**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**Form10-Q**

| **(Mark One)**                                   |                                                                          | ** ** |
|--------------------------------------------------|-------------------------------------------------------------------------------|------------|
| ** **                                       |
| **x**                                            | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES**  |
| **EXCHANGE  ACT OF 1934**                        |
|                                             |
| **For the  quarterly period ended June 2, 2007** |
|                                             |
| **OR**                                           |
| ** **                                       |
| **o**                                            | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES** |
| **EXCHANGE  ACT OF 1934**                        |
|                                                  |                                                                               |            |  |

 

**CommissionFile Number       1-6807**

**FAMILYDOLLAR STORES, INC.**

(Exact name ofregistrant as specified in its charter)

| **Delaware**                              |   | **56-0942963**       |
|-------------------------------------------|--------|----------------------|
| (State or other  jurisdiction of          |   | (I.R.S. Employer     |
| incorporation or  organization)           |   | Identification  No.) |
|                                      |   |                 |
| **P. O.  Box 1017, 10401 Monroe Road**    |   | ** **           |
| **Charlotte,  North Carolina**            |   | **28201-1017**       |
| (Address of  principal executive offices) |   | (Zip Code)           |

 

Registrant’s telephone number, including area code:  **(704) 847-6961**

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes x   No o

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

Large AcceleratedFiler x   Accelerated Filer o   Non-Accelerated Filer o

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).Yes o   No x

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.
| Class                          | ** ** | **Outstanding at June 29, 2007** |
|--------------------------------|------------|----------------------------------|
| Common Stock,  $0.10 par value |       | 145,584,602  shares              |

 

 

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**FAMILY DOLLAR STORES, INC. ANDSUBSIDIARIES**

**INDEX**
| Part I - Financial  Information                                                                        |   |   |
|--------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                   |   |   |
| Item 1 -  Consolidated Condensed Financial Statements (unaudited):                                     |   |   |
|                                                                                                   |   |   |
| Consolidated  Condensed Balance Sheets -  June 2, 2007 and August 26, 2006                             |   |   |
|                                                                                                   |   |   |
| Consolidated  Condensed Statements of Income -  Quarter Ended June 2, 2007 and May 27, 2006            |   |   |
|                                                                                                   |   |   |
| Consolidated  Condensed Statements of Income -  Three Quarters Ended June 2, 2007 and May 27, 2006     |   |   |
|                                                                                                   |   |   |
| Consolidated  Condensed Statements of Cash Flows -  Three Quarters Ended June 2, 2007 and May 27, 2006 |   |   |
|                                                                                                   |   |   |
| Notes to  Consolidated Condensed Financial Statements                                                  |   |   |
|                                                                                                   |   |   |
| Item 2 -  Management’s Discussion and Analysis of Financial Condition and Results of  Operations  |   |   |
|                                                                                                   |   |   |
| Item 3 -  Quantitative and Qualitative Disclosures About Market Risk                                   |   |   |
|                                                                                                   |   |   |
| Item 4 - Controls  and Procedures                                                                      |   |   |
|                                                                                                   |   |   |
| Part II - Other  Information and Signatures                                                            |   |   |
|                                                                                                   |   |   |
| Item 1 - Legal  Proceedings                                                                            |   |   |
|                                                                                                   |   |   |
| Item 1A - Risk Factors                                                                                 |   |   |
|                                                                                                   |   |   |
| Item 2 -  Unregistered Sales of Equity Securities and Use of Proceeds                                  |   |   |
|                                                                                                   |   |   |
| Item 6 - Exhibits                                                                                      |   |   |
|                                                                                                   |   |   |
| Signatures                                                                                             |   |   |

 

