Richard Galanti, Chief Financial Officer James D. Sinegal, Chief Executive Officer and Director

Chuck Grom, JP Morgan Deborah Weinswig, Citigroup Jeff Stensen, Cleveland Research Gregory Melich, Morgan Stanley Todd Slater, Lazard Capital Virginia Genero, Merrill Lynch Nora Khan (Mark Husson), HSBC Mark Miller, William Blair Bob Drbul, Lehman Brothers Craig Harris, Seattle Post Dan Binder, Buckingham Research

Good morning. My name is Amy and I will be your conference operator today. At this time, I would like to welcome everyone to the Costco Wholesale Fiscal 2006 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question and answer session. If you would like to ask a question during this time simply press * and then the number 1 on your telephone keypad. If you would like to withdraw your question, press the # key. On today’s call we have Mr. Richard Galanti, Chief Financial Officer, and Mr. Jim Sinegal, President. Thank you, Mr. Galant, you may begin your conference. Richard Galanti, Chief Financial Officer: Thank you, Amy. Good morning to everyone. This morning’s press release covers two major items, our fourth and fiscal 2006 year end operating results and the results of our review by the special committee of appointed board members of our historical stock option procedures. As with every call, let me start by stating that the discussions we are having will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and that these statements involve risks and uncertainties that may cause actual events, results, and/or performances to differ materially from those indicated by such statements. The risks and uncertainties include but are not limited to those outlined in today’s press call as well as other risks identified from time to time in the Company’s public statements and reports filed with the SEC. To begin with, our 17-week fourth quarter of fiscal ‘06 operating results, for the quarter we came in at a reported $0.75 a share. This compares to our August 30th revised guidance of $0.68 to $0.71 and current first call of $0.73. My guess is the first call number of $0.73 excluded the $0.03 amount related to the tax issue that we had mentioned in that August 30th release. In last year’s fourth quarter a reported $0.73 a share figure benefited greatly from a very low reported tax rate of just under 29% for the quarter. As I discussed last year, using a more normalized tax rate, we estimated last year’s fourth quarter earnings per share would have been $0.66 a share, and so in our view on a kind of apples-to-apples basis it would be $0.66 a year comparison to this year’s $0.75 number. So essentially, quarter over quarter earnings per share increased we estimate by about 14% on that normalized basis. For the year we came in at a reported $2.30 a share, again assuming a more normalized income tax rate for last fiscal year, which included both the unusual tax benefit in the last year’s fourth quarter as well as the significant cash benefits reported in the second quarter of fiscal ’05 as well as a one time noncash charge last year in ’05 in the second quarter related to an adjustment to our method of accounting releases, again we estimated earnings for ’05 on what we would call a normalized basis, would have been $2.04; so EBIT $2.04 in our view compared to $2.30, which would imply the 13% increased year over year. In terms of our sales for the quarter, as previously reported, our 17-week comparable sales figures shows an increase of 8% and for the fiscal year also an increase of 8%. Other topics of interest I’ll review this morning is our opening plans. As you may know we opened for the fiscal year ended on September 3rd 27 net new locations during the year, 20 new in the U.S., 3 in Canada, 2 in the U.K. These 25 units are consolidated into our operating results, as well as we opened 2 in Mexico which we count for a yearly basis. In addition, during fiscal ’06 we had three locations. For fiscal ’07 we are planning a higher level of expansion, and again this fiscal year began September 4th of last month. Also, this morning, I’ll review with you our ancillary business results, Costco Online, membership trends, our balance sheet for the fiscal year just ended, and I know a couple of you have already noticed a small reclassification issue that basically takes a small amount of money out of SG&A as something historically had reduced SG&A and added to sales, and we’ll have some of those reclassification numbers for you, so we have an apples-to-apples comparison. So, with that said and before I get into the actual earnings results let me review what was said in this morning’s press release relating to the stock options, and again I’m really going to be talking from the press release itself. Following publicity regarding the granting of options, like many companies out there, we initiated an internal review many months of historical stock option practices to determine whether our grant dates of options were supported by the Company’s books of records. As a result of an internal review, a special committee of the independent directors was formed. The three members of that independent board committee was Mr. Dan Evans, William Gates, and Charlie Munger. This special committee engaged its own independent counsel and forensic experts, spent a lot of time reviewing all the equity grants and reviewing people and what have you, and all grants paid during years 1996 to 2000. In late September, the special committee reported its conclusions and recommendations to the board, and these were adopted by the full board. Importantly, the review identified no evidence of fraud, falsification of records, concealment of actions or documentation or intentional deviation from generally accepted accounting principles. The review did indicate that at several instances it was not possible to determine with precision the appropriate measurement date for specific grants. In fact, they concluded it was feasible only to identify a range of dates that includes the appropriate measurement dates, where some dates in that range are after the recording grant date. As again, as the press release states, grants were made to over 1000 of the Company’s employees including among others all of our warehouse managers and merchandizing people and what have you, and again it talks about the fact that none of the options in review identified any imprecision in the grant process issued to our CEO Jim Sinegal, our Chairman Jeff Brotman or any of the non-employee directors with the exception of one grant in April 1997, about nine and a half years ago, where both Jim and Jeff received as part of a broad grants and literally hundreds of employees a grant that may have been subject to as much as that could have benefitted them up to $200,000. Other grants subject to grant precision were made of course to me as well as Dick DiCerchio, another employee director at Costco. Based on the findings of the review we do not anticipate any restatement of previously filed financial statements and consistent with the recent staff accounting bulletin issued by the SEC, we have transferred as of fiscal year end $116.1 million of net worth shown on our balance sheet from retained earnings to paid in capital and increased our deferred tax asset account by about $31.5 million. Keep in mind that our total net income over this 10-year period reflected in these adjustments is about $6 billion. In terms of fiscal 2006 stock option expense, we have increased it by about $2 million after tax as a result of this review and that’s of course included in the fourth quarter and fiscal ’06 income statements. As stated in the release, given the lack of historical document, it was not profitable to precisely determine the amount of the adjustments that should have been made. The actual adjustments made and recommended by the special committee are based on assumptions that are more likely in their view to overstate and understate the effects of the imprecisions identified in the Company’s option grants. At present, we believe that impact on the Company’s historical federal income tax filings arising from this review will be less than $2 million. As also disclosed in the press release, the Company has in other respects generally taken a conservative position with regard to stock options. Beginning as you know in fiscal 2003, the Company voluntarily expensed option grants prior to any formal obligation to do so. Additionally, actually something we’ve been talking for well over a year here and unrelated to this issue, Costco has ceased granting of options currently in favor of restricted stocking. We’ve determined that in the future we are also going to establish standing equity grant dates applicable to RSUs or option grants should we do that in the future or in any form of equity type of offering, such that it will be set always at the fifth trading day following the release of quarterly or annually earnings results, and any exception to that policy would be with formal approval by our compensation committee. As you would expect, we have also informed the SEC of our own investigation and conclusions and have communicated with them, and needless to say we will cooperate fully in any event of enquiry. That’s really all that can be said at this point, and again we’re here to respond but pretty much what you see in there is what we’ll be able to talk about. In terms of the earnings and operating results, again sales for this year’s fourth quarter, the 17 weeks ended September 3rd were $19.5 billion, up 19% from last year’s fourth quarter sales of $16.4 billion. Of course this year’s fourth quarter had an extra week and that slightly explains the 19% figure. On a comp basis, which is alike number of weeks, fourth quarter comps were up 8%. While our quarters are slightly different than formal calendar months, essentially the 17 weeks comprised of most of May, all of June, July, and August, and a few days in September. In terms of our 8% fourth quarter comp, it’s comprised of 10% May, 6% June, 7% July, and 7% in August, so basically a 10, 6, 7, 7. For the quarter our 8% comp figure resulted from a combination of an average transaction increase of about 7% and an average frequency increase of a little under 1% for the quarter. Included in the average transaction increase of 7% in the fourth quarter was the continuation of strong FX, dollar versus some of the foreign currencies where we operate. This represented about 150 basis point boost to the quarterly comp number, not that different than what