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 August 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 August 31, 2009, we conducted auctions at 50 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 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 a 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 customer traffic and sales trends. We are still at a relatively early stage in the national rollout of our retail concept, and as of August 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 Second Quarter Highlights

††† Net sales and operating revenues increased 13% to $2.08 billion from $1.84 billion in the second quarter of fiscal 2009, while net earnings increased to $103.0 million, or $0.46 per share, from $14.0 million, or $0.06 per share.

††† Total used vehicle revenues increased 16% to $1.71 billion from $1.48 billion in the second quarter of fiscal 2009. Total used vehicle unit sales increased 10%, reflecting the combination of an 8% increase in comparable store used unit sales and sales from newer stores not yet included in the comparable store base. The comparable store sales increase was primarily the result of improved sales execution. We believe the effects of new sales training initiatives and increased inventory levels, as well as having a larger percentage of motivated buyers contributed to this improvement.

††† Total wholesale vehicle revenues increased 6% to $237.0 million from $223.3 million in the prior year quarter. Wholesale vehicle unit sales increased 5%, primarily reflecting a substantial improvement in our appraisal buy rate.

††† Our total gross profit increased 23% to $314.5 million from $255.9 million in the second quarter of fiscal 2009, reflecting the combination of the increase in unit sales plus an improvement in our total gross profit dollars per retail unit, which increased $363 to $3,116 per unit from $2,753 per unit in the corresponding prior year period.

††† CAF reported income of $72.1 million compared with a loss of $7.1 million in the second quarter of fiscal 2009. Results for both periods were affected by adjustments primarily related to loans originated in previous fiscal periods. These adjustments increased CAF income by $36.2 million in the second quarter of fiscal 2010, and they reduced CAF income by $28.2 million in the prior year quarter. CAF's gain on loans originated and sold increased to $19.9 million compared with $9.4 million in the prior year quarter, reflecting an increase in the spread between rates charged customers and CAF's funding cost and an increase in credit quality of loans originated in the current quarter, which reduced the required credit enhancements associated with the securitization of these loans.

††† Selling, general and administrative ("SG&A") expenses were reduced to $218.1 million from $225.1 million in the prior year quarter, despite the increase in unit sales, primarily due to reductions in advertising and growth-related expenses. SG&A as a percent of net sales and operating revenues (the "SG&A ratio") decreased to 10.5% from 12.2% in the second quarter of fiscal 2009, reflecting both the reduction in SG&A expenses and the leverage associated with the increases in used unit sales and average selling prices.

††† In the first half of fiscal 2010, $51.3 million of cash was used in operating activities, while in the first half of fiscal 2009, $218.9 million of cash was provided by operating activities. The fiscal 2010 period reflected the use of cash for increases in the retained interest in securitized receivables and inventory, while the prior year period reflected the generation of cash from a significant 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                                   Six Months Ended
                                      August 31                                           August 31
(In millions)        2009           %          2008           %          2009           %          2008           %
Used vehicle
sales              $ 1,706.6        82.2     $ 1,476.3        80.3     $ 3,255.9        83.3     $ 3,293.2        81.4
New vehicle
sales                   63.2         3.0          77.8         4.2         111.8         2.9         159.9         3.9
Wholesale
vehicle sales          237.0        11.4         223.3        12.1         408.5        10.4         465.6        11.5
Other sales and
revenues:
Extended service
plan revenues           39.9         1.9          31.7         1.7          74.4         1.9          68.3         1.7
Service
department sales        26.8         1.3          26.5         1.4          53.5         1.4          51.0         1.3
Third-party
finance fees,
net                      3.1         0.2           3.4         0.2           6.9         0.2           9.9         0.2
Total other
sales and
revenues                69.9         3.4          61.7         3.4         134.8         3.4         129.2         3.2
Total net sales
and operating
revenues           $ 2,076.7       100.0     $ 1,839.1       100.0     $ 3,911.0       100.0     $ 4,047.8       100.0

RETAIL VEHICLE SALES CHANGES
                                               Three Months Ended August 31              Six Months Ended August 31
                                               2009                    2008              2009                   2008
Vehicle units:
Used vehicles                                        10 %                    (7 )%             (3 )%                   2 %
New vehicles                                        (19 )%                  (24 )%            (31 )%                 (25 )%
Total                                                 9 %                    (7 )%             (4 )%                   1 %