 2 

----

**PART I –FINANCIAL INFORMATION**

**Item 1.    Consolidated Condensed Financial Statements**

**FAMILYDOLLAR STORES, INC. AND SUBSIDIARIES**

**CONSOLIDATED CONDENSED BALANCE SHEETS**

**(Unaudited)**
| **(in thousands, except per share and share amounts)**                                                                                                                                                     | ** ** | **  June 2, 2007  ** | ** ** | **  August 26, 2006  ** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|-------------------------------------------------------|------------|
| **Assets**                                                                                                                                                                                                                                    | ** ** | ** **                                         | ** ** | ** **                                            | ** ** |
| Current assets:                                                                                                                                                                                                                               |       |                                               |       |                                                  |       |
| Cash and cash  equivalents (Note 2)                                                                                                                                                                                                           |       | $                                                  | 156,192    |                                                  | $          | 79,727 |   |
| Investment  securities (Note 2)                                                                                                                                                                                                               |       | 200,373                                            |       | 136,505                                               |       |
| Merchandise  inventories                                                                                                                                                                                                                      |       | 1,007,792                                          |       | 1,037,859                                             |       |
| Deferred income  taxes                                                                                                                                                                                                                        |       | 148,086                                            |       | 133,468                                               |       |
| Income tax  refund receivable                                                                                                                                                                                                                 |       | —                                             |       | 2,397                                                 |       |
| Prepayments and  other current assets                                                                                                                                                                                                         |       | 52,887                                             |       | 28,892                                                |       |
| Total current  assets                                                                                                                                                                                                                         |       | 1,565,330                                          |       | 1,418,848                                             |       |
|                                                                                                                                                                                                                                          |       |                                               |       |                                                  |       |
| Property and equipment,  net                                                                                                                                                                                                                  |       | 1,053,213                                          |       | 1,077,608                                             |       |
| Other assets                                                                                                                                                                                                                                  |       | 24,104                                             |       | 26,573                                                |       |
| ** **                                                                                                                                                                                                                                    |       | $                                                  | 2,642,647  |                                                  | $          | 2,523,029 |   |
| ** **                                                                                                                                                                                                                                    | ** ** | ** **                                         | ** ** | ** **                                            | ** ** |
| **Liabilities and Shareholders’  Equity**                                                                                                                                                                                                | ** ** | ** **                                         | ** ** | ** **                                            | ** ** |
| Current liabilities:                                                                                                                                                                                                                          |       |                                               |       |                                                  |       |
| Accounts payable                                                                                                                                                                                                                              |       | $                                                  | 552,580    |                                                  | $          | 556,531 |   |
| Accrued  liabilities                                                                                                                                                                                                                          |       | 454,480                                            |       | 429,580                                               |       |
| Income taxes  payable                                                                                                                                                                                                                         |       | 41,316                                             |       | —                                                |       |
| Total current  liabilities                                                                                                                                                                                                                    |       | 1,048,376                                          |       | 986,111                                               |       |
|                                                                                                                                                                                                                                          |       |                                               |       |                                                  |       |
| Long-term debt (Note 4)                                                                                                                                                                                                                       |       | 250,000                                            |       | 250,000                                               |       |
| Deferred income taxes                                                                                                                                                                                                                         |       | 72,443                                             |       | 78,525                                                |       |
| Commitments and  contingencies                                                                                                                                                                                                                |       |                                               |       |                                                  |       |
|                                                                                                                                                                                                                                          |       |                                               |       |                                                  |       |
| Shareholders’ equity:  (Notes 5 and 6)                                                                                                                                                                                                   |       |                                               |       |                                                  |       |
| Preferred stock,  $1 par; authorized and unissued 500,000 shares                                                                                                                                                                              |       |                                               |       |                                                  |       |
|                                                                                                                                                                                                                                          |       |                                               |       |                                                  |       |
| Common stock,  $.10 par; authorized 600,000,000 shares; issued 179,702,109 shares at June 2,  2007, and 178,559,411 shares at August 26, 2006; and outstanding 147,298,382  shares at June 2, 2007, and 150,210,484 shares at August 26, 2006 |       | 17,970                                             |       | 17,856                                                |       |
| Capital in  excess of par                                                                                                                                                                                                                     |       | 180,991                                            |       | 140,829                                               |       |
| Retained  earnings                                                                                                                                                                                                                            |       | 1,701,411                                          |       | 1,546,366                                             |       |
|                                                                                                                                                                                                                                          |       | 1,900,372                                          |       | 1,705,051                                             |       |
| Less: common  stock held in treasury, at cost (32,403,727 shares at June 2, 2007, and  28,348,927 shares at August 26, 2006) (Note 6)                                                                                                         |       | 628,544                                            |       | 496,658                                               |       |
| Total  shareholders’ equity                                                                                                                                                                                                              |       | 1,271,828                                          |       | 1,208,393                                             |       |
|                                                                                                                                                                                                                                          |       | $                                                  | 2,642,647  |                                                  | $          | 2,523,029 |   |

 

