Forward-looking Statements

Certain statements contained in this document constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For these purposes, forward-looking statements are statements that address activities, events, conditions or developments that the Company expects or anticipates may occur in the future. Such forward-looking statements involve risks and uncertainties that may cause actual events, results or performance to differ materially from those indicated by such statements. These risks and uncertainties include, but are not limited to, domestic and international economic conditions, including exchange rates, the effects of competition and regulation, uncertainties in the financial markets, consumer and small business spending patterns and debt levels, conditions affecting the acquisition, development, ownership or use of real estate, actions of vendors, rising costs associated with employees (including health care and workers' compensation costs), rising costs associated with the acquisition of merchandise (including the direct and indirect effects of the changing cost of petroleum-based products and fuel and energy costs), geopolitical conditions and other risks identified from time to time in the Company's public statements and reports filed with the SEC.

This management discussion should be read in conjunction with the management discussion included in our fiscal 2008 annual report on Form 10-K, as amended, previously filed with the SEC.

Overview

We operate membership warehouses based on the concept that offering our members low prices on a limited selection of nationally branded and selected private-label products in a wide range of merchandise categories will produce high sales volumes and rapid inventory turnover. This rapid inventory turnover, when combined with the operating efficiencies achieved by volume purchasing, efficient distribution and reduced handling of merchandise in no-frills, self-service warehouse facilities, enables us to operate profitably at significantly lower gross margins than traditional wholesalers, mass merchandisers, supermarkets and supercenters. Certain percentages presented are calculated using actual results prior to rounding.

Key items for the third quarter of fiscal 2009 as compared to the third quarter of fiscal 2008 included:

• Net sales decreased 4.8% from the prior year to $15,477, attributable to a 7% decrease in comparable sales (sales in warehouses open for at least one year, including relocated warehouses), offset by the opening of 18 new warehouses (26 opened and eight closed due to relocations) since the end of the third quarter of fiscal 2008. Net sales were significantly impacted by the decrease, quarter over quarter, in the price of gasoline and by certain foreign currency exchange rates;

• Membership fees decreased 6.4% to $329, resulting from a $27 charge related to a proposed litigation settlement concerning our membership renewal policy;

• Gross margin (net sales less merchandise costs) as a percentage of net sales increased 45 basis points;

• Selling, general and administrative (SG&A) expenses as a percentage of net sales increased 96 basis points;

• Net income decreased to $210 from $295;

• Net income per diluted share decreased to $0.48 from $0.67;

• The Board of Directors declared a quarterly cash dividend in the amount of $0.18 per share, reflecting a 12.5% increase, from $0.64 to $0.72 per share on an annualized basis.

Item 2-Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued) (dollars in millions, except per share data)

Results of Operations (dollars in millions, except earnings per share and warehouse number data)

Our fiscal year ends on the Sunday closest to August 31. References to the third quarters of 2009 and 2008 relate to the 12-week fiscal quarters ended May 10, 2009, and May 11, 2008, respectively. References to the first thirty-six weeks of 2009 and 2008 relate to the thirty-six weeks ended May 10, 2009, and May 11, 2008, respectively.

Net Sales



                                                   12 Weeks Ended                     36 Weeks Ended
                                             May 10,           May 11,          May 10,           May 11,
                                               2009              2008             2009              2008
Net sales                                    $ 15,477          $ 16,263         $ 48,001          $ 48,351
Increase (decrease) in comparable sales            (7 )%              8 %             (3 )%              7 %

Net Sales

Net sales decreased 4.8% during the third quarter of 2009 compared to the third quarter of 2008. The $786 decrease was comprised of a $1,062 decrease in comparable sales, partially offset by a $276 increase from sales at 18 new warehouses opened (26 opened, eight closed due to relocations) since the end of the third quarter of 2008.

For the first thirty-six weeks of 2009, net sales decreased 0.7% compared to the first thirty-six weeks of 2008. The $350 decrease was comprised of a $1,364 decrease in comparable sales, partially offset by a $1,014 increase from sales at 18 new warehouses opened (26 opened, eight closed due to relocations) since the end of the third quarter of 2008.

