OVERVIEW

Our fiscal year ends on the Sunday closest to August 31. References to 2009, 2008, and 2007 relate to the 52-week years ended August 30, 2009, August 31, 2008, and September 2, 2007 respectively.

Key items for 2009 included:

• Net sales decreased 1.5% from the prior year to $69,889, attributable to a 4% decrease in comparable sales (sales in warehouses open for at least one year, including relocated warehouses), partially offset by the opening of 15 new warehouses (19 opened, two closed due to relocation, and the closure of our two Costco Home locations) in 2009. Net sales were significantly impacted by the year-over-year decrease in the price of gasoline and by certain foreign exchange rates;

• Membership fees increased 1.8%, to $1,533, primarily due to new membership sign-ups at warehouses opened in 2009, the continued benefit of membership sign-ups at warehouses opened in 2008, and increased penetration of our higher-fee Executive Membership program. Membership fees were negatively impacted by 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 28 basis points over the prior year,

• Selling, general and administrative (SG&A) expenses as a percentage of net sales increased 58 basis points over the prior year;

• Net income decreased 15% to $1,086, or $2.47 per diluted share, in 2009 compared to $1,283, or $2.89 per diluted share, in 2008;

• The Board of Directors approved an increase in the quarterly cash dividend from $0.16 to $0.18 per share; and

• We repurchased 895,000 shares of our common stock, at an average cost of $63.84 per share, totaling approximately $57.

As previously reported, 2007 was impacted by the following unusual items, the effects of which are reflected in the table below:

• Sales returns reserve: We revised our estimate of our sales returns reserve to include a longer timeframe for returns, as well as a lower realization rate on certain returned items.

• Employee tax consequences on stock options: We made payments to employees in connection with changes in exercise prices designed to avoid adverse tax consequences for employees and recorded a charge for the estimated amount to remedy adverse tax consequences related to stock options held and previously exercised by employees outside the United States.

• Excise tax refund: We received a refund related to 2002 through 2006, as a result of a settlement with the U.S. Internal Revenue Service relating to excise taxes previously paid.

• Deferred membership: We analyzed the timing of recognition of membership fees, resulting in a reduction to membership fee revenue and a corresponding increase to deferred membership fees on our consolidated balance sheet.

Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in millions, except per share and warehouse number data)
(Continued)

We believe disclosing the effects of these items helps provide a meaningful comparison of our current year results to prior years. The impact of each of these items noted above is presented below:

                                                                              2007
                                                         Employee tax
                                 Sales return           consequences on            Deferred            Excise tax
                                   reserve               stock options            membership             refund            Total
Net sales                       $         (452 )       $               -         $          -         $          -         $ (452 )
Membership fees                              -                         -                  (56 )                  -            (56 )

Total revenue                             (452 )                       -                  (56 )                  -           (508 )
Merchandise costs                          358                         -                    -                    9            367

Gross margin(1)                            (94 )                       -                    -                    9            (85 )
SG&A                                         -                       (47 )                  -                    -            (47 )

Operating income                           (94 )                     (47 )                (56 )                  9           (188 )
Interest expense                             -                         -                    -                    -              -
Interest income and other                   (1 )                       -                    -                    1              -

Income before income taxes                 (95 )                     (47 )                (56 )                 10           (188 )
Provision for income taxes                  35                        17                   21                   (4 )           69

Net Income                      $          (60 )       $             (30 )       $        (35 )       $          6         $ (119 )

(1) Net sales less merchandise costs.

Results of Operations

Net Sales



                                                          2009             2008            2007
Net sales                                               $ 69,889         $ 70,977        $ 63,088
Effect of change in estimated sales returns reserve            -                -             452

Net sales, as adjusted                                  $ 69,889         $ 70,977        $ 63,540
Net sales (decrease) increase                               (1.5 )%          12.5 %           7.0 %
Net sales (decrease) increase, as adjusted                  (1.5 )%          11.7 %           7.8 %
Increase (decrease) in comparable warehouse sales             (4 )%             8 %             6 %
Warehouse openings, net                                       15               24              30


2009 vs. 2008

Net Sales

Our 2009 sales results, particularly in hardlines and softlines, were negatively impacted by general economic conditions, and we believe that those conditions may 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.

Net sales decreased 1.5% during 2009 compared to 2008. The $1,088 decrease was comprised of a $2,590 decrease in comparable sales, partially offset by an increase of $1,502 primarily from sales at new warehouses opened during 2009 and 2008. Our sales were also impacted by a lower number of warehouse openings year-over-year.

Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in millions, except per share and warehouse number data)
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Foreign currencies, particularly in Canada, the United Kingdom, and Korea, weakened against the U.S. dollar, which negatively impacted net sales during 2009 by approximately $2,421 (341 basis points). Net sales were also negatively impacted by gasoline price deflation during 2009 by approximately $2,164 (305 basis points), which resulted from a 30% decline in the average sales price per gallon.

Comparable Sales

Comparable sales decreased 4% in 2009. Weakening foreign currencies negatively impacted comparable sales by approximately $2,339 (333 basis points) in 2009. Gasoline price deflation negatively impacted comparable sales results by approximately $2,113 (298 basis points) during 2009. Comparable sales were negatively impacted by a decline in the average amount spent (after adjustment for gasoline price deflation and measured in local currencies), partially offset by an increase in shopping frequency. Reported comparable sales growth includes the negative impact of cannibalization (established warehouses losing sales to our newly opened locations). We believe the decline is a function of adverse economic conditions generally rather that a fundamental change in our members' relationship to the company.

2008 vs. 2007

Net sales increased 12.5% to $70,977 in 2008, from $63,088 in 2007. Excluding the impact of the change in the estimated sales returns reserve in 2007, net sales, as adjusted, increased $7,437, or 11.7% in 2008 as compared to the previous year. The $7,437 increase in adjusted net sales is comprised of $5,153 from the increase in comparable warehouse sales and $2,284 primarily from sales at new warehouses opened during 2008 and 2007. In the third quarter of 2007, we introduced a 90-day return policy in the United States on certain electronic items.

Significantly stronger foreign currencies, particularly in Canada, positively impacted adjusted net sales by approximately $1,134, or 180 basis points. Gasoline sales also contributed to the $7,437 adjusted net sales growth by approximately $2,236, with approximately $1,489 related to the increase in gasoline sales prices. Additionally, we experienced price increases in certain foods and fresh foods items that positively impacted net sales, which were partially offset by price decreases in certain items within our hardlines category.

Most of the comparable sales growth was derived from increased amounts spent by members, with a smaller contribution from increases in shopping frequency. Gasoline sales positively impacted comparable warehouse sales growth by approximately $1,938. Comparable warehouse sales growth excluding gasoline would have been lower by approximately 267 basis points. Significantly stronger foreign currencies, particularly in Canada, positively impacted comparable sales by approximately $1,070, or 170 basis points. Reported comparable sales growth includes the negative impact of cannibalization (established warehouses losing sales to our newly opened locations).

Membership Fees



                                                      2009             2008             2007
Membership fees                                     $  1,533         $  1,506         $  1,313
Adjustment to deferred membership balance                  -                -               56

Membership fees, as adjusted                        $  1,533         $  1,506         $  1,369
Membership fees increase                                 1.8 %           14.7 %           10.5 %
Membership fees increase, as adjusted                    1.8 %           10.0 %           15.2 %
Membership fees as a percent of net sales               2.19 %           2.12 %           2.08 %
Adjusted membership fees, as a percent of
adjusted net sales                                      2.19 %           2.12 %           2.16 %
Total cardholders                                     56,000           53,500           50,400

Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in millions, except per share and warehouse number data)
(Continued)

2009 vs. 2008

Membership fees increased 1.8% in 2009 compared to 2008, primarily due to membership sign-ups at the 15 new warehouses opened in 2009 (19 opened, two closed due to relocations, and two closed Costco Home locations), the continued benefit of membership sign-ups at warehouses opened in 2008, and increased penetration of our higher-fee Executive Membership program. This increase was negatively impacted by a charge of $27 related to a proposed litigation settlement concerning our membership renewal policy and the weakening of foreign currencies against the U.S. dollar, particularly in Canada, the United Kingdom, and Korea, which negatively impacted membership fees during 2009 by approximately $50. Membership fees were also impacted by a lower number of warehouse openings year-over-year. 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.

2008 vs. 2007

Membership fees increased 14.7% to $1,506, or 2.12% of net sales in 2008, from $1,313, or 2.08% of net sales in 2007. Excluding the adjustment to deferred membership fees in 2007, adjusted membership fees increased 10.0% from 2007. The increase was primarily due to: new membership sign-ups at the 24 new warehouses opened (34 opened and 10 closed due to relocations); increased penetration of the higher-fee Executive Membership program; and the five dollar increase in our annual membership fee in the second half of 2006 for non-Executive members. Our member renewal rate at the end of 2008 was 87%.