## See notes to the consolidated condensed financial statements.

3

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**FAMILYDOLLAR STORES, INC. AND SUBSIDIARIES**

**CONSOLIDATED CONDENSED STATEMENTS OF INCOME**

**(Unaudited)**
| ** **                                                            | ** ** | **Quarter Ended**     | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------|------------|
| **(in thousands, except per share amounts)** | ** ** | **June 2, 2007** | ** ** | **May 27, 2006** | ** ** |
| Net sales                                                             |       | $                          | 1,654,776  |   | $ | 1,569,516 |   |
|                                                                  |       |                       |       |   |   |
| Cost and  expenses:                                                   |       |                       |       |   |   |
| Cost of sales                                                         |       | 1,077,765                  |       | 1,041,789 |   |
| Selling, general and administrative                                   |       | 484,137                    |       | 435,366 |   |
| Cost of sales  and operating expenses                                 |       | 1,561,902                  |       | 1,477,155 |   |
|                                                                  |       |                       |       |   |   |
| Operating profit                                                      |       | 92,874                     |       | 92,361 |   |
|                                                                  |       |                       |       |   |   |
| Interest income                                                       |       | 3,224                      |       | 2,086 |   |
|                                                                  |       |                       |       |   |   |
| Interest expense  (Note 4)                                            |       | 3,167                      |       | 3,093 |   |
|                                                                  |       |                       |       |   |   |
| Income before  income taxes                                           |       | 92,931                     |       | 91,354 |   |
|                                                                  |       |                       |       |   |   |
| Income taxes                                                          |       | 32,557                     |       | 34,440 |   |
|                                                                  |       |                       |       |   |   |
| Net income                                                            |       | $                          | 60,374     |   | $ | 56,914 |   |
|                                                                  |       |                       |       |   |   |
| Net income per  common share – basic (Note 7)                    |       | $                          | 0.40       |   | $ | 0.37 |   |
| Weighted average shares – basic (Note 7)                         |       | 149,758                    |       | 154,260 |   |
|                                                                  |       |                       |       |   |   |
| Net income per  common share – diluted (Note 7)                  |       | $                          | 0.40       |   | $ | 0.37 |   |
| Weighted average shares – diluted (Note 7)                       |       | 150,495                    |       | 154,566 |   |
|                                                                  |       |                       |       |   |   |
| Dividends declared per  common share                                  |       | $                          | 0.115      |   | $ | 0.105 |   |

 

Seenotes to the consolidated condensed financial statements.

4

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**FAMILYDOLLAR STORES, INC. AND SUBSIDIARIES**

**CONSOLIDATED CONDENSED STATEMENTS OF INCOME**

**(Unaudited)**
| ** **                                                            | ** ** | **Three Quarters Ended** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------------|------------|
| **(in thousands, except per share amounts)** | ** ** | **June 2, 2007**         | ** ** | **May 27, 2006** | ** ** |
| Net sales                                                             |       | $                                  | 5,202,420  |   | $ | 4,816,656 |   |
|                                                                  |       |                               |       |   |   |
| Cost and  expenses:                                                   |       |                               |       |   |   |
| Cost of sales                                                         |       | 3,420,017                          |       | 3,210,237 |   |
| Selling, general and administrative                                   |       | 1,455,096                          |       | 1,298,834 |   |
| Litigation charge (Note 8)                                            |       | —                             |       | 45,000 |   |
| Cost of sales  and operating expenses                                 |       | 4,875,113                          |       | 4,554,071 |   |
|                                                                  |       |                               |       |   |   |
| Operating profit                                                      |       | 327,307                            |       | 262,585 |   |
|                                                                  |       |                               |       |   |   |
| Interest income                                                       |       | 8,179                              |       | 5,135 |   |
|                                                                  |       |                               |       |   |   |
| Interest expense  (Note 4)                                            |       | 13,340                             |       | 8,242 |   |
|                                                                  |       |                               |       |   |   |
| Income before  income taxes                                           |       | 322,146                            |       | 259,478 |   |
|                                                                  |       |                               |       |   |   |
| Income taxes                                                          |       | 117,105                            |       | 96,646 |   |
|                                                                  |       |                               |       |   |   |
| Net income                                                            |       | $                                  | 205,041    |   | $ | 162,832 |   |
|                                                                  |       |                               |       |   |   |
| Net income per  common share – basic (Note 7)                    |       | $                                  | 1.36       |   | $ | 1.04 |   |
| Weighted average shares – basic (Note 7)                         |       | 150,300                            |       | 156,294 |   |
|                                                                  |       |                               |       |   |   |
| Net income per  common share – diluted (Note 7)                  |       | $                                  | 1.36       |   | $ | 1.04 |   |
| Weighted average shares – diluted (Note 7)                       |       | 150,914                            |       | 156,365 |   |
|                                                                  |       |                               |       |   |   |
| Dividends declared per  common share                                  |       | $                                  | 0.335      |   | $ | 0.305 |   |

 

Seenotes to the consolidated condensed financial statements.