we’ve seen of late. Gas linked pricing, again is not different than what we’ve seen of late, has helped our comps during the fourth quarter by about 150 basis points as well due to higher year-over-year gas prices. This of course reversed itself in September and as you know we reported September comps last week, as a year ago we were anniversaring Hurricane Katrina which occurred in the last week of August and throughout September there was plenty of gas price and gas availability craziness out there. I might add that in terms of our sales productivity, as you know in fiscal ’05, Company wide including all countries, the average sales annual productivity per warehouse was $120 million, within the U.S. only it was $124 million. For fiscal ‘06 which just ended the 120 company wide has become 127, and the 124 U.S. only has become 130 million, and again that reflects of course part of the 8% comp that we experienced both for the quarter and the year. As you all know, last week we reported September comps, we came in at 4% reported comp. As expected, we had a big swing from August, these are the gas sales, both in terms of gallonage but more importantly in terms of gas pricing. Again, it was last September when prices really sky rocketed with the factor of Hurricane Katrina. All in all, just a shade weaker than the August 8% figure if you try to normalize the impact of gasoline. In terms of sales comparisons by geography, no real surprises in the fourth quarter, pretty consistent with what we’ve seen in the second and third quarters. In the second and third quarters of course we were at 7% comps overall and 8% in the fourth quarter. Again as you expected the reported number of 4 for the month of September would then have tended to impact all the divisions most notably in the U.S. In terms of merchandizing categories, the main four categories -- food sundries, hard lines, soft lines, fresh food, the bell weather of course has been fresh foods coming in at a low double digit comp. Food sundries has continued relatively strong. Hard lines has some strength and some weakness in it, although the number for this quarter is similar to the last quarter, and soft lines while the weakest of the four components historically over the last year is up slightly. Within the food sundries comp all sub categories were up year over year in the fourth quarter. Within our hard lines comp we saw strength in majors, again the continuation of strong electronic sales as well as toys; those were the two strongest sub categories. Within soft lines, house wares, domestics, home furnishings, and small appliances were strong; the strongest, however, was like last month with women’s apparel, offset by weaker comps and media. Fresh food comps again did really much for bell weather with particular strength in produce. Moving to light items of the income statement, I’ll start with membership fees. Now membership fees reported in the fourth quarter were $379.5 million, in terms of dollars up 12% or up $39.7 million year over year. However, as a percent of sales, it is down 14 basis points. Usually I don’t discuss this next little piece but when you look at the reported figures here for the first time in a long time it shows that membership fees as a percent of sales dropped by 14 basis points. Specifically it’s about flat, maybe even up a few basis points with the conversion of some members to executive memberships. This impact here in this quarter is mostly due to the impact of a 53-week year and the 17-week fourth quarter related to that extra week this fiscal year and at the quarter. A reported book fourth quarter membership fee encumbers essentially 1/13th…again remember we operate on 13 four-week periods with our first three quarters being 12 weeks each and our fourth quarter being 16 weeks. Our reported book numbers are essentially 1/13th for each of the prior 12 four-week periods of cash membership fees plus a 1/13th of the cash fees we received in August, which was a five-week period. Our sales figure of course, there are no deferrals, it’s all the sales in the five-week month of August. So, if you have a low reported book membership amount on all that sales, you’re going to have a slightly lower percentage. Probably the best way to think about it is this; if you think about it in a 16-week typical fourth quarter, an extra week is about 6% more days, 6% more sales, although on a deferred basis given that you’ve got 12/13th of membership fee number coming from prior months which were just four weeks, you basically have a 6% reduction and a 2% reward, which is about 12 basis points. I know that’s confusing to some of you, the math works, and we’re fine. And probably the best way here is to show you on a cash basis. Our fourth quarter membership fees were $386 million or 1.98% of sales versus the cash membership fees in the fourth quarter a year ago of $325 million or 1.99% of sales. So, on a cash basis whereas on a book reported basis membership fees were up 12% in the quarter, on a cash basis there were up 19% or down 1 basis point, and instead of being up on a book basis $39 million they were up $61 million. It is pretty much in line with what we expected. In terms of membership, we continue to benefit from the renewal rates, good renewal rates as well as penetration of the $100 a year executive membership, recognizing the PNL benefit from the $5 increase that we initiated in May. The real impact starts in July because that’s when it started impacted renewals and we will see 86% of our membership fee in a given year of renewals, and that should grow given the deferred accounting nature of that $5 increase. In terms of number of members at year end, we had 17.4 million Gold Star members, up 400,000 from the third quarter end and up 1.2 million from last year end; 5.2 million primary business members, up 100,000 from last year and pretty much in line with a quarter ago, up slightly but rounding to 100,000; business add-ons 3.5 million; total memberships 26.1 million, and including spouse cards 47.8 million at the end of ’06, up 800,000 from the third quarter ’06 and up about 2.5 million from last fiscal year end. At fiscal year end on September 3rd, we had a little over 5.2 million paid executive members; this is about 20% of our membership base. This also represented about 250,000 member increase or a 5% over the last 17 weeks since the third quarter end. So still even though the number of new executive members per week is coming down, it’s still 15,000 a week during the quarter. I should point out that these roughly 20% of our membership base generate more than 50% of our sales, recognizing about 10 percentage point of those sales are non rewardable such as gas, tobacco, and alcohol and a few looking at our reward as a percent of sales it’s a little over 80 basis points, which would imply a little over 40% of our sales that are rewardable. In terms of renewal rates, they continue strong at an all time high. At the third quarter end renewal rate was 86% which was comprised of 91 business and 84% Gold Star. At year end the 91 has rounded up to 92 and the 84 has rounded up to 85. Those are in full integers in terms of the rounding, but at fiscal year end we were right at a reported 86 but right at an 86.5 compared to a year ago when our 86 was an 85.7. So we’ve actually seen a little improvement over the last year in our renewal rates. Again that’s consistent with everything we’ve done as it relates to executive membership penetration as well. With the $5 increase historically we’ve seen a small reduction in renewal rate. It’s really too early to tell, although early indications from our head of membership and marketing is that we are not seeing very much resistance to the $5 increase implemented in May and beginning in July with our renewals. Before going on to gross margins and SG&A let me mention that we made a small reclassification to our prior period income statements whereby a small amount of credit to offset SG&A historically is now being reclassified to conform with current GAAP accounting. The impact in the fourth quarter, like in all prior periods, is a small hit to SG&A with those dollars being reclassified to sales, so something historically credited to SG&A is now being added to sales. With that impact you’re going to have a small increase in sales, a like amount of dollar increase in SG&A, and bottom line profits of course are unchanged. It’s not a big deal, it simply conforms with what we believe to be correct. When it was a smaller number it really didn’t stand out and as it has grown a little bit and reviewing with our outside accounts we concurred that that was the right thing to do. However, with the small reclassification gross margin percent increases slightly because sales are increasing slightly and your cost of sales stay the same, offset of course by the same amount in the SG&A. Comparisons will be applies-to-apples and we’ll provide by about noon today Pacific Time our Q&A which will be on the Costco website, we will show you that basically the reclassified income statements showing the small impact of this on an apples-to-apples basis for the last two fiscal years and by quarters. So, you’ll see kind of the same two-year quarterly income statement presentation that you’ll see in our 10-K in a month a half, and that will show those little differences. I know a few of you have already emailed me as to what’s the $10 million or $20 million difference there. Going down the gross margin line, our gross margin in the fourth quarter was lower year over year by 12 basis points from 10.48 last year to 10.36 this year, and again we are conforming last year’s quarterly and annual numbers to show the same reclassification so we can look at apples to apples. If you jot down a couple of small numbers here, we’ll just give you the last couple of quarters: merchandizing is line 1, 2% reward is line 2, and LIFO is line 3, and of course the total line 4. In the third quarter you had merchandizing gross margin up by 1 basis point year over year, 2% reward was a negative 10 basis point contributor, LIFO was a plus 3 basis point contributor. So, in the third quarter year over year, we were lower by 6 basis points of margin. In the fourth quarter, we were minus 8 basis points on merchandizing, minus 9 on 2% reward, plus 5 on LIFO, and a total of minus 12. And for the year, the third column, minus 4 for merchandizing, minus 10 for reward, plus 3 for LIFO from minus 11 year over year. As you can see our overall merchandizing