Gross Margin



                                                        2009           2008           2007
Gross margin                                           $ 7,554        $ 7,474        $ 6,638
Unusual items                                                -              -             85

Gross margin, as adjusted                              $ 7,554        $ 7,474        $ 6,723
Gross margin increase                                      1.1 %         12.6 %          6.8 %
Gross margin increase, as adjusted                         1.1 %         11.2 %          8.1 %
Gross margin as a percent of net sales                   10.81 %        10.53 %        10.52 %
Adjusted gross margin as a percent of adjusted net
sales                                                    10.81 %        10.53 %        10.58 %

2009 vs. 2008

Gross margin, as a percent of net sales, increased 28 basis points compared to 2008. This increase was primarily related to a net 18 basis point increase in our core merchandise departments, primarily in food and sundries, partially offset by a decrease in softlines, and a net seven basis point increase from our warehouse ancillary businesses, primarily our gasoline and pharmacy departments. 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. Increased sales penetration of the Executive Membership two-percent reward program negatively affected gross margin by six basis

Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in millions, except per share and warehouse number data)
(Continued)

points. In addition, gross margin was favorably impacted by nine basis points due to reversing the $32 LIFO reserve established in the prior year as we experienced net deflation, year-over-year, in the cost of our merchandise inventories.

Foreign currencies, particularly in Canada, the United Kingdom and Korea, weakened against the U.S. dollar, which negatively impacted gross margin for 2009 by approximately $258.

2008 vs. 2007

Gross margin, as a percent of net sales, increased one basis point compared to 2007. Excluding the unusual items affecting net sales and gross margin in 2007, adjusted gross margin as a percent of adjusted net sales decreased five basis points in 2008 as compared to 2007. This decrease was largely due to a net 12 basis point decrease in our warehouse ancillary businesses, particularly in one-hour photo, tire shop and food services, partially offset by an increase in our gasoline business; a $32, or five basis point LIFO charge, resulting from price increases in certain food items and gasoline; and a three basis point decrease resulting from the increased penetration of the Executive Membership two-percent reward program and increased spending by Executive members. These decreases were partially offset by a net 15 basis point increase from our merchandise departments, particularly fresh foods, food and sundries, Costco Online and our international operations, partially offset by a decrease in softlines.

Selling, General and Administrative Expenses



                                                     2009         2008         2007
   Selling, general and administrative expenses     $ 7,252      $ 6,954      $ 6,273
   Unusual items                                          -            -          (47 )

   SG&A, as adjusted                                $ 7,252      $ 6,954      $ 6,226
   SG&A as a percent of net sales                     10.38 %       9.80 %       9.94 %
   Adjusted SG&A as percent of adjusted net sales     10.38 %       9.80 %       9.80 %

2009 vs. 2008

SG&A expenses, as a percent of net sales, increased 58 basis points compared to 2008. Increased warehouse operating and central administrative costs, as a percent of net sales, negatively impacted SG&A by approximately 56 basis points, resulting primarily from lower sales levels and higher employee health care costs. Higher stock-based compensation expense had a negative impact of one basis point. In addition, we recorded an adjustment to the net realizable value of the cash surrender value of employee life insurance contracts, which negatively impacted SG&A, as a percent of net sales, by two basis points. The net realizable value of the insurance contracts is largely based on changes in investment assets underlying the policies and is subject to conditions generally affecting equity and debt markets. In 2008, we recorded a $16 reserve in connection with a legal settlement, which positively impacted the comparison to current year's SG&A expense, as a percent of net sales, by two basis points.

SG&A expenses, as a percent of net sales, for 2009 were adversely impacted by the decrease in the price of gasoline, as it produced a decline in sales dollars without a comparative reduction in labor or other administrative costs. Foreign currencies, particularly in Canada, the United Kingdom, and Korea, weakened against the U.S. dollar, which positively impacted SG&A for 2009 by approximately $217.

Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in millions, except per share and warehouse number data)
(Continued)

2008 vs. 2007

SG&A expenses, as a percent of net sales, decreased 14 basis points compared to 2007. Excluding the unusual items affecting net sales and SG&A expenses in 2007, adjusted SG&A as a percentage of adjusted net sales was comparable to 2007. Warehouse operating and central administrative costs positively impacted adjusted SG&A comparisons, on a net basis, by approximately seven basis points, primarily due to decreased payroll and benefits costs as a percent of adjusted net sales. Stock-based compensation expense negatively impacted adjusted SG&A comparisons by three basis points, primarily due to a higher closing stock price on the date that our October 2007 RSU grant was valued as compared to previous grants. Additionally, in 2008, we recorded a $16 reserve in connection with a litigation settlement and accrued approximately $9 for compensation adjustments we made to employees enrolled in our medical and dental plans related to a decision to share a portion of the health plan's savings that we achieved. These two items negatively impacted adjusted SG&A comparisons by four basis points.