5

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 **FAMILYDOLLAR STORES, INC. AND SUBSIDIARIES**

**CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS**

**(Unaudited)**
| ** **                                                                         | ** ** | **Three Quarters Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| **(in thousands)**                                                            | ** ** | **June 2, 2007**         | ** ** | **May 27, 2006** | ** ** |
| **Cash  flows from operating activities:**                                         | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                                  | 205,041    |   | $ | 162,832 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                               |       |   |   |
| Depreciation and amortization                                                      |       | 107,567                            |       | 99,044 |   |
| Deferred income taxes                                                              |       | (20,700                            | )          | (42,344 | ) |
| Stock-based compensation                                                           |       | 9,173                              |       | 5,945 |   |
| Loss on disposition of property and equipment                                      |       | 2,409                              |       | 4,189 |   |
| Changes in operating assets and liabilities:                                       |       |                               |       |   |   |
| Merchandise inventories                                                            |       | 30,067                             |       | 62,570 |   |
| Income tax refund receivable                                                       |       | 2,397                              |       | — |   |
| Prepayments and other current assets                                               |       | (23,995                            | )          | (25,996 | ) |
| Other assets                                                                       |       | 2,469                              |       | 634 |   |
| Accounts payable and accrued liabilities                                           |       | (1,052                             | )          | 43,736 |   |
| Income taxes payable                                                               |       | 41,316                             |       | 3,844 |   |
|                                                                               |       | 354,692                            |       | 314,454 |   |
|                                                                               |       |                               |       |   |   |
| **Cash  flows from investing activities:**                                         | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Purchases of investment securities                                                 |       | (1,003,969                         | )          | (261,305 | ) |
| Sales of investment securities                                                     |       | 940,101                            |       | 196,435 |   |
| Capital expenditures                                                               |       | (85,899                            | )          | (144,378 | ) |
| Proceeds from dispositions of property and equipment                               |       | 318                                |       | 1,675 |   |
|                                                                               |       | (149,449                           | )          | (207,573 | ) |
|                                                                               |       |                               |       |   |   |
| **Cash  flows from financing activities:**                                         | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Issuance of long-term debt                                                         |       | —                             |       | 250,000 |   |
| Payment of debt issuance costs                                                     |       | —                             |       | (958 | ) |
| Repurchases of common stock                                                        |       | (131,886                           | )          | (334,051 | ) |
| Changes in cash overdrafts                                                         |       | 20,942                             |       | (16,016 | ) |
| Proceeds from employee stock options                                               |       | 29,856                             |       | 5,277 |   |
| Excess tax benefits from stock-based compensation                                  |       | 1,248                              |       | 196 |   |
| Payment of dividends                                                               |       | (48,938                            | )          | (46,759 | ) |
|                                                                               |       | (128,778                           | )          | (142,311 | ) |
|                                                                               |       |                               |       |   |   |
| **Net  change in cash and cash equivalents**                                       |       | 76,465                             |       | (35,430 | ) |
| **Cash  and cash equivalents at beginning of period**                              |       | 79,727                             |       | 105,175 |   |
| **Cash and cash equivalents at  end of period**                                    |       | $                                  | 156,192    |   | $ | 69,745 |   |

 

## See notes to the consolidated condensed financial statements.

6

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## **FAMILYDOLLAR STORES, INC. AND SUBSIDIARIES**

## **NOTES TO CONSOLIDATED CONDENSED FINANCIALSTATEMENTS**

1.               In the opinion of the Company, theaccompanying unaudited consolidated condensed financial statements contain alladjustments (consisting of only normal recurring accruals unless otherwisestated) necessary to present fairly the Company’s financial position as of June2, 2007; the results of operations for the thirteen and forty-week periodsended June 2, 2007 (“third quarter and first three quarters of fiscal 2007,”respectively), and thirteen and thirty-nine-week periods ended May 27, 2006 (“thirdquarter and first three quarters of fiscal 2006,” respectively); and the cashflows for the first three quarters of fiscal 2007 and first three quarters offiscal 2006.  For further information,refer to the consolidated financial statements and footnotes included in theCompany’s Annual Report on Form 10-K for the fiscal year ended August 26, 2006(“fiscal 2006”).

**The results of operations for thethird quarter and first three quarters of fiscal 2007 are not necessarilyindicative of the results to be expected for the full year.**

**Certain reclassifications of theamounts for the third quarter and first three quarters of fiscal 2006 have beenmade to conform to the presentation for the third quarter and first threequarters of fiscal 2007.**

2.               The Company considers all highly liquidinvestments with an original maturity of three months or less to be “cashequivalents.”  The carrying amount of theCompany’s cash equivalents approximates fair value due to the short maturitiesof these investments and consists primarily of money-market funds and otherovernight investments.  The Companymaintains cash deposits with major banks, which from time to time may exceedfederally insured limits.  The Companyperiodically assesses the financial condition of the institutions and believesthat the risk of any loss is minimal.

