Item 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION

The data below reflect sales data, the percentage relationship between sales
and major categories in the Consolidated Statements of Earnings and the
percentage change in the dollar amounts of each of the items.

<CAPTION>
PERCENTAGE

OPERATING EXPENSES:

INTEREST INCOME (EXPENSE):

Weighted  Average  Weekly Sales per

(1) Fiscal years 2000, 1999 and 1998 refer to the fiscal years ended January
28, 2001; January 30, 2000; and January 31, 1999, respectively.

(2) Excludes wholly owned subsidiaries: Apex Supply Company, Georgia Lighting,
Maintenance Warehouse, and National Blinds and Wallpaper.

RESULTS OF OPERATIONS

For an understanding of the significant factors that influenced the Company's
performance during the past three fiscal years, the following discussion should
be read in conjunction with the consolidated financial statements and the notes
to consolidated financial statements presented in this annual report.

Net sales for fiscal 2000 increased 19.0% to $45.7 billion from $38.4 billion
in fiscal 1999. This increase was attributable to, among other things, full
year sales from the 169 new stores opened during fiscal 1999, a 4% comparable
store-for-store sales increase and 204 new store openings.

Gross profit as a percent of sales was 29.9% for fiscal 2000 compared to 29.7%
for fiscal 1999. The rate increase was primarily attributable to a lower cost
of merchandise resulting from product line reviews, benefits from global
sourcing programs and an increase in the number of tool rental centers from 150
at the end of fiscal 1999 to 342 at the end of fiscal 2000.

Operating expenses as a percent of sales were 20.7% for fiscal 2000 compared to
19.8% for fiscal 1999. Selling and store operating expenses as a percent of
sales increased to 18.6% in fiscal 2000 from 17.8% in fiscal 1999. The increase
was primarily attributable to higher store selling payroll expenses resulting
from market wage pressures and an increase in employee longevity. In addition,
medical costs increased due to higher family enrollment in the Company's
medical plans, rising health care costs and higher prescription drug costs.
Finally, store occupancy costs, such as property taxes, property rent,
depreciation and utilities, increased due to new store growth and energy rate
increases.

Pre-opening expenses as a percent of sales were 0.3% for both fiscal 2000 and
1999. The Company opened 204 new stores and relocated 8 stores in fiscal 2000,
compared to opening 169 new stores and relocating 6 stores in fiscal 1999.
Pre-opening expenses averaged $671,000 per store in fiscal 2000 compared to
$643,000 per store in fiscal 1999. The higher average expense was primarily due
to the opening of more EXPO Design Center stores and expansion of Home Depot
stores into certain new markets including international locations, which
involved longer pre-opening periods and higher training, travel and relocation
costs.

General and administrative expenses as a percent of sales were 1.8% for fiscal
2000 compared to 1.7% for fiscal 1999. The increase was primarily due to
investments in Internet development and international operations, as well as a
full year of payroll and other costs associated with operating four new
divisional offices, which opened during the fourth quarter of fiscal 1999.

Interest and investment income as a percent of sales was 0.1% for both fiscal
2000 and 1999. Interest expense as a percent of sales was 0.1% for both
comparable periods.

The Company's combined federal and state effective income tax rate decreased to
38.8% for fiscal 2000 from 39.0% for fiscal 1999. The decrease was attributable
to higher tax credits in fiscal 2000 compared to fiscal 1999.

Net earnings as a percent of sales were 5.6% for fiscal 2000 compared to 6.0%
for fiscal 1999, reflecting higher selling and store operating expenses as a
percent of sales partially offset by a higher gross profit rate as described
above. Diluted earnings per share were $1.10 for fiscal 2000 compared to $1.00
for fiscal 1999.

Net sales for fiscal 1999 increased 27.2% to $38.4 billion from $30.2 billion
in fiscal 1998. This increase was attributable to, among other things, full
year sales from the 138 new stores opened during fiscal 1998, a 10% comparable
store-for-store sales increase, and 169 new store openings and 6 store
relocations during fiscal 1999.

