This discussion and analysis summarizes the significant factors affecting our consolidated operating results, liquidity and capital resources during the three and six months ended July 31, 2009, and August 1, 2008. 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 January 30, 2009 (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; however, given the current economic cycle and the significant proportion of long-lived assets associated with stores currently in operation, we have elected to provide enhanced disclosure related to our critical accounting policy for long-lived asset impairment for operating stores.

Long-Lived Asset Impairment - Operating Stores

Description
At July 31, 2009, $19.3 billion of the Company's long-lived assets were associated with stores currently in operation. We review the carrying amounts of operating stores whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. When evaluating operating stores for impairment, our asset group is at an individual store level, as that is the lowest level for which cash flows are identifiable. Cash flows for individual operating stores do not include an allocation of corporate overhead.

We evaluate operating stores on a quarterly basis to determine when store assets may not be recoverable. Our primary indicator that operating store assets may not be recoverable is negative cash flow for a rolling 12 month period for those stores that have been open in the same location for a sufficient period of time to allow for meaningful analysis of ongoing operating results. Management also monitors other factors when evaluating operating stores for impairment, including individual stores' execution of their operating plans and local market conditions, including incursion, which is the opening of either other Lowe's stores or direct competitors' stores competing within the same market.

For operating stores, a potential impairment has occurred if projected future undiscounted cash flows expected to result from the use and eventual disposition of the store assets are less than the carrying value of the assets. When determining the stream of projected future cash flows associated with an individual operating store, management makes assumptions, incorporating local market conditions, about key store variables including sales growth rates, gross margin and controllable expenses such as store payroll, occupancy expense and advertising costs.

An impairment loss is recognized when the carrying amount of the operating store is not recoverable and exceeds its fair value. We use an income-based approach to determine the fair value of our operating stores. This involves making assumptions regarding both a store's future cash flows, as described above, and the discount rate to determine the present value of those future cash flows. We discount our cash flow estimates at a rate based upon the risk free rate plus the average credit spread of selected market participants, which is a group of other retailers with a store footprint similar in size to ours.

There were no operating store impairment charges for the three or six months ended July 31, 2009.

Judgments and uncertainties involved in the estimate Our impairment loss calculations require us to apply judgment in estimating expected future cash flows, including estimated sales, margin and controllable expenses and assumptions about market performance. We also apply judgment in estimating asset fair values, including the selection of a risk-adjusted discount rate for those estimated future cash flows.

Effect if actual results differ from assumptions We have not made any material changes in the methodology used to estimate the future cash flows of operating stores during the past three fiscal years. If the actual results of our operating stores are not consistent with the assumptions and judgments we have made in estimating future cash flows and determining asset fair values, our actual impairment losses could vary positively or negatively from our estimated impairment losses.

During the six months ended July 31, 2009, we evaluated two operating stores with indicators of non-recoverability for impairment. The carrying value of these stores was $24 million. We determined that the carrying value was less than the projected future undiscounted cash flows expected to result from their use and eventual disposition; therefore, we did not record impairment charges. A 2% reduction in projected annual sales assumed in estimating future cash flows for these stores would have resulted in an impairment charge of $10 million. We analyzed other assumptions made in estimating the future cash flows of the operating stores evaluated for impairment, but the sensitivity of those assumptions was not significant to the estimates.

EXECUTIVE OVERVIEW

Home improvement spending remained weak in the second quarter of 2009. Wavering levels of consumer confidence combined with unseasonable weather in many areas of the country and tougher than anticipated comparisons to last year's fiscal stimulus tax rebates contributed to the sales declines. In this uncertain economic environment, many consumers are only taking on home improvement projects that are absolutely necessary and are postponing discretionary projects. As a result, we have continued to experience pronounced weakness in larger ticket discretionary projects, as evidenced by comparable store sales for tickets above $500 declining 16%.

Despite the external pressures weighing on our sales, focused execution and an evolving competitive landscape helped us deliver solid market share gains. According to third-party estimates, we gained 70 basis points of unit market share in the second calendar quarter. While we expect the pressures of the current economic environment to continue and hurricane spending from last year's hurricane season to wane, there have been encouraging signs that a bottoming process is underway. Customer traffic continues to show signs of stabilization as evidenced by only a slight decrease in comparable store transactions during the quarter.