Vehicle dollars:
Used vehicles                                        16 %                   (12 )%             (1 )%                  (3 )%
New vehicles                                        (19 )%                  (26 )%            (30 )%                 (26 )%
Total                                                14 %                   (13 )%             (2 )%                  (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 August 31              Six Months Ended August 31
                                               2009                    2008              2009                   2008
Vehicle units:
Used vehicles                                         8 %                   (17 )%             (6 )%                  (8 )%
New vehicles                                        (19 )%                  (20 )%            (31 )%                 (19 )%
Total                                                 7 %                   (17 )%             (7 )%                  (8 )%

Vehicle dollars:
Used vehicles                                        13 %                   (22 )%             (4 )%                 (12 )%
New vehicles                                        (19 )%                  (21 )%            (30 )%                 (20 )%
Total                                                12 %                   (22 )%             (6 )%                 (13 )%

CHANGE IN USED CAR SUPERSTORE BASE
                                                 Three Months Ended August 31             Six Months Ended August 31
                                                 2009                     2008             2009                 2008
Used car superstores, beginning of period               100                     95               100                  89
Superstore openings                                       -                      3                 -                   9
Used car superstores, end of period                     100                     98               100                  98

Used Vehicle Sales. Our 16% increase in used vehicle revenues in the second quarter of fiscal 2010 resulted from a 10% increase in unit sales and a 6% increase in average retail selling price. The unit sales growth reflected an 8% increase in comparable store used unit sales and sales from newer superstores not yet included in the comparable store base. The increase in comparable store sales was primarily the result of an improvement in sales execution, which occurred despite a further tightening of CAF lending standards implemented at the start of this year's second quarter. We believe several factors may have contributed to the improvement in the sales conversion rate, including the effects of new sales training initiatives and increased inventory levels, as well as having a larger percentage of motivated buyers. In the more challenging economic environment, we believe there are fewer casual shoppers. We estimate the combined effect of the tightening in CAF lending standards in the second half of fiscal 2009 and the further tightening in the current fiscal year adversely affected our second quarter comparable store used unit sales growth by several percentage points. While customer traffic steadily strengthened throughout the first half of fiscal 2010, it remained slightly below the prior year quarter, despite the government's Consumer Assistance to Recycle and Save Act ("CARS" or "cash for clunkers"), which resulted in a spike in our traffic in late July and August 2009. Similar to our experience with previous successful, broad-based new car incentive programs, we believe this program had a beneficial effect on our used car customer traffic and sales. The increase in the average retail selling price primarily reflected increases in our acquisition costs, which have been affected by the steady appreciation in used car wholesale values since the start of calendar 2009.

Our 1% decrease in used vehicle revenues in the first half of fiscal 2010 resulted from the combination of a 3% decrease in unit sales and a 2% increase in average selling price. The unit sales decline reflected a 6% decrease in comparable store used unit sales, partially offset by sales from newer superstores not yet in the comparable store base. For the six-month period, 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 an increase in our sales conversion rate compared with the prior year period. The higher conversion rate occurred despite the tightening in CAF lending standards, which we estimate adversely affected our comparable store used unit sales change by several percentage points in the first half of fiscal 2010.

New Vehicle Sales. Compared with the corresponding prior year periods, new vehicle revenues decreased 19% in the second quarter of fiscal 2010 and 30% in the first half of the fiscal year. The decreases were almost entirely the result of the declines in unit sales of 19% and 31%, respectively, that reflected the extremely soft new car industry sales trends. We experienced a smaller year-over-year decline in new vehicle unit sales in the second quarter of fiscal 2010 versus the first quarter of the year, as our new vehicle sales benefited from the cash for clunkers new car incentive program. This program, which was effective between July 1 and August 24, 2009, provided vouchers of between $3,500 and $4,500 for the purchase of a new vehicle that achieved specified increases in fuel efficiency compared with the consumer's trade-in vehicle.

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 6% increase in wholesale vehicle revenues in the second quarter of fiscal 2010 resulted from a 5% increase in wholesale unit sales and a 1% increase in average wholesale selling price. While our appraisal traffic improved from the current year's first quarter, in part due to the benefit of the cash for clunkers program, it remained significantly below the prior year's second quarter. However, we experienced a substantial improvement in our appraisal buy rate, which more than offset the lower appraisal traffic. We believe the strong industry-wide wholesale vehicle pricing environment and the resulting increases in our appraisal offers, together with the increased percentage of motivated buyers, had a favorable effect on the buy rate. The change 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.

The 12% decrease in wholesale vehicle revenues in the first half of fiscal 2010 resulted from a 10% decrease in wholesale unit sales combined with a 2% decline in average wholesale selling price. The decline in unit sales primarily reflected the decrease in our appraisal traffic, partly offset by an improvement in our appraisal buy rate. The factors that contributed to the higher buy rate in the second quarter also contributed to the improvement in the first half of the year.