Foreign currencies, particularly in Canada, the United Kingdom and Korea, weakened against the U.S. dollar, which negatively impacted net sales during the third quarter and first thirty-six weeks of 2009 by approximately $713 (438 basis points), and $1,933 (400 basis points), respectively. Net sales were also negatively impacted by gasoline price deflation in the third quarter and first thirty-six weeks of 2009 by approximately $650 (399 basis points), and $1,189 (246 basis points), respectively, which resulted from a 39% and 27% decline in the average sales price per gallon, respectively.

Our sales results in the third quarter and first thirty-six weeks of 2009, particularly in hardlines and softlines, were negatively impacted by general economic conditions, and we believe that those conditions will continue to have a significant adverse impact on spending by our members. We believe, however, that due to the nature of our business model, we are better positioned than many retailers to compete in such an environment.

Comparable Sales

Comparable sales decreased 7% and 3% in the third quarter and first thirty-six weeks of 2009.

Weakening foreign currencies negatively impacted comparable sales by approximately $691 (430 basis points) and $1,869 (390 basis points) in the third quarter and first thirty-six weeks of 2009, respectively. Gasoline price deflation negatively impacted comparable sales results by approximately $634 (390 basis points) and $1,160 (240 basis points), during the third quarter and first thirty-six weeks of 2009, respectively. Comparable sales were positively impacted by an increase in shopping frequency but negatively impacted by a decline in the average amount spent (after adjustment for gasoline price deflation and measured in local currencies).

Item 2-Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued) (dollars in millions, except per share data)

Membership Fees



                                                12 Weeks Ended            36 Weeks Ended
                                             May 10,      May 11,      May 10,      May 11,
                                               2009         2008         2009         2008
 Membership fees                             $    329     $    351     $  1,043     $  1,032
 Membership fees as a percent of net sales       2.12 %       2.16 %       2.17 %       2.13 %
 Total cardholders (000's)                     54,900       52,600       54,900       52,600

Membership fees decreased 6.4% in the third quarter of 2009, compared to the third quarter of 2008, and increased 1.1% in the first thirty-six weeks of 2009 compared to the first thirty-six weeks of 2008. Membership fees for the third quarter and first thirty-six weeks of 2009 were negatively impacted by a charge of $27 related to a proposed litigation settlement concerning our membership renewal policy. This charge was offset by additional membership sign-ups at the 18 new warehouses opened since the third quarter of 2008 and increased penetration of our higher-fee Executive Membership program. Our member renewal rate, currently at 87%, is consistent with recent years.

As previously disclosed, effective with renewals occurring on and after March 1, 2009, we changed an element of our membership renewal policy. Memberships renewed within two months after expiration of the current membership year are extended for twelve months from the expiration date. (Under the previous policy renewals within six months of the expiration date were extended for twelve months from the expiration date.) Memberships renewed more than two months after such expiration date are extended for twelve months from the renewal date. Although this change will have the effect of deferring recognition of certain membership fees paid by late-renewing members, the effect is not expected to be material.

Foreign currencies, particularly in Canada, the United Kingdom and Korea, weakened against the U.S. dollar, which negatively impacted membership fees for the third quarter and the first thirty-six weeks of 2009 by approximately $16 and $41, respectively.

Gross Margin



                                               12 Weeks Ended            36 Weeks Ended
                                            May 10,      May 11,      May 10,      May 11,
                                              2009         2008         2009         2008
   Gross margin                             $  1,701     $  1,715     $  5,178     $  5,146
   Gross margin as a percent of net sales      10.99 %      10.54 %      10.79 %      10.64 %

Gross margin, as a percent of net sales, increased 45 basis points compared to the third quarter of 2008. This increase was primarily related to a net 42 basis point increase in our core merchandise departments, primarily in food and sundries and hardlines, offset by decreases in softlines and fresh foods, and a net eight basis point increase from our warehouse ancillary businesses. The majority of this gross margin improvement was due to our lower margin gas business having lower sales penetration, due to the decline in the average selling price per gallon. In addition, gross margin was favorably impacted by four basis points due to a LIFO adjustment. Increased penetration of the Executive Membership two-percent reward program and increased spending by Executive members negatively affected gross margin by nine basis points.