Selling to the Do-it-Yourself (DIY) customer remains a priority of ours, and the growing trend of a return to DIY continued during the quarter. With the resurgence of DIY, many customers may be tackling their first home improvement project in some time, and are looking to us for not only home improvement products but for how-to information to successfully complete those projects. We have modified our staffing model to ensure departments that feature project basics like paint, rough plumbing, rough electrical and hardware remain appropriately staffed to address the needs of the DIY customer. During the quarter, we experienced relative strength in key DIY product categories including paint, hardware and rough plumbing, and also in products such as mower repair parts, grill repair parts and gardening supplies.

As the return to DIY leads to more frequent trips to our stores by consumers, we have an opportunity to capture additional sales related to this customer traffic.

In this time of uncertainty, we remain focused on maintaining the flexibility to appropriately adjust to a weaker or stronger than expected sales environment, while continuing to emphasize our dedication to customer service and delivering reasonable profitability to shareholders. We continue to maintain an appropriately cautious sales outlook, and we will continue building and adjusting our plans accordingly. In response to the challenging economic environment, we have re-evaluated our future store expansion plans, and as a result, we are no longer pursuing several projects. This decision resulted in an impairment charge for certain excess properties to adjust their carrying amounts to fair value and a write-off of previously capitalized costs in the second quarter of 2009.

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
                            July 31, 2009    August     2009 vs.     2009 vs.
                                            1, 2008       2008         2008
Net sales                          100.00 %   100.00 %        N/A        (4.6) %
Gross margin                        34.84      34.34           50        (3.2)
Expenses:
Selling, general and                22.45      20.78          167          3.1
administrative
Store opening costs                  0.10       0.14          (4)       (32.5)
Depreciation                         2.95       2.63           32          7.0
Interest - net                       0.55       0.47            8         10.6
Total expenses                      26.05      24.02          203          3.5
Pre-tax earnings                     8.79      10.32        (153)       (18.8)
Income tax provision                 3.31       3.86         (55)       (18.3)
Net earnings                         5.48 %     6.46 %       (98)       (19.0) %

EBIT margin (1)                      9.34 %    10.80 %      (146)       (17.5) %



                                                         Basis
                                                         Point
                                                       Increase /
                                                       (Decrease)   Percentage
                                                           in       Increase /
                                                       Percentage   (Decrease)
                                                         of Net     in Dollar
                                                       Sales from    Amounts
                                                         Prior      from Prior
                                Six Months Ended         Period       Period
                            July 31, 2009    August     2009 vs.     2009 vs.
                                            1, 2008       2008         2008
Net sales                          100.00 %   100.00 %        N/A        (3.2) %
Gross margin                        35.12      34.50           62        (1.4)
Expenses:
Selling, general and                23.56      21.65          191          5.5
administrative
Store opening costs                  0.11       0.14          (3)       (29.4)
Depreciation                         3.15       2.85           30          6.9
Interest - net                       0.60       0.55            5          6.3
Total expenses                      27.42      25.19          223          5.4
Pre-tax earnings                     7.70       9.31        (161)       (20.0)
Income tax provision                 2.89       3.49         (60)       (19.9)
Net earnings                         4.81 %     5.82 %      (101)       (20.1) %

EBIT margin (1)                      8.30 %     9.86 %      (156)       (18.5) %



                                     Three Months Ended                    Six Months Ended
Other metrics:                July 31, 2009     August 1, 2008     July 31, 2009     August 1, 2008
Comparable store sales
changes (2)                            (9.5) %            (5.3) %           (8.2) %            (6.7) %
Total customer
transactions (in millions)               225                217               411                398
Average ticket (3)           $         61.43    $         66.95   $         62.46   $          66.62
At end of period:
Number of stores                       1,688              1,577
Sales floor square feet
(in millions)                            191                179
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 is considered comparable once it has been open longer than 13 months.

(3) We define average ticket as net sales divided by the total 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 - Economic conditions continued to weigh on consumers and pressured our sales. Reflective of these pressures, net sales decreased for both the three and six months ended July 31, 2009. Although total customer transactions increased 4.0% compared to the second quarter of 2008, average ticket decreased 8.2% to $61.43. Comparable store sales declined 9.5% for the second quarter of 2009 and 8.2% for the first half of 2009. Comparable store customer transactions decreased 0.9% compared to the second quarter of 2008 while comparable store average ticket decreased 8.6%, evidence that many consumers continued to postpone larger discretionary projects.

