 2010 resulted from a 25% decrease in wholesale unit sales combined with a 6% decline in average wholesale selling price. The decline in the unit sales primarily reflected a decrease in our appraisal traffic, partly offset by a slight improvement in our appraisal buy rate. We believe the recent upward trend in industry wholesale prices and the resulting increase in our appraisal offers had a favorable effect on the buy rate. The decline in average wholesale selling price reflected the trends in the general wholesale market for the types of vehicles we sell, as well as changes in vehicle mix and the average age, mileage and condition of the vehicles wholesaled.

Other Sales and Revenues. Other sales and revenues include commissions on the sale of ESPs, service department sales and net third-party finance fees. In the first quarter of fiscal 2010, other sales and revenues declined 4% from the prior year's first quarter. ESP revenues decreased 5%. Compared with the 13% decrease in total used unit sales in the first quarter, ESP revenues benefited from a slow down in the rate of ESP cancellations, which we believe was the result of the decline in auto industry sales and trade-ins. In addition, fiscal 2010 ESP revenues benefited from modifications in pricing made during the second half of fiscal 2009. Service department sales increased 9%, reflecting higher service-related customer traffic. Third-party finance fees declined 42%, primarily reflecting a mix shift among providers, as well as the lower retail unit sales. The fixed fees paid by our third-party finance providers

vary by provider, reflecting their differing levels of credit risk exposure. Providers who purchase the highest risk loans purchase those loans at a discount, which is reflected as an offset to finance fee revenues received from the other third-party providers.

Seasonality. Historically, our business has been seasonal. Typically, our superstores experience their strongest traffic and sales in the spring and summer quarters. Sales are typically slowest in the fall quarter, when used vehicles generally experience proportionately more of their annual depreciation. We believe this is partly the result of a decline in customer traffic, as well as discounts on model year closeouts that can pressure pricing for late-model used vehicles. Customer traffic generally tends to slow in the fall as the weather changes and as customers shift their spending priorities toward holiday-related expenditures. During the current recession, the traditional seasonal sales patterns have been masked by the weakness in the economy and the stresses on consumer spending, which have adversely affected industry-wide auto sales.

Supplemental Sales Information.

UNIT SALES
                                          Three Months Ended May 31
                                       2009          2008         Change
               Used vehicles            92,863       106,747          (13 )%
               New vehicles              2,031         3,515          (42 )%
               Wholesale vehicles       42,226        56,329          (25 )%

AVERAGE SELLING PRICES
                                          Three Months Ended May 31
                                       2009            2008       Change
               Used vehicles        $    16,489      $ 16,852          (2 )%
               New vehicles         $    23,773      $ 23,211           2 %
               Wholesale vehicles   $     3,936      $  4,184          (6 )%

RETAIL VEHICLE SALES MIX
                                                                   Three Months Ended May 31
                                                                   2009                 2008
Vehicle units:
Used vehicles                                                            98 %                 97 %
New vehicles                                                              2                    3
Total                                                                   100 %                100 %

Vehicle dollars:
Used vehicles                                                            97 %                 96 %
New vehicles                                                              3                    4
Total                                                                   100 %                100 %

As of May 31, 2009, we had a total of six new car franchises representing the Chevrolet, Chrysler, Nissan and Toyota brands. In June 2009, we were notified by General Motors that our Chevrolet franchise in Kenosha, Wisconsin, will be terminated no later than October 2010. We expect to stop selling new General Motors vehicles at this site, where we also have a used car superstore and a Toyota franchise, by this date. We do not expect this action to have any material effect on sales or earnings.

GROSS PROFIT
                                                Three Months Ended May 31
           (In millions)                      2009          2008       Change
           Used vehicle gross profit        $   185.8      $ 186.0        (0.1 )%
           New vehicle gross profit               1.1          3.0       (64.2 )%
           Wholesale vehicle gross profit        38.2         44.2       (13.6 )%
           Other gross profit                    51.2         49.5         3.3 %
           Total gross profit               $   276.2      $ 282.7        (2.3 )%

GROSS PROFIT PER UNIT
                                                                 Three Months Ended May 31
                                                         2009                                 2008
                                             $ per unit (1)              % (2)    $ per unit (1)              % (2)
Used vehicle gross
profit                                      $          2,001          12.0       $          1,742          10.2
New vehicle gross
profit                                      $            532           2.2       $            860           3.7
Wholesale vehicle gross
profit                                      $            904          22.3       $            784          18.2
Other gross
profit                                      $            539          78.8       $            449          73.4
Total gross
profit                                      $          2,911          15.1       $          2,564          12.8

(1) Calculated as category gross profit divided by its respective units sold, except the other and total categories, which are divided by total retail units sold.
(2) Calculated as a percentage of its respective sales or revenue.