Gross profit as a percent of sales was 29.7% for fiscal 1999 compared to 28.5%
for fiscal 1998. The rate increase was primarily attributable to a lower cost
of merchandise resulting from product line reviews and increased sales of
imported products, and other merchandising initiatives begun in prior years and
continued during fiscal 1999, as well as to sales mix shifts to higher gross
margin product categories and assortments. In addition, inventory and refund

systems improvements and more effective training resulted in better inventory
shrink results and lower product markdowns.

Operating expenses as a percent of sales were 19.8% for fiscal 1999 compared to
19.7% for fiscal 1998. Selling and store operating expenses as a percent of
sales increased to 17.8% in fiscal 1999 from 17.7% in fiscal 1998. The increase
was primarily attributable to higher store selling payroll expenses resulting
from market wage pressures and an increase in employee longevity, as well as by
the Company's continued investment in new customer service initiatives. In
addition, medical costs increased due to higher family enrollment in the
Company's medical plans, increased claims and higher prescription drug costs.
The Company's strong financial performance during fiscal 1999 also resulted in
higher bonus expenses as a percent of sales. Credit card discounts increased as
a result of higher penetrations of credit card sales and increases in
non-private label discount rates. Partially offsetting these increases were
lower net advertising expenses resulting from higher cooperative advertising
participation by vendors and economies realized from the increased use of
national advertising.

Pre-opening expenses as a percent of sales were 0.3% for both fiscal 1999 and
1998. The Company opened 169 new stores and relocated 6 stores in fiscal 1999,
compared to 138 new stores and 4 store relocations in fiscal 1998. Pre-opening
expenses averaged $643,000 per store in fiscal 1999 compared to $618,000 per
store in fiscal 1998. The higher average expense was primarily due to the
opening of more EXPO Design Center stores and expansion of Home Depot stores
into certain new markets, which involved longer pre-opening periods and higher
training, travel and relocation costs.

General and administrative expenses as a percent of sales were 1.7% for both
fiscal 1999 and 1998. Incremental expenses related to long-term growth and
business planning initiatives, including Internet development, international
operations and the opening of four new divisional offices during the fourth
quarter of fiscal 1999, were offset by efficiencies realized from increased
sales.

Interest and investment income as a percent of sales was 0.1% for both fiscal
1999 and 1998. Interest expense as a percent of sales was 0.1% for both
comparable periods.

The Company's combined federal and state effective income tax rate decreased to
39.0% for fiscal 1999 from 39.2% for fiscal 1998. The decrease was attributable
to higher tax credits in fiscal 1999 compared to fiscal 1998.

Net earnings as a percent of sales were 6.0% for fiscal 1999 compared to 5.3%
for fiscal 1998, reflecting a higher gross profit rate partially offset by
higher operating expenses as a percent of sales as described above. Diluted
earnings per share were $1.00 for fiscal 1999 compared to $0.71 for fiscal
1998.

Cash flow generated from store operations provides the Company with a
significant source of liquidity. Additionally, a portion of the Company's
inventory is financed under vendor credit terms.

The Company currently plans to open approximately 200 new stores and relocate 9
existing stores during fiscal 2001. It is anticipated that approximately 92% of
these locations will be owned, and the remainder will be leased.

The Company has two operating lease agreements totaling $882 million for the
purpose of financing construction costs of certain new stores. Under the
operating lease agreements, the lessor purchases the properties, pays for the
construction costs and subsequently leases the facilities to the Company. The
leases provide for substantial residual value guarantees and include purchase
options at original cost on each property. The Company financed a portion of
its new stores opened from fiscal 1997 through fiscal 2000, as well as office
buildings in fiscal 1999 and 2000, under the operating lease agreements.

The cost of new stores to be constructed and owned by the Company varies
widely, principally due to land costs, and is currently estimated to average
approximately $14.1 million per location. The cost to remodel and/or fixture
stores to be leased is expected to average approximately $4.9 million per
store. In addition, each new store will require approximately $3.5 million to
finance inventories, net of vendor financing.

During fiscal 1999, the Company issued $500 million of 6 1/2% Senior Notes
("Senior Notes"). The Senior Notes are due on September 15, 2004 and pay
interest semi-annually. The Senior Notes may be redeemed by the Company at any
time, in whole or in part, at a defined redemption price plus accrued interest
up to the redemption date. The net proceeds from the offering were used to
finance a portion of the Company's capital expenditure program, including store
expansions and renovations, for working capital needs and for general corporate
purposes.