gross margin was lower fourth quarter over fourth quarter by 8 basis points and year over year by 4 basis points. Our core merchandized business, which is about just under 80% of our business comprised of food and sundries, hard lines, soft lines, and fresh foods, so it excludes the ancillary businesses such as gas, pharmacy, and optical. These were up year over year in the fourth quarter by 4 basis points. Now this compares to the same core departments being up year over year in the third quarter by about 14 basis points. The difference is things that we talked about on the August 30ths conference call which followed the press release, little markdowns in things like furniture at the year end and more importantly some additional process associated with electronics returns. So that’s really the difference you see there. Even though these departments are up 4 basis points in the fourth quarter, with a little sales penetration of these categories given the strength and things like gas, it was still a slight negative contributor to total company gross margins. Our year over year gross margin in the gas business was actually about flat in the fourth quarter. It started off strong for much of the quarter. It was weak in the last week or so and restrengthened has gas prices fell, but it’s still a very low gross margin build that’s relative to the rest of the Company. And then as well, our fourth quarter gross margin was impacted by the negative 9 basis points from the executive membership program, higher penetration there, again with continued growth and success with that program, and by an improvement LIFO in the fourth quarter last year we had $7.4 million LIFO charge. We have no charge this year in the fourth quarter. In terms of our gross margin outlook going forward, reported gross margins could probably be up a little to start the year due in large part to the falling gas prices, although you have to compare that to what penetration of gas is going to do, and it’s really a guess at this point. So it could be up a little bit or down a little bit, my guess is it is going to start up a little bit because of the strength with what we talked about with September and Katrina from last year, and we’ll see how the rest of the quarter goes. The impact from increasing executive membership should still be a small hit to reported gross margins, but less than the 10 basis points last year. LIFO again right now, we’re only a month into the year of course and with big deflation in gas and really nothing to speak about inflation area in the rest of the business, a little bit needs, a little nuts but nothing dramatic, and again it’s only four weeks of the fiscal year so far. So LIFO was an assumption, my guess is zero at best, slightly negative at worst. We think overall our core merchandizing group -- again food sundries, hard lines, soft lines, and fresh foods -- should be okay. We still have the challenges of electronics as well as we want to see what are the sales trends and what the economy does this upcoming year. Before we go into SG&A, in terms of ancillary businesses, we ended the year with 401 pharmacies, 452 food courts, and 450 one-hour mini labs, 442 optometry shops, 9 copy centers, 196 hearing aid centers, and 250 gas stations. These businesses are generally doing fine, no big issues, we’ve talked about gas and you know what happens when the price of gas goes up and down. In total for the fourth quarter our ancillary businesses comp sales were up 20%, up 8% without gas. Moving to SG&A, our SG&A percentages in fourth quarter over fourth quarter were lower or better by 1 basis point, coming in at 9.58% this year versus 9.59% of sales in last year’s fourth quarter. Again, quickly jotting down a few numbers here, the line items would simply be operations, central, stock options, and total. We’ll just start for the last couple of quarters in third quarter and the fourth quarter and for the year. The plus means it’s better or lower, so plus is good here. Operations in the third quarter ’06 were +8 basis points, central +3 basis points, stock options -3 basis points, total up 8 basis. So year over year, again comparing apples to apples percentages based on that small reclassification, was better by 8 basis points. In the fourth quarter ’06, operations was higher or -1 basis point, central was +7, stock options were -5, for a total of +1 or slightly better, year over year better by 1 basis point of SG&A. For the year, +5 basis points in operations, +4 central, -5 options, +4 year over year. So reported SG&A year over year was better but lower by 4 basis points. In terms of a little editorial on the filings, operations as you see here showed a detriment of 1 basis point year over year; however, about 6 basis points of it is the fact that we internally hit our bonus numbers this year, which impacts about 2000 people, adding about 1000 people this year. So we have about 2000 people this year and that was about 6 basis points year over year as last year we didn’t hit all the goals. So that’s about 6 basis points of that. Also, we benefitted in lower fourth quarter in SG&A in improvement of our largest expense category payroll, which improved year over year by 7 basis points. Of course, the chunk of that essentially is that same 6 basis points. Finally our stock option expense which was 5 basis points year over year, going forward we don’t expect to see that positive comparison year over year but unlike the last four fiscal years, ’03, ’04, ’05, and ’06 since we began expensing options this has been a constant drag on year over year SG&A comparisons. They really should be essentially flat going forward. In terms of SG&A outlook for ’07, we could be helped by slightly lower expense percentages in payroll benefits and worker’s comp. Really the big question is sales trends and where those go over the next year, not unlike what I said on the August 30th call and what we said at the end of the third quarter as well. With respect to benefits and worker’s comp, as you know we’ve seen some good improvement in those numbers over the last two or three years. In terms of benefits, there were some changes we made in late calendar ’03 really impacting beginning in calendar ’04. We’re near the tail end of those benefits, should get a little more this year. With regard to worker’s comp the big issue there was changes in legislation in California’s worker comp laws which was hurting us for a few years if you recall but started to benefit us starting mid calendar ’05. We’ve really seen a lot of that benefit already, maybe get a little bit more this year but not much. On terms of income pre-opening expense, last year the fourth quarter was $10.4 million or 6 basis points, this year $15.1 million or 8 basis points, so $4.7 million higher and 2 basis points higher year over year. No big surprises here. Last year in the fourth quarter we had 6 openings, this year we had 9, and of course this year we also had plenty going on in the beginning of the first quarter some of which pre-opening falls into the fourth quarter, probably on a relative basis a little more this year than last year. In terms of provision for impaired assets at closing costs, last year in the fourth quarter we had $6.6 million charge. Looking back at my notes from last year, I mentioned that about $3.9 million of that was a little bit of an anomaly related to the closing down of some minor food manufacturing businesses we had. So that was 39 of the 6.6, about $2.7 million was the rest of the provision. This year in the fourth quarter the number was $1.6 million. Operating in the fourth quarter was up 10% year over year from $467 million last year to $514 million this year, an increase of $46 million. The yearly operating income line reported interest expense was lower year over year with fourth quarter ’06 coming in at $3.2 million, a little less than half of the $7.3 million of last year’s fourth quarter. This of course reflects both the June 15, 2005 pay off of $300 million debt amount and lower interest expense on a convertible debt as more of our holders converted into our dividend paying common stock compared to the way in the money convertible debt instrument. Interest income and other was a bit better, higher year over year by $5 million in the quarter, up from $38.6 million last year to $43.8 million this year. This $5 million higher income figure was due to higher interest rates being earned on our investments, somewhat offset by slightly lower investment asset balance as we continued to repurchase stock. So, overall our pre-tax income was up 11% year over year in the quarter from $498 million last year to $555 million this year. In terms of our tax rate, I recall in the fourth quarter ’05 our tax benefitted due to some usual income tax credit and the amount of approximately $34 million or $0.07 a share and for all of ’05, for the year, a little over $70 million in related credits, which impacted all of fiscal ’05 by about $0.14 a share. In the fourth quarter ’06, as you recall on our August 30th conference call and our press release, we indicated that this year’s fourth quarter tax rate would be negatively impacted by about $14 million but since that time other items have essentially offset those negatives. An example would be just a couple of weeks ago we received a letter from a foreign taxing authority saying that our position where they previously assessed us for something, therefore we continue to accrue for it and the total amount in U.S. dollars was about $5.4 million to the tax rate. We received a letter just two weeks ago and again it’s related to several years of history here that they agreed with our position. So, normal adjustment just came since August 30th and we had a few of those happening. In terms of our effective tax rate going forward, again I’m still going to assume somewhere above 37%, 37% to 37.5% to start off the year, although one could look at the prior couple of years and taking the leaf out of these big adjustment we’ve experienced something slightly less than that. For a quick rundown of our balance sheet, again this will be part of the Q&A that’s posted by noon Pacific Time on our website. Our cash equivalents at September 3rd is $2.833 billion, inventories $4.569 billion, other current 801, total current assets $8.203 billion, net PPNE 8564 billion, other assets 699, total assets $17.466 billion. On the left hand side short-term debt of 350, that of course includes $300 million that will come due this spring, which is another