Used Vehicle Gross Profit. Our used vehicle gross profit of $185.8 million in the first quarter of fiscal 2010 was similar to the $186.0 million in the prior year's first quarter, despite the 13% decline in used unit sales. The used vehicle gross profit per unit increased $259, or 15%, to $2,001 per unit compared with $1,742 per unit in the first quarter of fiscal 2009. In part, this improvement reflected the significantly below-average profitability reported in the prior year period, when the initial slowdown in customer traffic and the rapid decline in underlying values of SUVs and trucks put pressure on our used vehicle margins. Our prior year first quarter gross profit also reflected the impact of having lower margin vehicles in inventory at the beginning of the quarter. The improvement also reflected benefits realized from our initiatives to reduce vehicle reconditioning costs, which we estimate reduced our cost of sales by approximately $100 per unit compared with the corresponding prior year period. We believe the fiscal 2010 gross profit per unit also benefited from a small improvement in inventory turns, achieved despite the more difficult sales environment.

New Vehicle Gross Profit. Our new vehicle gross profit declined to $1.1 million in the first quarter of fiscal 2010 compared with $3.0 million in the prior year's first quarter. The reduction reflected both the 42% decline in new unit sales and a $328 decline in gross profit per unit. These reductions resulted from the sharp decline in new car industry sales and the resulting increase in competitiveness in the new car market. We experienced a disproportionate reduction in profitability at our two Chrysler franchises, which was a function of both the severe drop in traffic experienced by this manufacturer's franchises and our decision to cut selling prices and margins in order to reduce our Chrysler new car inventory.

Wholesale Vehicle Gross Profit. Our wholesale vehicle gross profit decreased by $6.0 million, or 14%, to $38.2 million in the first quarter of fiscal 2010 from $44.2 million in the prior year quarter. The reduction was driven by the 25% decline in wholesale unit sales, partially offset by an increase in wholesale gross profit per unit of $120, or 15%, to $904 per unit in the first quarter fiscal 2010 from $784 per unit in the first quarter of fiscal 2009. The wholesale price appreciation in the current year period, combined with a significantly higher dealer-to-car ratio, and the resulting price competition among bidders, contributed to the increase in wholesale gross profit per unit. Our wholesale vehicles are predominantly comprised of older, higher mileage vehicles, and we believe the demand for these types of vehicles has remained strong from dealers who specialize in selling to credit-challenged customers.

Other Gross Profit. We have no cost of sales related to either ESP revenues or third-party finance fees, as these represent commissions paid to us by the third-party providers. Our other gross profit increased $1.7 million, or 3%, to $51.2 million in the first quarter of fiscal 2010 compared with $49.5 million in the prior year period. The increase reflected higher service department profits resulting from the increase in service sales, partly offset by the declines in ESP revenues and third-party finance fees. Other gross profit per unit increased to $539 from $449 in the prior year first quarter primarily due to an improvement in service margins. Service margins generally rise when sales grow at a rate greater than fixed service overhead costs.

Impact of Inflation. Historically, inflation has not been a significant contributor to results. Profitability is primarily affected by our ability to achieve targeted unit sales and gross profit dollars per vehicle rather than on average retail prices. However, increases in average vehicle selling prices benefit the SG&A ratio and CAF income to the extent the average amount financed also increases.

CarMax Auto Finance (Loss) Income. CAF provides financing for a portion of our used and new car retail sales. Because the purchase of a vehicle is often reliant on the consumer's ability to obtain on-the-spot financing, it is important to our business that financing be available to creditworthy customers. While financing can also be obtained from third-party sources, we believe that total reliance on third parties can create unacceptable volatility and business risk. Furthermore, we believe that our processes and systems, the transparency of our pricing and our vehicle quality provide a unique and ideal environment in which to procure high-quality auto loans, both for CAF and for the third-party financing providers. Generally, CAF has provided us the opportunity to capture additional profits and cash flows from auto loan receivables while managing our reliance on third-party financing sources.

COMPONENTS OF CAF (LOSS) INCOME
                                                               Three Months Ended May 31
(In millions)                                       2009            %           2008            %
Total loss
(1)                                               $   (37.3 )        (8.1 )   $    (2.9 )        (0.5 )
Other CAF income: (2)
Servicing fee
income                                                 10.4           1.0          10.2           1.0
Interest
income                                                 16.4           1.6          11.1           1.1
Total other CAF
income                                                 26.8           2.7          21.3           2.2
. . .