Preopening Expenses



                                             2009    2008    2007
                       Preopening expenses   $  41   $  57   $  55

                       Warehouse openings       19      34      30

Preopening expenses include costs incurred for startup operations related to new warehouses and the expansion of ancillary operations at existing warehouses. Preopening expenses can vary due to the timing of the opening relative to our year-end, whether the warehouse is owned or leased, whether the opening is in an existing, new, or international market. The decline in 2009 is primarily attributable to fewer warehouse openings.

Provision for Impaired Assets and Closing Costs, Net



                                                          2009    2008       2007
     Warehouse closing expenses                           $   9   $   9      $  16
     Impairment of long-lived assets                          8      10          -
     Net gains on the sale of real property                   -     (19 )       (2 )

     Provision for impaired assets & closing costs, net   $  17   $   -      $  14

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, based on the shortened useful life through the expected closing date, 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.

2009 vs. 2008

The net provision for impaired assets and closing costs was a $17 in 2009, compared to a nominal amount in 2008. The provision in 2009 included charges of $9 for warehouse closing expenses, and impairment charges of $8, primarily related to the closing of our two Costco Home locations in July 2009.

Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in millions, except per share and warehouse number data)
(Continued)

2008 vs. 2007

The net provision for impaired assets and closing costs was a nominal amount in 2008, compared to $14 in 2007. The provision in 2008 included charges of $9 for warehouse closing expenses, and impairment charges of $10, primarily related to a location in Michigan that was demolished and rebuilt. These charges were offset by $19 of net gain on the sale of real property, largely former warehouse locations.

At the end of both 2009 and 2008, the reserve for warehouse closing costs was $5 and primarily related to future lease obligations.

Interest Expense

2009 vs. 2008

Interest expense primarily relates to our $900 of 5.3% and $1,100 of 5.5% Senior Notes (2007 Senior Notes) issued in 2007. The increase in interest expense is primarily due to a decrease in capitalized interest related to reduced new warehouse and remodel construction activity year-over-year.

2008 vs. 2007

The increase in interest expense resulted primarily from the issuance of our 2007 Senior Notes in February 2007, partially offset by lower interest expense resulting from the repayment in March 2007 of the $300 5.5% Senior Notes.

Interest Income and Other



                                               2009       2008       2007
                 Interest income               $  27      $  96      $ 128
                 Earnings of affiliates           33         42         36
                 Minority interest and other     (15 )       (5 )        1

                 Interest Income and other     $  45      $ 133      $ 165

2009 vs. 2008

The decrease in interest income was largely due to lower interest rates, year-over-year, on our cash and cash equivalents and short-term investment balances resulting from a change in policy to invest primarily in U.S. government and agency securities, which earn a lower interest rate. In addition, we recognized $12 of other-than-temporary impairment losses on certain securities within our investment portfolio in 2009 compared to an impairment loss of $5 in 2008. See further discussion in Liquidity and Capital Resources. The decrease in the earnings of affiliates is primarily attributable to our investment in Costco Mexico (a 50%-owned joint venture). Costco Mexico's earnings were lower in 2009, primarily due to the peso weakening against the U.S. dollar. The decrease in minority interest and other is primarily due to a negative $5 mark-to-market charge in 2009, compared to a $6 gain in 2008, related to our forward foreign exchange contracts. See the Derivatives section for more information.

Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in millions, except per share and warehouse number data)
(Continued)

2008 vs. 2007

The decrease in interest income was largely due to lower interest rates, year-over-year, on our cash and cash equivalents and short-term investment balances. In addition, we recognized $5 of other-than-temporary impairment losses on certain securities within our investment portfolio. The increase in the earnings of affiliates is primarily attributable to our investment in Costco Mexico (a 50%-owned joint venture).

Provision for Income Taxes



                                         2009        2008        2007
                   Income tax expense   $  628      $  716      $  627
                   Effective tax rate     36.7 %      35.8 %      36.7 %

The lower tax rate in 2008 was primarily attributable to discrete benefits recognized during the year.

Net Income



                                                 2009                2008               2007
Net income                                     $   1,086           $   1,283          $   1,083
Unusual items (net of tax)                             -                   -                119

Net income, as adjusted                        $   1,086           $   1,283          $   1,202
Diluted earnings per share                     $    2.47           $    2.89          $    2.37
Shares used to calculate diluted net
income per common share (000's)                  440,454             444,240            457,641
Diluted earnings per share (decrease) /
increase                                             (15 )%               22 %                3 %

2009 vs. 2008

Net income for 2009 decreased to $1,086, or $2.47 per diluted share, from . . .