small debt instrument we had out there from I think from five years ago. Accounts payable $4.581 billion, other current liabilities $2.865 billion, total current liabilities $7.796 billion. Long-term debt 215, which is principally the remnants of our convertible debt issue. Deferred and other is 248, total liabilities $8.259 billion, minority interest is 63, stock holders equity is $9.143 billion; for the right hand column also totaling to $17.466 billion. Balance sheet is strong, arguably we’ve seen a little reduction in cash with the stock buybacks, plenty of financial strength. Accounts payable as a percent of inventories on a reported basis is 100%, down slightly from 105% a year ago. That includes of course accounts payable related to non-merchandize for all construction we have principally. If you took out that and looked at just merchandize payables, a year ago the number was 87%, at year end this year 83%. So still 83% of our trade inventories are being financed, slightly taking as much anticipation and early payment as we can for a discount our accounts payable as a percent of inventories were being funded with trade payables by 83%. Our average inventory per warehouse a year ago at the year end was $9.293 million. This year it was $9.975 million, or up about 7%. Probably a little piece of it is the fact that it’s a week later; last year it ended a few days further behind Labor Day as we built up for the holidays here. In terms of where it is, about 60,000 is due to the continued weak dollar as a result of FX. We have about $165,000 higher balance in consumer electronics, within about 10,000 of the same type of delta at the third quarter end. Same with jewelry and toys, about $130,000 higher year over year, again the delta year over year at the third quarter end was about the same, I think about $10,000 different. No real inventory concerns at this point. In terms of CapEx, in ’06 we spent $1.2 billion. This figure by the way included the fourth quarter of ’06 of $455 million, some of which of course relates to ’07 ramped up level of openings. So you’re always going to have some carry over but again as we’ve ramped up our expansion probably more than a year ago. I would estimate that our ’07 CapEx will be higher than last year’s figure, and I’ll give you a wide range here because a lot of it depends on timing in the fourth quarter of what we’ve got going on in the first quarter and beyond in fiscal ’08, but we would estimate probably a single digit estimate of $1.5 billion with a range of $1.4 billion or $1.6 billion, up from $1.2 billion in ’06. In terms of dividends, this past May we increased our quarterly dividend from $0.115 a share per quarter to $0.13 a share. On an annualized basis this $0.52 per share annual dividend represents it across the company of about $240 million. In terms of Costco Online, it continues to do quite well. For the fourth quarter it showed a sales increase of 53% and 62% for all of fiscal ’06. Sales for ’06 were $902 million, again up from $558 million last year. E-commerce is profitable and needless to say we have lofty goals for this year as well, to do well over $1 billion. In terms of expansion, as I mentioned in the beginning of the call, the year just ended we opened 27 net new units, 25 consolidated, plus 2 in Mexico. This fiscal year I’m going to give you a single point estimate of 35 net new units plus 2 in Mexico, so 37 including Mexico, plus probably two relocations, maybe one more but I’ll assume two at this point. I think on August 30th we mentioned that by September 3rd and the calendar year end we plan to open 20 units. It looks like that’s going to be about 18, maybe even 16 or 17. That’s simply three or four units with various construction delays and zoning issues moving into the first few months of calendar ’07; no big deal there. We would expect to open a net of 12 in the first quarter, a net of 6 in the second quarter, a net of 7 in the third quarter, and a net of 10 in the fourth quarter plus that would equal a single point estimate of 35 and plus 2 in Mexico. Now if you asked us, we’d probably 35 to 40, but as you and I know as we give performance of the following year, so 35 I think is good as a single point estimate. In terms of ’08, my guess is the number would be a little higher from there, perhaps 5 more. In terms of our stock repurchases, we really began in earnest back in June ’05. Since that time we repurchased approximately 40.4 million shares. I think that’s about 10 million more shares than we repurchased as of the last conference call at the end of May, so we’ve spent a little over $2 billion and about 40.4 million shares with our current authorizations out there, which authorization expire in November ’07, we still have authorizations of $2.49 billion. Finally, before I turn it back to Amy for questions, a little direction for the first quarter ’07 and for ’07 overall. Before today’s announcement, the first call was of course $0.50 for the first quarter of ’07 and what I’ll say is we’ll give you a little wider range than we normally do, probably something in the 48% to 51% range and again we’re hedging our bets and want to see how the economy continues through Christmas here. For the year first calls are at $259 million and again I’ll put probably about $0.15 per share range on that with it SKU’ed a little lower than higher perhaps at $250 to $265 range. Again, it’s a long year ahead of us, it’s a strange economy out there, and as we’ve tried to do in the last few quarters we’ll try to look at it optimistically as we run our operation but cautiously as we view our numbers. With that I’ll put it on the speaker phone here and turn it over for Q&A. Amy…

At this time, I would like to remind everyone, if you would like to ask a question, press * then the number 1 on your telephone keypad. We’ll pause for just a moment to compile the Q&A roster. Your first question comes from Chuck Grom with JP Morgan. Chuck Grom, JP Morgan: Good morning Richard, thanks. You’re on pace, like you said 35 stores next year, could you remind us of the new versus existing store mix and historically what the productivity is for both of those type of openings? Richard Galanti, Chief Financial Officer: I don’t the exact number, I’m willing to bet it’s 90% but recognizing as we open a sixth unit next month in Atlanta…it’s not new anymore a 14th unit in Chicago this coming year. So some of what was new is not, 90 is probably a little low frankly. In terms of sales productivity if you go back to the ’01 and ’02 when we opened a lot of new market units in several new states in the U.S., the first 52 weeks of this new market unit had probably averaged somewhere in the low 50s, whereas an existing market unit today might start off in its first 52 weeks in the low 100s, 110-120 perhaps. If you net cannibalization out of that existing market, our best guess is probably somewhere around 80, and we’ve had extreme examples of units doing 150 plus in their first 52 weeks, which again net of cannibalization might be 110, but on average probably a net of 80. Of course in an existing market unit you generally have a little higher margin than the new market, but frankly there are not as many new market units today. Chuck Grom, JP Morgan: Okay great, then can you elaborate a little bit more on your comments that sales trends improved towards the end of the quarter and more specifically what you’re seeing today in some of the more discretionary categories? Richard Galanti, Chief Financial Officer: I don’t recall saying sales trends improving at the end of the quarter. We did say at the end of the quarter… Chuck Grom, JP Morgan: Well, just in the press release you say the last five weeks got a little bit better and that’s the reason why you think it could be about a couple of pennies, exactly what you’re saying, and I guess more importantly what you saw in September related to some of the discretionary categories. Richard Galanti, Chief Financial Officer: What we said in the press release on August 30th when we guided downward, what were the deltas that caused us to do better than that? Again, there were some positive tax things occurring as well as the negative you mentioned that included some year end accruals, expense accruals being better than planned, but we also indicated that until we actually close the period, which was 10 days later, because we had one more week of the fiscal period, it was a five-week period, you never know how a $5 billion period is going to come out and we did better than we planned, even though we have a pretty good handle on it, until it’s over it’s not over. So that was really more of the earnings trend in the month of August. Again, in September…I think some of you have reminded me, we warned everybody a lot about it, but with the Katrina issue you had this China impact in September and to some extent in October. I think our reported comps in September were 11 and October were 10. So, again looking at just the bottom number for September over September and October over number, we’ve tried the best we could, take out that SKU’ing due to the craziness with gas and the improvement that helped last year. What I did mention today was even if you take that out, my guess is where we showed in September a 4% comp versus this month early August at 8%, the real change for month and month is not 4 percentage points, it’s probably 1 downward a little bit, not unlike what we’ve seen out there. Chuck Grom, JP Morgan: Okay, and then last question was just on the TV returns, can you walk us through how the accounting works on that, is it entirely accounted for in the gross profit margin line, is there any SG&A, and can give us an update on the concierge test? Richard Galanti, Chief Financial Officer: It’s entirely a margin, of course there’s SG&A because somebody has to handle it at the front desk but that’s minimal. The concierge test is something we’re doing in Southern California, and it’s really two fold. First part of the roll out is simply having an 800 number where somebody can call and get quick, high quality advice, a lot better than frankly some of the underlying manufacturers if you call their 800 numbers. Jim is here so he knows a little more about it than I do. James D. Sinegal, Chief Executive Officer and Director: We’re in the process of expanding that to a greater portion of California. We would hope that by the early part of the first of the year we would have that in all of California. Chuck Grom, JP Morgan: Okay great, thanks, good luck.