The Company has a commercial paper program that allows borrowings up to a
maximum of $1 billion. As of January 28, 2001, there were $754 million of
borrowings outstanding under the program. In connection with the program, the
Company has a back-up credit facility with a consortium of banks for up to $800
million. The credit facility, which expires in September 2004, contains various
restrictive covenants, none of which is expected to impact the Company's
liquidity or capital resources.

As of January 28, 2001, the Company had $167 million in cash and cash
equivalents. Management believes that its current cash position, internally
generated funds, funds available from its $1 billion commercial paper program
and the ability to obtain alternate sources of financing should enable the
Company to complete its capital expenditure programs, including store openings
and renovations, through the next several fiscal years.

Although the Company cannot accurately determine the precise effect of
inflation on its operations, it does not believe inflation has had a material
effect on sales or results of operations.

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 requires all derivatives to be
carried on the balance sheet at fair value. Changes in the fair value of
derivatives must be recognized in the Company's statements of earnings when
they occur; however, there is an exception for derivatives that qualify as
hedges as defined by SFAS 133. If a derivative qualifies as a hedge, a company
can elect to use "hedge accounting" to eliminate or reduce the income statement
volatility that would arise from reporting changes in a derivative's fair
value. The Company will adopt SFAS 133 in the quarter ending April 29, 2001 and
will record its derivatives at fair value. Based on the Company's derivative
positions at January 28, 2001, the adoption of SFAS 133 will not have a
material impact on the Company's financial results.

In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. As of January 28, 2001, the Company was in compliance with SAB 101.

Certain statements we make in this report, and other written or oral statements
made by or on behalf of the Company, may constitute "forward-looking
statements" within the meaning of the federal securities laws. Words or phrases
such as "should result," "are expected to," "we anticipate," "we estimate," "we
project," "we believe," or similar expressions are intended to identify
forward-looking statements. Examples of such statements in this report include
descriptions of our plans with respect to new store openings and relocations,
our plans to enter new markets and expectations relating to our continuing
growth. These statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from the Company's historical
experience and its present expectations or projections. Management believes
that these forward-looking statements are reasonable; however, you should not
place undue reliance on such statements. Such statements speak only as of the
date they are made, and we undertake no obligation to publicly update or revise
any forward-looking statement, whether as a result of future events, new
information or otherwise.

The following are some of the factors that could cause the Company's actual
results to differ materially from the expected results described in the
Company's forward-looking statements:

-        Adverse or unanticipated weather conditions, which may affect the
Company's overall level of sales and sales of particular lines of
products, such as building materials, lumber and lawn and garden
supplies.

-        Instability of costs and availability of sourcing channels, which may
affect the prices that the Company pays for certain commodity
products, such as lumber and plywood, as well as the Company's ability
to improve its mix of merchandise. Our cost of sales is affected by
our ability to maintain favorable arrangements and relationships with
our suppliers. Our sources of supply may be affected by trade
restrictions, tariffs, currency exchange rates, transport costs and
capacity, and other factors affecting domestic and international
markets.

-        Our ability to attract, train and retain highly qualified associates
to staff both existing and new stores.

-        Conditions affecting the availability, acquisition, development and
ownership of real estate, including local zoning and land use issues,
environmental regulations and general conditions in the commercial
real estate market.

-        General economic conditions, which affect consumer confidence and home
improvement and home-building spending, including interest rates, the
overall level of economic activity, the availability of consumer
credit and mortgage financing and unemployment rates.

-        The impact of competition, including competition for customers,
locations and products and in other important aspects of our business.
Our primary competitors include electrical, plumbing and building
materials supply houses, lumber yards, home improvement stores and
other local, regional or national hardware stores, as well as discount
department stores and any other channel of distribution that offers
products that we sell. Our business is highly competitive, and we may
face new types of competitors as we enter new markets or lines of
business.

-        Changes in laws and regulations, including changes in accounting
standards, tax statutes or regulations and environmental and land use
regulations, and uncertainties of litigation.