Gross margin, as a percent of net sales, increased 15 basis points compared to the first thirty-six weeks of 2008. Our warehouse ancillary businesses experienced a 12 basis point increase, primarily in

Item 2-Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued) (dollars in millions, except per share data)

our gasoline business, pharmacy and food courts, offset by decreases in one-hour photo. Our core merchandise departments increased by a net six basis points, primarily in foods and sundries, and a favorable LIFO adjustment impacted gross margin by four basis points. Increased penetration of the Executive Membership two-percent reward program and increased spending by Executive members negatively affected gross margin by seven basis points.

Foreign currencies, particularly in Canada, the United Kingdom and Korea, weakened against the U.S. dollar, which negatively impacted gross margin for the third quarter and the first thirty-six weeks of 2009 by approximately $75 and $206, respectively.

Selling, General and Administrative Expenses



                                                   12 Weeks Ended                36 Weeks Ended
                                               May 10,        May 11,        May 10,        May 11,
                                                 2009           2008           2009           2008
Selling, general and administrative (SG&A)
expenses                                       $  1,655       $  1,582       $  4,998       $  4,767
SG&A expenses as a percent of net sales           10.69 %         9.73 %        10.41 %         9.86 %

SG&A expenses, as a percent of net sales, increased 96 basis points compared to the third quarter of 2008. Increased warehouse operating and central administrative costs negatively impacted SG&A expense comparisons, as a percent of net sales, by approximately 82 basis points, resulting primarily from lower sales levels and increased employee benefit costs. Additionally, SG&A was negatively impacted by a charge of $7, or four basis points, related to a proposed litigation settlement concerning our membership renewal policy. Higher stock-based compensation expense negatively impacted SG&A expense, as a percent of net sales, by five basis points.

SG&A expenses, as a percent of net sales, increased 55 basis points compared to the first thirty-six weeks of 2008. Increased warehouse operating and central administrative costs negatively impacted SG&A expense comparisons, as a percent of net sales, by approximately 48 basis points, the largest single factor being increased employee benefit costs. SG&A expenses also included a $26 charge for a mark-to-market write-down of the cash surrender value of employee life insurance contracts in the first thirty-six weeks of 2009, which negatively impacted SG&A expenses as a percent of net sales by five basis points. Higher stock-based compensation expense negatively impacted SG&A, as a percent of net sales, by three basis points.

SG&A expenses, as a percent of net sales, for both the third quarter and first thirty-six weeks of 2009, were significantly adversely impacted by the decrease in the price of gasoline. Foreign currencies, particularly in Canada, the United Kingdom and Korea, weakened against the U.S. dollar, which positively impacted SG&A for the third quarter and the first thirty-six weeks of 2009 by approximately $65 and $175, respectively.

Preopening Expenses



                                                    12 Weeks Ended                 36 Weeks Ended
                                               May 10,          May 11,       May 10,          May 11,
                                                2009             2008          2009              2008
Preopening expenses                           $       9        $       9     $      29        $       40

Warehouse openings                                    5                4            13                21
Relocations                                          (1 )              -            (2 )              (4 )

Warehouse openings, net of relocations                4                4            11                17

Item 2-Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued) (dollars in millions, except per share data)

Preopening expenses include costs incurred for startup operations related to new warehouses, warehouse remodel projects and the expansion of ancillary operations at existing warehouses. Preopening expenses per warehouse opening can vary due to the timing of the opening relative to our fiscal quarter end, whether the warehouse is owned or leased, whether the opening is in an existing, new or international market, and the number and magnitude of warehouse remodel projects.