Your next question comes from Deborah Weinswig with Citigroup. Deborah Weinswig, Citigroup: Good morning, Richard. Once again on the return policing in the consumer electronics area, can you talk about any update there based on what you saw this quarter? Richard Galanti, Chief Financial Officer: Well, in terms of returns again it gets more attention because we mentioned it. Again as we said in August, it was exacerbated perhaps a little bit over the summer with continuing declining prices and with some of the passport items. What we have said time and again is the last thing we want to do is change the return policy. That being said we’re trying other things first and we have not made any decisions. We continue to talk about it and when we know you’ll know. I’m not trying to be cute there, it’s just that this concierge service is addressing some of the issue, not all of it. Part of the concierge services is also not just answering the phone and helping somebody through something, but also offering an installation service, something that we’re already doing online with electronics. Deborah Weinswig, Citigroup: And right now is there opportunity for your customers to let’s say obtain additional information online or is that an additional opportunity to maybe stem some of the returns as well? Richard Galanti, Chief Financial Officer: Well, I’ll have to get back to you on that. I’m sure there is an opportunity online. I think we’re taking some of the burden off of the manufacturers. They like it, we like it because these are people that are level 2 people, these are people that are higher so we can answer hopefully more of your questions on the first round. And by the way, I think it was about 40% of the calls we are getting for televisions, the other 60% for everything else. I’m sure some of you know first hand, when you’ve got yourself or your kid an iPod “how the hell do I make this thing work?” It may simple to some but it’s not to many. Deborah Weinswig, Citigroup: I’ve been there. Then last question, can you talk about inflation area or deflation area categories different than what you had expected in the quarter? Richard Galanti, Chief Financial Officer: I’m sorry what was that? Deborah Weinswig, Citigroup: Inflation area, deflation area categories in the quarter. Richard Galanti, Chief Financial Officer: What I have in front of me is really for the whole year. From what I remember it’s not changed that much. We’ve seen some continued increases in the prices of beef and nuts. On the deflation area side everything ends with LCD or ultra or plasma or megabyte for the most part or gas in the first quarter, a very minor inflation in the fourth quarter I guess, and expect a deflation in the first quarter. It’s a big negative in September; that will all subside, but my guess is it will continue to be negative. Deborah Weinswig, Citigroup: Okay great, thanks so much.

Your next question comes from Jeff Stensen with Cleveland Research. Jeff Stensen, Cleveland Research: Richard, could you talk a little bit further about the gasoline as far as the gross margin impact it had last year and kind of what that delta should be this year, because a look at the numbers by the time we get to the end of your fiscal first quarter gasoline prices if they stay where they are should be fairly flat with last year? Richard Galanti, Chief Financial Officer: You know it’s really hard to predict. I’m not trying to be cute here, even our guys from the gas department here from one day to the next can’t tell you which direction it’s going to go. Last year I know in the first quarter and in the second quarter we indicated that it was the penetration of gas, not the margin of gas earnings. In the fourth quarter it tended to be a little above. Yesterday I read that it’s going to be a mild winner, so if it’s a mild winner that helps reduce gas prices, which is a positive, but it’s really very hard to predict Jeff. Jeff Stensen, Cleveland Research: And the penetration, Richard, if we were to look at the end of the fourth quarter this year versus last year, what do those numbers look like? Richard Galanti, Chief Financial Officer: I think penetration in the fourth quarter ’06 versus fourth quarter ’05 was clearly up probably over 100 basis points. I don’t have the exact number in front of me. My guess is in the first quarter it’s going to be down. Now, the bad news is it is down and it affects comps and it affects sales. The good news is they help profits a little, but we had a pretty strong first quarter a year ago margin wise and profitability wise, so let’s see. We started off in the first few weeks okay, but as I said at the end of the third quarter that we had a first couple of good weeks in gas margins but that can fleeting and it was. Usually you do get the cyclical benefit between extreme heat and cold seasons here, so September and October should all things be equal in the world with the craziness, it should be okay. Jeff Stensen, Cleveland Research: Richard, one followup question, if you look at the change to the restricted shares, does that change at all from the impact from an accounting standpoint on the numbers? Richard Galanti, Chief Financial Officer: Not really. Historically when we granted options we used the Black/Scholes model and invested 1/5 a year, so the impact would go in 1/5 a year. The formula is if a recipient historically received “x” options, they’re now going to receive 1/3 as many RSUs. On a Black/Scholes model relative to where the stock price was on the date of the grant, and it’s on the date of the grant that you determine even over the next five years what you’re going to book for book purposes, the impact is about the same, because typically it was the Black/Scholes expense if you will, calculated expense, was about 1/3 of the stock price on the date of the grant with RSUs as the stock price on the day of the grant. They can be up or down a little bit but not much. Jeff Stensen, Cleveland Research: Thank you.

Your next question comes from Gregory Melich with Morgan Stanley. Gregory Melich, Morgan Stanley: Hi, I have two questions, one is on the SG&A. Richard, you mentioned that the worker’s comp and other expense accruals was one of the things that changed in the last five weeks, was that all in the SG&A ops, was that the improvement in payroll basically? Richard Galanti, Chief Financial Officer: Actually it’s not payroll but is it an ops. I’ll give you a silly example. In the company we accrue based on salary dollars, we accrue based on vacation accruals, sick leave accruals. Use vacation for a minute; an employee in the U.S. earns one week of vacation during their first year of employment. So during the year we are accruing a week of that. We’re similarly accruing a certain number of days for sick leave and what have you. In years two through five of employment we accrue two weeks, so we’re accruing two weeks during their year of payroll, and then in years six through ten three weeks, and beyond ten four weeks. This is a small piece of this number but in central Canada with the oil boom going in Alberta, we had a lot more turn over in those locations. When you’re having turn over you’re having people that were leaving high paying jobs to get hourly paying jobs, double and triple and more by traveling hundreds of miles north and working for the next year or two. The short-term impact for us is we didn’t change dramatically our accruals but we picked some serious dollars over the last year. Now we look at these things on a quarterly basis, but the numbers are so big now with thousands of employees, something a little like that can be a couple of million dollars. That’s just one little example. Gregory Melich, Morgan Stanley: So, when you say payroll is better by 7 basis points that is basically… Richard Galanti, Chief Financial Officer: The payroll better by 7 basis points, a chunk of that was the fact that our bonus accrual, and I’m talking about management bonus accrual for about 2000 employees company wide, there’s a company half and an individual half. When things are good all of the company half is paid and most of individual half. When things are good but not great a good chunk of the employee half is paid and anywhere between all and none of the company half is paid. This year relative to our original budget we did better than we did in ’05. Gregory Melich, Morgan Stanley: And when were payroll hours up just to look at it another way? Richard Galanti, Chief Financial Officer: I don’t know, if you want to call me… Gregory Melich, Morgan Stanley: This is one for Jim because we’ve got him there, your balance sheet is very strong and I’m just sort of curious as to Jim your thoughts on what sort of capitalization or debt levels do you think the company should have or cash levels to run the business effectively? James D. Sinegal, Chief Executive Officer and Director: Again, we’re going to continue to ramp up the business. Our intention as I think we’ve mentioned to you in the past is to open more warehouses than we have in past years. This year Richard showed you that including Mexico we would expect to have about 37 warehouses. We would hope that next year that number on the basis of what we see in the pipeline at the moment would be exceeding 40 warehouses. Obviously that’s gong to determine on deals getting done and the fact that we can get permission to do business in those places, but that’s where we intend to spend what money we have available and the cash flow we have available. Gregory Melich, Morgan Stanley: And just given that there’s been a lot of other companies really looking at being public or private, is to run your business well and help your numbers, is it better to be a public or a private company, what’s your take on that? James D. Sinegal, Chief Executive Officer and Director: I have a long protracted answer on that, but let me just tell you that we have no trouble with the system. We think the system works and being a public company means you have disclose a lot more and somethings you can’t do, but… Gregory Melich, Morgan Stanley: You’ve got to deal with people like us, which can sometimes be a pain. James D. Sinegal, Chief Executive Officer and Director: Yeah, there are a lot of things that don’t work perfectly but on an overall basis I think we feel pretty good about being a public company. Gregory Melich, Morgan Stanley: Great, thank you.