As a result of consumers' willingness to complete small DIY projects that enhance the appearance of their homes and outdoor spaces, our nursery and paint categories delivered positive comparable store sales for the quarter while our lawn & landscape category performed well above our average comparable store sales change. Other categories that performed above our average comparable store sales change included building materials, rough plumbing, hardware and outdoor power equipment, reflective of consumers tackling basic repair and maintenance projects. Seasonal living and appliances performed at approximately the overall corporate average. The most pronounced weaknesses occurred in our cabinets & countertops, fashion plumbing, flooring and millwork categories, reflective of consumers' continued postponement of larger discretionary projects and the resurgence of DIY. These trends led to a 22.4% comparable store sales decline for Installed Sales and a 22.6% comparable store sales decline in Special Order Sales during the second quarter.

From a geographic perspective, comparable store sales in our Western U.S. markets showed sequential improvement in the quarter; however, we continued to experience double-digit comparable store sales declines in these markets. While positive housing turnover in certain of these markets is an encouraging sign, home prices are still declining and consumer confidence remains weak. In addition, certain areas of the Southeast and Northeast experienced double-digit comparable store sales declines during the quarter. We believe our Southeast markets were impacted by the fiscal stimulus tax rebate spending on home improvement last year when these markets had more stable housing prices. In addition, certain areas of the Northeast were negatively impacted by the unseasonably cool, wet weather in the second quarter of 2009.

Gross Margin - For the second quarter of 2009, gross margin increased 50 basis points as a percentage of sales compared to the second quarter of 2008. The increase was attributable to a number of factors, including 19 basis points of leverage due to the mix of products sold across product categories, 10 basis points of leverage due to lower inventory shrink, and 8 basis points of leverage from lower distribution costs, largely driven by lower fuel costs.

The increase in gross margin as a percentage of sales for the first six months of 2009 compared to 2008 was attributable to the same factors that contributed to the increase in gross margin in the second quarter of 2009, as well as a moderating promotional environment and our decision not to repeat certain promotions we had implemented during the first quarter of 2008.

SG&A - For the second quarter of 2009, SG&A increased 167 basis points as a percentage of sales compared to the second quarter of 2008, primarily driven by de-leverage of 59 basis points in store payroll resulting from comparable store sales declines. Certain stores were operating at base staffing hours during the quarter which created short-term pressure on earnings, but in the long-term ensures that we maintain high customer service levels. We also experienced de-leverage of 27 basis points due to increased losses associated with our proprietary credit program. We anticipate reaching our contractual limits for actual losses under the program in the second half of 2009; therefore, we do not expect this de-leverage to continue. We experienced 20 basis points of de-leverage in fixed expenses such as rent, property taxes and utilities as a result of comparable store sales declines. Bonus expense de-leveraged 19 basis points in the second quarter of 2009 attributable to an increase in achievement against performance targets. Additionally, we re-

evaluated the pipeline of potential future store sites and made the decision to no longer pursue several projects. This resulted in a $25 million charge for impairment of certain excess properties to adjust their carrying amounts to fair value and a $23 million charge for the write-off of previously capitalized costs. As economic conditions warrant, we will continue to evaluate future store expansion plans and the carrying value of operating assets.

The increase in SG&A as a percentage of sales for the first six months of 2009 compared to 2008 was attributable to the same factors that contributed to the increase in SG&A in the second quarter of 2009.

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 $14 million and $21 million in the second quarters of 2009 and 2008, respectively. Because store opening costs are expensed as incurred, the timing of expense recognition fluctuates based on the timing of store openings. We opened 18 new stores in the second quarter of 2009, including three new stores in Canada, compared to the opening of 23 new stores in the second quarter of 2008. Store opening costs for stores opened during both the second quarters of 2009 and 2008 averaged approximately $0.7 million per store.

Store opening costs totaled $27 million and $38 million for the first six months of 2009 and 2008, respectively. These costs were associated with the opening of 39 new stores in 2009, including three new stores in Canada, compared to 43 new stores in 2008, including one new store in Canada. Store opening costs for stores opened during each of the first six months of 2009 and 2008 averaged approximately $0.8 million per store.

Depreciation - The de-leverage in depreciation expense for the three and six months ended July 31, 2009, was driven by comparable store sales declines and the addition of 111 new stores over the past four quarters. Property, less accumulated depreciation, totaled $22.7 billion at July 31, 2009, an increase of 3.0% from $22.1 billion at August 1, 2008. At July 31, 2009, we owned 88% of our stores compared to 87% at August 1, 2008, which includes stores on leased land.