Provision for Impaired Assets and Closing Costs, Net



                                                    12 Weeks Ended              36 Weeks Ended
                                                 May 10,       May 11,       May 10,       May 11,
                                                  2009          2008          2009          2008
Warehouse closing expenses                      $       -     $       -     $       6     $       3
Impairment of long-lived assets                         7             9             9             9
Net (gains)/losses on sale of real property             -             -             -            (6 )

Provision for impaired assets & closing
costs, net                                      $       7     $       9     $      15     $       6

This provision primarily includes costs related to impairment of long-lived assets, future lease obligations of warehouses that have been closed or relocated to new facilities, accelerated depreciation on buildings to be demolished or sold and that are not otherwise impaired, and losses or gains resulting from the sale of real property, largely comprised of former warehouse locations. In the third quarter of 2009, we recognized a charge of $7, primarily related to the closure in July 2009 of our two Costco Home locations.

Interest Expense



                                     12 Weeks Ended         36 Weeks Ended
                                  May 10,     May 11,    May 10,     May 11,
                                    2009        2008       2009        2008
               Interest expense   $     25    $     25   $     75    $     71

Interest expense primarily relates to our $900 of 5.3% and $1,100 of 5.5% Senior Notes issued in fiscal 2007. The increase in interest expense for the first thirty-six weeks of 2009 over the previous year is primarily due to a decrease in capitalized interest related to reduced new warehouse and remodel construction activity year-over-year.

Interest Income and Other



                                        12 Weeks Ended               36 Weeks Ended
                                   May 10,         May 11,      May 10,         May 11,
                                     2009           2008          2009           2008
     Interest income               $      3       $      19     $     17       $      71
     Earnings of affiliates               9               8           23              29
     Minority interest and other         (8 )            (3 )        (10 )            (2 )

     Interest income and other     $      4       $      24     $     30       $      98

The decrease in interest income in the third quarter of 2009 compared to third quarter of 2008 was largely due to lower interest rates on our cash and cash equivalents and short-term investment balances and a change in policy to invest primarily in U.S. government and agency securities. In addition,

Item 2-Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued) (dollars in millions, except per share data)

we recognized $5 and $1 of other-than-temporary impairment losses on certain securities within our investment portfolio in the third quarter of 2009 and 2008, respectively. See further discussion in Liquidity and Capital Resources. The decrease in minority interest and other is primarily due to a negative $8 compared to a nominal mark-to-market charge in the third quarter of 2009 and 2008, respectively, related to our forward foreign exchange contracts. See the Derivatives section for more information.

The decrease in interest income in the first thirty-six weeks of 2009 compared to first thirty-six weeks of 2008 was largely due to lower interest rates on our cash and cash equivalents and short-term investment balances and a change in policy to invest primarily in U.S. government and agency securities. In addition, we recognized $12 and $4 of other-than-temporary impairment losses on certain securities within our investment portfolio in the first thirty-six weeks of 2009 and 2008, respectively. See further discussion in Liquidity and Capital Resources. The decrease in earnings of affiliates is due to a decrease in earnings from our 50% owned joint-venture in Mexico. Costco Mexico's earnings were lower in the first thirty-six weeks of 2009, primarily due to the peso weakening against the U.S. dollar. The decrease in minority interest and other for the first thirty-six weeks of 2009 is primarily due to a negative $6 compared to a positive $3 mark-to-market adjustment in the third quarter of 2009 and 2008, respectively, related to our forward foreign exchange contracts. See the Derivatives section for more information.

Provision for Income Taxes



                                         12 Weeks Ended             36 Weeks Ended
                                     May 10,       May 11,      May 10,       May 11,
                                       2009         2008          2009         2008
        Provision for income taxes   $    128     $     170     $    422     $     507
        Effective tax rate               38.0 %        36.6 %       37.3 %        36.4 %

The effective tax rate for the third quarter of 2009 was negatively impacted by various discrete items of approximately $5.