Your next question comes from Todd Slater with Lazard Capital. Todd Slater, Lazard Capital: Thank you very much. I’m just trying to understand the apples-to-apples EBIT number for the fourth quarter this year and last year. So, if we take out the LIFO charge last year from…or we add back the LIFO charge to 468 we get about 475, is that a fair sort of number that doesn’t have a lot of noise in it from last year’s fourth quarter? Richard Galanti, Chief Financial Officer: Yes, you take that out. Todd Slater, Lazard Capital: So this year there was no LIFO adjustment, right? Richard Galanti, Chief Financial Officer: Right. Todd Slater, Lazard Capital: So is the 514 then is a reasonably accurate assessment of the operating line this year or is there any other noise in it; I mean there was an extra week in there, right? Richard Galanti, Chief Financial Officer: There was an extra week. Other than that above the operating income lines there was no lease accounting issue other than LIFO. Todd Slater, Lazard Capital: How much do you think the extra week added in EBIT dollars? Richard Galanti, Chief Financial Officer: 150 seconds. Todd Slater, Lazard Capital: Well, given the fact that there was some gas benefit in the margin there at the end, would it have been a little more than average? Richard Galanti, Chief Financial Officer: It’s so hard to say, Todd; I mean if you think about the 17-week fourth quarter, on the one hand an extra week is 6% of the weeks. On the other hand a chunk of fourth quarter every year is all your accrual drops and shrinkage, and we take inventories mid year and year end. You’re talking about tens of millions of dollars. On a year over year basis there should be big deltas because we’ve done the same way for 20 years. Todd Slater, Lazard Capital: Okay, so 514 is a reasonable number to grow off for ’07? Richard Galanti, Chief Financial Officer: Well, I would hope so, the direction for the year in terms of earnings growth is anywhere from a high single digit to a mid teen digit number. We’ve got to wait and see. Todd Slater, Lazard Capital: Okay, so if you take out the noise from both numbers I get about a 25 basis point decline in operating margin despite an 8% comp in the quarter, is that a sort of a reasonable way to look at it? Richard Galanti, Chief Financial Officer: Are you talking about for next year? Todd Slater, Lazard Capital: No, just for the fourth quarter this year versus last year, I’m just trying to understand sort of what the leverage was in the quarter; you know earnings just simply divided into the revenues. Richard Galanti, Chief Financial Officer: Well, again, the big difference I think to start with is this membership issue that I talked about early on. Because of an extra week, the same exact thing happened five years ago in that quarter. In fact we were looking at it and were wondering what happened in that quarter, because membership fees as a percent of sales had been so consistent for so many quarters, how could it all suddenly be down 14 basis points. Well in fact it’s not. It is on a book basis, you’re going to see that, so more than half of your thought there is thrown out the window. Todd Slater, Lazard Capital: Okay, it’s only about half that much. Then when you’re looking forward in ’07, are you expecting operating leverage on the operating income line in ’07 versus ’06, what kind of a comp do you need to generate to get operating leverage do you think? Richard Galanti, Chief Financial Officer: It’s hard to say Todd. While we look at our own numbers and our own budgets for the whole year, which is within that range of that 250-265 if you will, that implies a host of flat pre-tax earnings, up a few basis points, down a few basis points; where it is on there who knows. Todd Slater, Lazard Capital: I want to go above pre-tax, I want to go the operating line, take out the interest expense chain issue and stuff like that. Richard Galanti, Chief Financial Officer: Well, you know this is more detailed and I’d be happy to chat with you offline. Everyone of you has a different model with a list of different things. The interest expense and income should be a small pickup on basis points as it continues to be. That impact was reduced by continued back buy stock as we’ve continued to do, although that helps your earnings per share growth rate, so that’s kind of a wash. Beyond that there’s the challenge of running the business, and a lot of it depends on sales as you mentioned. Comps are 6 instead of 5 or 4 instead of 5, different numbers. Todd Slater, Lazard Capital: Okay, so do you have a sense of what the sensitivity on leverage on the operating line, what kind of comp growth would you need to get some basis points? Richard Galanti, Chief Financial Officer: Well, I stopped predicting that about six years ago, because again there are so many moving targets. What we’re best at predicting sometimes is the bottom line and sometimes you can get to the bottom line in three different ways based on which basis points. As you will know on $60 plus billion in sales 10 basis points of anything is a lot of sense of share. Todd Slater, Lazard Capital: Okay, are you going to change in all your accruals for LIFO for ’07 versus ’06 how you’ve done in the past or how are you looking at it now? Richard Galanti, Chief Financial Officer: We really haven’t changed the way we’ve done it for years. I think the difference is we had some LIFO charges for a couple years, we’ve also had LIFO credits going back a few years ago. My best guess, again based on 28 days, is that it will be 0. We can hedge ourselves a little bit. There’s always concern about inflation, but that’s always muted by the fact that the economy isn’t so robust. We don’t have any economists here. Todd Slater, Lazard Capital: Right, but I’m assuming you accrue it more than 0 or is that incorrect? Richard Galanti, Chief Financial Officer: We accrue it, we have six LIFO pools, we look at them every month relative to where it was at the end of the prior month, and we’ll make a small amount of accrual at each quarter end if we feel warranted, recognizing whatever you do mid year at the end of fist quarter, second quarter, and third quarter is going to still be based not only what’s actually happened but what you think it’s going to be going forward. So, if our buyers have knowledge that prices of plastic goods have gone up a lot but there seems to be a glut now and they’re going down, you might mitigate that a little bit. It’s kind of easy to figure out right now simply because there’s not a big change either way. Todd Slater, Lazard Capital: Okay, great.