Other Sales and Revenues. Other sales and revenues include commissions on the sale of ESPs, service department sales, net third-party finance fees and guaranteed asset protection ("GAP") product sales (reported in ESP revenues). In the second quarter of fiscal 2010, other sales and revenues increased 13% from the prior year's second quarter. The increase was primarily due to a 26% increase in ESP revenues. ESP revenues benefited from the increase in used unit sales and the successful introduction of a GAP product in fiscal 2010. In addition, fiscal 2010 ESP revenues benefited from modifications in pricing made during the second half of fiscal 2009.

For the first half of the year, other sales and revenues increased 4% in fiscal 2010. The increase was comprised of a 9% increase in ESP revenues, a 5% increase in service department sales and a 30% decline in third-party finance fees. The factors that contributed to the increase in ESP revenues in the second quarter also contributed to the improvement in the first half of the year. The decline in third-party finance fees reflected a shift in mix among, and discount arrangements with, third-party finance providers. The fixed fees paid by 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                        Six Months Ended
                                 August 31                                August 31
                       2009         2008        Change         2009          2008         Change
Used vehicles          98,260       89,664           10 %      191,123       196,411           (3 )%
New vehicles            2,689        3,300          (19 )%       4,720         6,815          (31 )%
Wholesale vehicles     57,790       55,124            5 %      100,016       111,453          (10 )%

AVERAGE SELLING PRICES
                            Three Months Ended                     Six Months Ended
                                 August 31                             August 31
(In millions)          2009         2008       Change        2009         2008       Change
Used vehicles        $ 17,185     $ 16,278           6 %   $ 16,847     $ 16,590           2 %
New vehicles         $ 23,373     $ 23,434           0 %   $ 23,545     $ 23,319           1 %
Wholesale vehicles   $  3,978     $  3,935           1 %   $  3,960     $  4,061          (2 )%

RETAIL VEHICLE SALES MIX
                      Three Months Ended August 31            Six Months Ended August 31
                       2009                  2008              2009                 2008
Vehicle units:
Used vehicles                 97 %                  96 %             98 %                 97 %
New vehicles                   3                     4                2                    3
Total                        100 %                 100 %            100 %                100 %

Vehicle dollars:
Used vehicles                 96 %                  95 %             97 %                 95 %
New vehicles                   4                     5                3                    5
Total                        100 %                 100 %            100 %                100 %

As of August 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                           Six Months Ended
                                      August 31                                   August 31
(In millions)             2009          2008          Change          2009          2008          Change
Used vehicle gross
profit                  $   208.3     $   167.7             24 %    $   394.1     $   353.6             11 %
New vehicle gross
profit                        2.9           3.0             (5 )%         3.9           6.0            (35 )%
Wholesale vehicle
gross profit                 47.7          49.5             (4 )%        85.9          93.6             (8 )%
Other gross profit           55.6          35.8             55 %        106.8          85.3             25 %
Total gross profit      $   314.5     $   255.9             23 %    $   590.8     $   538.6             10 %

GROSS PROFIT PER UNIT
                                  Three Months Ended                                        Six Months Ended
                                       August 31                                               August 31
                           2009                        2008                         2009                        2008
                     $ per                       $ per                       $ per                        $ per
                   unit (1)            % (2)   unit (1)            % (2)    unit (1)            % (2)   unit (1)            % (2)
Used vehicle
gross profit       $   2,120        12.2       $   1,870        11.4       $    2,062        12.1       $   1,800        10.7
New vehicle
gross profit       $   1,060         4.5       $     909         3.9       $      833         3.5       $     883         3.8
Wholesale
vehicle gross
profit             $     826        20.1       $     897        22.2       $      859        21.0       $     840        20.1
Other gross
profit             $     551        79.6       $     385        58.0       $      545        79.2       $     420        66.1
Total gross
profit             $   3,116        15.1       $   2,753        13.9       $    3,017        15.1       $   2,650        13.3

(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 increased 24% to $208.3 million from $167.7 million in the second quarter of fiscal 2009, reflecting the combination of the 10% increase in used unit sales and an improvement in used vehicle gross profit dollars per unit, which increased $250, or 13%, to $2,120 per unit compared with $1,870 per unit in the prior year quarter. The improvement in gross profit per unit resulted from a combination of factors, including the continued appreciation in used car wholesale values since January . . .