Net Income



                                                 12 Weeks Ended              36 Weeks Ended
                                              May 10,       May 11,       May 10,       May 11,
                                               2009          2008          2009          2008
Net income                                   $     210     $     295     $     712     $     885
Diluted net income (per share)               $    0.48     $    0.67     $    1.62     $    1.99
Shares used to calculate diluted net
income per common share (000's)                439,997       443,281       439,995       444,379

Net income for the third quarter of 2009 decreased to $210, or $0.48 per diluted share, from $295, or $0.67 per diluted share, during the third quarter of 2008, representing a 28.4% decrease in diluted net income per share. As previously discussed, foreign currencies, particularly in Canada, the United Kingdom and Korea, weakened against the U.S. dollar, which negatively impacted net income for the third quarter of 2009 by approximately $25 pre-tax, or $0.04 per diluted share. Additionally, net income for the third quarter of fiscal 2009 was negatively impacted by a $34 pre-tax charge, or approximately $0.05 per diluted share, related to a proposed litigation settlement concerning our membership renewal policy.

Item 2-Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued) (dollars in millions, except per share data)

Net income for the first thirty-six weeks of 2009 decreased to $712, or $1.62 per diluted share, from $885, or $1.99 per diluted share, during the first thirty-six weeks of 2008, representing an 18.6% decrease in diluted net income per share. As previously discussed, foreign currencies, particularly in Canada, the United Kingdom and Korea, weakened against the U.S. dollar, which negatively impacted net income for the for the first thirty-six weeks of 2009 by approximately $73 pre-tax, or $0.10 per diluted share. Additionally, net income for the first thirty-six weeks of 2009 was negatively impacted by a $34 pre-tax charge, or approximately $0.05 per diluted share, related to a proposed litigation settlement concerning our membership renewal policy as well as a $26 pre-tax charge, or approximately $0.04 per diluted share, for a mark-to-market write-down of the cash surrender value of employee life insurance contracts.

Liquidity and Capital Resources (dollars in millions, except per share data)

Cash Flows

The following table itemizes components of our most liquid assets:



                                             May 10,     August 31,
                                               2009         2008
                 Cash and cash equivalents   $  3,083   $      2,619
                 Short-term investments .         585            656

                 Total                       $  3,668   $      3,275

Our primary sources of liquidity are cash flows generated from warehouse operations and existing cash and cash equivalents and short-term investments balances, which were $3,668 and $3,275 at May 10, 2009 and August 31, 2008, respectively. Of these balances, approximately $748 and $788 at May 10, 2009 and August 31, 2008, respectively, represented debit and credit card receivables, primarily related to sales in the week prior to the quarter-end close. Fluctuations in foreign exchange rates had a material impact on the balances of our assets and liabilities year-over-year as reported in the condensed consolidated balance sheets, which impacted amounts shown in the condensed consolidated statement of cash flows.

Net cash provided by operating activities totaled $1,508 in the first thirty-six weeks of 2009, compared to $1,763 in the first thirty-six weeks of 2008. This net decrease of $255 was primarily attributable to a decrease in our net income of $173 and a $97 increase in our net investment in merchandise inventories (merchandise inventories less accounts payable).

Net cash used in investing activities totaled $778 in the first thirty-six weeks of 2009, compared to $1,466 in the first thirty-six weeks of 2008, a decrease of $688. The decrease in net cash used in investing activities relates primarily to a $252 decrease in cash used for the purchase of property and equipment and a $72 increase in cash provided by the net investment in short-term investments. In addition, as discussed below, $371 formerly classified as cash and cash equivalents was reclassified to short-term investments and other assets in the first thirty-six weeks of 2008.

In December 2007, one of our enhanced money fund investments, Columbia Strategic Cash Portfolio Fund (Columbia), ceased accepting cash redemption requests and changed to a floating net asset value. In light of the restricted liquidity, we elected to receive a pro-rata allocation of the underlying securities in a separately managed account. We assess the fair value of these securities through market quotations and review of current investment ratings, as available, coupled with an evaluation of

Item 2-Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued) (dollars in millions, except per share data)

the liquidation value of each investment and its current performance in meeting scheduled payments of principal and interest. During the third quarter of 2009 . . .