Your next question comes from Virginia Genero with Merrill Lynch Virginia Genero, Merrill Lynch: Thank you, just three quick ones if I may. First a dumb question on the membership fee; if you basically have 16-week fourth quarters, you have four of your four-week periods, why doesn’t membership income always grow faster in the fourth quarter? You know what I mean, how come it’s always sort of consistent, I would have expected it to be up if it’s been running up this year kind of 10%, I would expected it would have been up 13% in the August quarter? Richard Galanti, Chief Financial Officer: You’re always comparing to the like number of weeks the prior year, and if you looked at why with an extra it isn’t higher, is the percentage surprising relative to the third quarter, it gets back to this impact of the 53-week year and how deferred accounting works. Keep in mind we generate monthly renewals and not four- or five-week renewals. Virginia Genero, Merrill Lynch: Understood, but I guess I’m asking…forget the 17th week, but I’m just talking about in any August quarter I feel like your membership fees should be up, basically they should be growing about a quarter faster than they grow in the prior three quarters because you have this extra four-week period? Richard Galanti, Chief Financial Officer: I think part of it has to do also with the timing of renewals. If you look back historically we have more renewals in the fall than we have in the summer. The summer is seasonally slow. Historically, I don’t have the exact number but I bet you half of our units have opened between Labor Day and Christmas because anything that’s possible…ideally you’d like to open every location a month before Labor Day so it has the benefit of back to school Labor Day, Thanksgiving, Christmas, New Year, every holiday, and you can imagine. But it does grow more in the fourth quarter, but I think that may be a little of it. Again, I’m not trying to be defensive, if you want an answer to your question I’ll give you a call next week. This other issue we talked about membership fee and so we sat down and looked at, it’s kind of counter intuitive. Virginia Genero, Merrill Lynch: Second question if I may, are you seeing any impact on your pharmacy business in Florida, I don’t think you guys have any type of locations, but from Wal-Mart’s the generic initiative is there? Richard Galanti, Chief Financial Officer: By the way it’s Florida wide now, we’ve matched them. Keep in mind these generics I think they indicated that it represented about 30% of the pills they sell, which means in my view it’s less than 15% of the dollars if not even lower. The same thing with us, it’s a small piece of the action although we’re matching it. Where you can mitigate that issue is they’re doing it on 30-day supplies for $4, meaning a three-month supply would be $12. We have three prices, 30-, 60-, and 90-day supplies with the cheaper price per pill at 90 days, and in some of those instances we’re actually cheaper than $12 on those and others we weren’t and we’re matching them. Some of the negative impact to us has already been in for a year now with Medicare Part D, different issue, but we really haven’t seen a big impact. If you had a guess, what is the negative impact if it impacted us, maybe it’s a penny a share, but that’s a wild guess. Virginia Genero, Merrill Lynch: That’s great, and then lastly sir, you started to comment about the outlook for SG&A and I would think that with the acceleration in openings this year and what it sounds like, is going to be a like increase in fiscal ’08 that you will face some SG&A pressure as those stores launch at higher SG&A rates effectively? Richard Galanti, Chief Financial Officer: That’s correct; however, in terms of that rate of pressure it’s diminishing. In ’05 we opened 15 or 16 locations, in ’06 about 25 consolidated, in ’07 about 35; you know 25 on 15 is greater than 35 on 25 and 40 on 35 is less than that. Yes, there is continued pressure but that’s the nature of our business. One of the things that you don’t have…one thing that’s pressured our SG&A over the last couple of years is option expense. That’s something that essentially goes to zero, it doesn’t help you but it stops hurting you. As I mentioned already we’ll probably get a little benefit still from worker’s comp and benefits related things but not a lot. So, yes, I think you’re right, probably a little less extreme than you think. Virginia Genero, Merrill Lynch: That’s fair, thank you.

Your next question comes from Mark Husson with HSBC. Nora Khan, HSBC: Hi this is Nora Khan in for Mark Husson. You were cycling some difficult comps early in the quarter and I was just wondering kind of the state of the consumer in your opinion and what trends you’ve seen in higher ticket discretionary items, particularly has that changed, have stock prices have started to come down at all? Richard Galanti, Chief Financial Officer: I don’t know if we seen it that quickly and that fast. The thing we mentioned a month ago was that again this was more logical to us. You know where we saw some weakness were some areas of big ticket discretionary like some of what we call collectables, you know the $400 crystal candy dish. Interestingly not as much of an impact on things like diamonds; maybe a little more impact on some watches. Again, and I think any consumer electronics company will tell you, still not a lot of impact in electronics just because the stuff is still so popular, every day they’re coming out with something new. Nora Khan, HSBC: Okay, and in particular in California where we’ve seen kind of the slow down in housing prices, the region hasn’t been on one of your strongest comps on a monthly or quarterly basis for a while, what are you seeing there, are the stores just aging or is there something else going on? Richard Galanti, Chief Financial Officer: It has been as long a period of time and we’re probably not smart enough to figure that out yet. The single biggest reason is our cannibalization is probably most impacting California. I don’t have the exact number in front of us, but from a company basis as an example in September cannibalization was 175 basis points and in August was 155, so call it 1.5 to 1.75 points, I’d bet you in California it’s double that. Again, you’ve got high volume units and that’s the short-term bad news. A year later you’ve got not only the new unit going into the comp for the first time but you have the two cannibalized units, thereby are being rejuvenated. So that’s part of doing business. Nora Khan, HSBC: Okay, and in terms of your merchandizing margins, have you seen any improvement in sort of your buying gross margins, were you able to get different sourcing? Richard Galanti, Chief Financial Officer: I think that we’ve seen that every year honestly for 20 years. Our buying power probably just looking at our sales dollars understates our buying power because we’re perfectly happy to have one brand over another one; we’re not going to carry off three brands of something, and the additional pressure if you will on prices related to private label. Put another way, the issue of cost historically has been, “We know you’ve got great buying power and it’s improving every year, how much are you going to give to the customer?” And historically we give most of it to the customer. We’ve shown that we’re prepared to do that to drive our business. Nora Khan, HSBC: So no kind of near term changes? Richard Galanti, Chief Financial Officer: I don’t think there is any. Certainly as we continue to increase the penetration a little bit of private label that helps a little, but a lot of the low hanging fruit has occurred over the last 10 years as we’ve gone from hardly any private label to 15% or 16% of our sales. Nora Khan, HSBC: Great, thank you.

Your next question comes from Mark Miller with William Blair. Mark Miller, William Blair: Hi, good morning, I was wondering how much you think you got in the way of incremental in-store traffic in fiscal ’06 with the surge in gas prices? My understanding from club managers is that about half the people that go to the gas station go into the club to make a purchase, is that roughly the right range and how much more difficult to do you see the comp hurdle in fiscal ’07 from that point? Richard Galanti, Chief Financial Officer: Clearly if you look back at the 11% comp in September, at the time we guesstimated there was probably a couple of extra percentage points related to gas itself and at least another percentage point related to people coming in the store. Now one over two happens to be 50%, and I’m not suggesting I know that exact number off the top of my head. A few years ago when we looked at what would happen when we added a gas station, we felt that for every dollar of gas when gas was a lower price it added maybe $0.40 in store. Anecdotally we always see not only more frequency but new sign ups when we’re on a local news station saying “Hey, where’s the best place to buy gas?” It’s at Costco. During the month of September it was on every new station and every town three times a day and certainly that helped us. My guess, it’s probably not more than half, it’s probably 40% or 50% as good a guess as anybody. Mark Miller, William Blair: So I think you’re implying that in September that hurt the underlying comps by about 3 percentage points from the prior trend, what are you expecting here in October; you alluded to more of a difficult comparison there? Richard Galanti, Chief Financial Officer: Well simple math would be we were 11 in September and 10 in October, so call 2, center 3. By the way Jim mentioned that our gas stations typically are open about five hours a day longer than the warehouse, as we have employees starting a few hours before in the bakery and stocking and receiving goods, and usually they are a little bit afterwards, the gas station stays open longer. So, during those five hours we don’t get the benefit of frequency. Mark Miller, William Blair: In your range for fiscal ’07, 9% to 15% EPS growth, what roughly would be the underlying comp range? Richard Galanti, Chief Financial Officer: It’s really hard to say. I don’t know the guesstimate of the comps could be this year, are in the mid single digits. I think it’s safe to assume that somewhere in the middle of that range is that number, but I’m not sure if it’s in the high end or low end of that range. There are so many moving parts. Mark Miller, William Blair: Okay, my final question is on the cannibalization, it’s come up a little bit over time and I guess I’m wondering in your new store development plans do you assume cannibalization more or less stays the same, do you assume it comes up and if it were to come up with that impact you’re thinking it all for club growth? Thank you. Richard Galanti, Chief Financial Officer: No, in a way the more cannibalization the better. We’re opening more units. Over the last three years we’ve essentially opened existing market units, 80% plus. If you think about it, if we’ve gone from ’05 opening 15-16 units to ’06 opening 25 to this coming year opening of 35, that’s going to increase the cannibalization number from 50 basis points to 120 to 180, it could very well be from now approaching 2 or if not a little over 2. That’s okay, I don’t think that’s going to impact what we do. If we could get 15 sites opening tomorrow in Los Angeles it would really impact our cannibalization that we would do it in a second. The comfort of the reality is anything can happen that fast. It’s hard work to get these things open and I think a better way to look at it is simple math would say the number will continue to inch up a little bit, so where it’s been 170 basis points, it’s going to probably inch up about 200, and then it will probably flatten out and then come down a little bit once we flatten out. Mark Miller, William Blair: Thank you.