Income Tax Provision - Our effective income tax rate was 37.6% and 37.5% for the three and six months ended July 31, 2009, respectively, and 37.4% and 37.5% for the three and six months ended August 1, 2008, respectively. Our effective income tax rate was 37.4% for fiscal 2008.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Inventory

At July 31, 2009, merchandise inventory was $8.2 billion compared to $7.9 billion at August 1, 2008, and $8.2 billion at January 30, 2009. The increase of 3.1% versus August 1, 2008, was attributable to sales floor square footage growth of 6.8% and higher distribution inventory as a result of opening our fourteenth regional distribution center in the fourth quarter of 2008. These factors were partially offset by a 5.2% reduction in comparable store inventory at July 31, 2009, versus August 1, 2008. We will continue to identify opportunities to further leverage our distribution centers to manage inventory in the coming quarters.

Cash Flows

Cash flows from operating activities continue to provide the primary source of our liquidity. Net cash provided by operating activities was $3.7 billion and $3.9 billion for the six months ended July 31, 2009, and August 1, 2008, respectively. The change in net cash provided by operating activities was primarily the result of decreased net earnings, partially offset by working capital improvements.

Net cash used in investing activities was $1.7 billion and $2.1 billion for the six months ended July 31, 2009, and August 1, 2008, respectively. 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 corporate infrastructure, including enhancements to our information technology infrastructure. Cash acquisitions of property were $1.0 billion for the six months ended July 31, 2009, versus $1.6 billion for the prior year, a decrease of 36.9%, primarily driven by a reduction in our store expansion program.

Net cash used in financing activities was $1.2 billion and $1.6 billion for the six months ended July 31, 2009, and August 1, 2008, respectively. The change in net cash used in financing activities was primarily driven by the redemption in June 2008 of our convertible notes issued in February 2001 and our senior convertible notes issued in October 2001. The ratio of debt to equity plus debt was 20.9%, 23.1% and 25.1% as of July 31, 2009, August 1, 2008, and January 30, 2009, respectively.

Sources of Liquidity

In addition to our cash flows from operations, additional liquidity is provided by our short-term borrowing facilities. We have a $1.75 billion senior credit facility that expires in June 2012. The senior credit facility supports our commercial paper and revolving credit programs. The senior credit facility has a $500 million letter of credit sublimit. Amounts outstanding under letters of credit reduce the amount available for borrowing under the senior credit facility. Borrowings made under the senior credit facility are unsecured and are priced at fixed rates 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 July 31, 2009. Nineteen banking institutions are participating in the senior credit facility. As of July 31, 2009, there were no outstanding borrowings under the senior credit facility or under the commercial paper program. As of July 31, 2009, there were no letters of credit outstanding under the senior credit facility.

We also have a Canadian dollar (C$) denominated credit facility in the amount of C$50 million that provides revolving credit support for our Canadian operations. This uncommitted credit facility provides us with the ability to make unsecured borrowings which are priced at fixed rates based upon market conditions at the time of funding in accordance with the terms of the credit facility. As of July 31, 2009, there was C$10 million, or the equivalent of $9 million, outstanding under the credit facility. The interest rate on the short-term borrowing was 1.92%.

Our debt ratings at July 31, 2009, were as follows:

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

We believe that net cash provided by operating and financing activities will be adequate for our expansion plans and for our other operating requirements over the next 12 months. The availability of funds through the issuance of commercial paper or new debt or the borrowing cost of these funds could be adversely affected due to a debt rating downgrade, which we do not expect, or a deterioration of certain financial ratios. In addition, continuing volatility in the global markets may affect our ability to access those markets for additional borrowings or increase costs associated with any borrowings. 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.

Cash Requirements

Capital Expenditures

Our 2009 capital forecast is approximately $2.4 billion, inclusive of approximately $300 million of lease commitments, resulting in an anticipated net cash outflow of $2.1 billion in 2009. Approximately 72% of this planned commitment is for store expansion. Our expansion plans for 2009 consist of 62 to 66 new stores that are expected to increase sales floor square footage by approximately 4%. Approximately 98% of the 2009 projects will be owned, which includes approximately 33% ground-leased properties.

. . .