Your next question comes from Bob Drbul from Lehman Brothers. Bob Drbul, Lehman Brothers: Good afternoon, Richard or Jim, could you just give us some of your thoughts as you head into the holiday season around the competitive environment or any major merchandizing initiatives that you’re excited about, new brands or anything that we should be looking for? James D. Sinegal, Chief Executive Officer and Director: Obviously it’s always a guess when you’re looking at Christmas. We can only judge on the basis of what we see selling at the moment, and the initial reaction to products like toys has been very favorable. On the other hand reaction to some of the trim items for holiday have been a little slower than we expected. So it’s kind of a mixed bag there. Toys are strong, the reaction to some of the winner goods that have come, the Cashmere sweaters and the outer wear has been very strong at this point, which would kind of imply despite the fact that we’ve had warm weather up here in north west and certainly in California and Arizona, but it implies that we’re heading into a pretty good season. So, at the moment we think Christmas looks promising, certainly more promising than we would have guessed five or six weeks ago. That could change very quickly, but with some of the things we see happening relative to electronics, relative to apparel and to toys encourage us. Bob Drbul, Lehman Brothers: Great, and just one final question from me would be, with respect to the consumer, have you seen a big change in response on couponing or anything sort of initiatives that you guys have been running throughout the clubs? James D. Sinegal, Chief Executive Officer and Director: No, it’s been running pretty much the way we had anticipated. There are times when certain categories become more important than others, electronics are always a very important category, but we’re in the process of having multi-vendor coupon that will go out this week and we expect that it’s going to be very well accepted. It all depends on the items you select. You select the right items you get good sales. If you make the wrong choices the sales are not so hot. Bob Drbul, Lehman Brothers: Great, good luck, thank you very much.

Your next question comes from Craig Harris with Seattle Post Craig Harris, Seattle Post: Good morning. Can you clarify for me how many stores you had opened at the end of the last fiscal year, and I want to make sure I’m doing my math right would that include 27 new units and you have 37 planned for fiscal ’07? Richard Galanti, Chief Financial Officer: We internally include Mexico since we operate from it. At the end of fiscal ’06 we had a 433 units consolidated into our operations plus 27 in Mexico for a total of 460. That was at the beginning of ’06. In ’06 we opened 25 in our consolidated area and 2 in Mexico, so we ended fiscal ’06 with 458 and consolidated it into our operations plus 29 in Mexico for a total of 487. So, as the fiscal year ends September 3rd we have 487. In ’07 our guess is it’s 35 to the 458, consolidated number and adding 2 or 3 to the 29 in Mexico. So if we added 37 to 487 we’d be at 524. Craig Harris, Seattle Post: So the 27 that you opened in ’06, was that a record at that time, was that a record for the fiscal year? Richard Galanti, Chief Financial Officer: No, I know in ’01 and ’02 we opened 32 and 29. I think the record that we remember most was in our fourth year of operations in fiscal ’88 when our base of 22 units we opened 20 that year and 15 or 16 in 12 weeks. Craig Harris, Seattle Post: The last question I have is I’m not quite clear on the statement you had in the release that talked about the grants to imprecision, I’m not clear what that means? Richard Galanti, Chief Financial Officer: I’m happy to chat with you offline, but basically there’s not a whole lot I can say other than what’s in the press release. Precision simply means is the committee, given that there was some lack of data in certain instances and precision in my view applies that you can’t calculate with certainty what it was. I think in the press release it stated that the committee felt the estimates based on a number that would overstate conservatively rather than understate the number. Craig Harris, Seattle Post: Here’s my last followup question. Considering that you were so open bout this in the press release, Jim talks about taking full responsibility that it did not limit the standards but it seems that nothing done was wrong, so I’m curious on the statement where Jim talked about it didn’t live up to the standards yet it didn’t seem that this was as huge of a problem as you’re seeing at other companies from Wall Street. Richard Galanti, Chief Financial Officer: Again, we take any issue very seriously as people have known us for 25 years, whether it’s a safety issue in the warehouse or it’s payment issue or it’s this issue. Certainly this is a very important issue, we don’t take it lightly. It certainly has gotten a lot of press in the last year with many, many companies out there. We feel it was handled like anything should be handled. You look at it, if you feel it’s something that is a potential issue you have outside people look at it, and again as stated in the press release we’ve gone through that process. By no means should the issue be diminished and Jim is here he can talk for himself. James D. Sinegal, Chief Executive Officer and Director: We always try to take the high road on anything we do, whether it’s with our customers or employees or products that we sell, and we continually operate on that basis and any time we don’t meet our own high standards we’re disappointed. Craig Harris, Seattle Post: Okay. Thank you. Richard Galanti, Chief Financial Officer: Okay, I’ll take one last question.

Your final question comes from Dan Binder with Buckingham Research. Dan Binder, Buckingham Research: Just a couple of quick questions; first on the TV cycle and the impact that you expect on gross margins going forward, do you have a rough sense of what that should look like as we move through this year? And then secondly given that the square footage growth is accelerating a little bit this year, do you have a sense of what the operating margin impact is as a result of that acceleration or is it 10 basis points with an incremental expense pressure between maybe lower expense leverage on those newer stores and pre-opening or is that too high? James D. Sinegal, Chief Executive Officer and Director: In terms of the gross margin pressure, we think there are some things that can be done to mitigate what our experience has been this past year. We’re very enthusiastic about what we can do with this concierge program and we think that we can do a lot better job in terms of educating our customers on these products. Someone mentioned earlier the fact that perhaps online information would be appropriate. We agree so we’re looking at all those types of things. So we have a pretty good feel that we’re going to get a grip on some of this stuff, and we’ll see as we move forward whether or not that indeed is the case. The fact of the matter is this is very complicated equipment and you all know you get lots of questions about it, many of you have been through the same thing yourself relative to hooking up the television sets. In terms of the issue relative to what happens with these new units, it’s pretty much a wash. Despite the fact that we have cannibalization when we open in infills, those units start out significant better and generate more dollars. So, opening a unit in Los Angeles area is going to be significantly more profitable and have better leverage than opening one in Columbus, Ohio or in Louisville, Kentucky where we’re going to be opening. Those will be tough relative to SG&A. We think that the infills, although they’re painful from a cannibalization standpoint, start out better and don’t have as big an impact on the overall SG&A. Dan Binder, Buckingham Research: Okay, and then the mix of infills versus what you would consider maybe newer markets, is that different than last year? James D. Sinegal, Chief Executive Officer and Director: Actually I think it is more infills this year than this past year. As we spread across the country there aren’t as many units, as Richard alluded to earlier when we go to Atlanta which was a new market, that’s no longer a new market. We go to Chicago or Minneapolis where we’re going to open this fall in Minneapolis and Chicago in the winter, those are no longer new markets for us; those are infills. Dan Binder, Buckingham Research: Okay, is it 100% infills this year? James D. Sinegal, Chief Executive Officer and Director: No, we still have the Louisville, Kentucky and we have Columbus, Ohio which are new markets. Certainly you could argue that Toledo, Ohio is going to be a new market for us, but by and large most of the other units, Vancouver…Nashville you could perhaps argue is going to be new because we only have one unit in the Nashville market that’s probably, need to fish in our file…Atlanta market, Montana, La Quinta, California, Quebec unit, all of these are existing markets, and one in Helena, Montana and you could say that’s new because it’s 50 or 60 miles away, but we’re very well known in Montana and we would absolutely consider that an infill. Dan Binder, Buckingham Research: And just in late August I guess you commented on the competitive environment heating up a bit, are there any significant changes there one way or the other? James D. Sinegal, Chief Executive Officer and Director: No I think it’s probably at the moment where it was in August or maybe a little better than where it was in August, but that goes back and forth, that’s a moving target that we check on a week-to-week basis. So, there’s no question that we’re going to continue to find tough markets and tough competitor situations, and I don’t think it is any worse, it maybe slightly better than it was in August. Dan Binder, Buckingham Research: Okay, great, thanks. Richard Galanti, Chief Financial Officer: Well, thank you very much and we’ll talk to you soon.

This concludes today’s conference call, you may now disconnect.