The items classified asinvestment securities are principally auction rate securities and variable ratedemand notes.  The Company classifies allinvestment securities as available-for-sale. Securities accounted for as available-for-sale are required to bereported at fair value with unrealized gains and losses, net of taxes, excludedfrom net income and shown separately as a component of accumulated othercomprehensive income within shareholders’ equity.  The securities that the Company hasclassified as available-for-sale generally trade at par and as a resulttypically do not have any realized or unrealized gains or losses.

3.               The preparation of the Company’s ConsolidatedCondensed Financial Statements, in conformity with accounting principlesgenerally accepted in the United States of America, requires management to makeestimates and assumptions.  Theseestimates and assumptions affect the reported amounts of assets andliabilities, the disclosure of contingent assets and liabilities at the date ofthe financial statements, and the reported amounts of revenues and expensesduring the reporting period.  Actual resultscould differ from these estimates.

4.               On December 19, 2006, the Company enteredinto separate agreements in connection with its unsecured Senior Notes (the “Notes”)and its unsecured revolving credit facility. The agreements extended the delivery date for the fiscal 2006 auditedfinancial statements, the unaudited financial statements for the first quarterof fiscal 2007 and the corresponding compliance certificates to March 31, 2007,and waived any Defaults or Events of Default that would have occurred due tothe failure of the Company to deliver such information in connection with theNotes and credit facility.  As discussedin Note 5 below, the Company formed a Special Committee of the Board ofDirectors to investigate the Company’s stock option granting practices.  As a result, the Company was unable to fileits Annual Report on Form 10-K for fiscal 2006 and its Quarterly Report on Form10-Q for the first quarter of fiscal 2007 by the required deadlines.  During March 2007, the Company delivered theappropriate financial statements and compliance certificates and is now incompliance with all covenants under both the Notes and credit facility.  As of the end of the first three quarters offiscal 2007, the Company had outstanding long-term debt of $250.0 millionrelated to the Notes.  The Company had noborrowings against its credit facility during the first three quarters offiscal 2007.

5.               The Company accounts for its stock-basedcompensation plans in accordance with Statement of Financial AccountingStandards (“SFAS”) No. 123 (revised 2004) “Share-Based Payment” (“SFAS 123R”).  Under SFAS 123R, all stock-based compensationcost is measured at the grant date, based on the estimated fair value of theaward, and is recognized as an expense in the income statement over therequisite service period.  The Companycurrently recognizes stock-based compensation in connection with its stockoption and performance share right awards.

During the third quarter andfirst three quarters of fiscal 2007, the Company recognized stock-basedcompensation expense (related to stock options and performance share rights) of$4.4 million and $9.9 million, respectively. During the third quarter and first three quarters of fiscal 2006, theCompany recognized stock-based compensation expense (related to stock optionsand performance share rights) of $2.5 million and $5.9 million,respectively.  These amounts wereincluded within selling, general, and administrative expenses on the ConsolidatedCondensed Statements of Income.

7

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*StockOptions*

The Company’s stock optionplans provide for grants of stock options to key employees at prices not lessthan the fair market value of the Company’s common stock on the grantdate.  The Company’s practice for anumber of years has been to make a single annual grant to all employeesparticipating in the stock option program and to generally make other grantsonly in connection with employment or promotions.  Options expire five years from the grant dateand are exercisable to the extent of 40% after the second anniversary of thegrant and an additional 30% at each of the following two anniversary dates on acumulative basis.  Compensation cost isrecognized on a straight-line basis, net of estimated forfeitures, over therequisite service period.  The Companyused the Black-Scholes option-pricing model to estimate the grant-date fairvalue of each option granted before and after the adoption of SFAS 123R onAugust 28, 2005.  The fair values ofoptions granted during the third quarter and first three quarters of fiscal2007 were estimated using the following weighted-average assumptions:

|                                           | ** ** | **Quarter Ended**     | ** ** | **Three Quarters Ended** | ** ** |
|-------------------------------------------|------------|----------------------------|------------|------------------------------------|------------|
| ** **                                | ** ** | **June 2, 2007** | ** ** | **June 2, 2007**         | ** ** |
| Expected  dividend yield                  |       | 1.71                       | %          | 1.78                               | %          |
| Expected stock  price volatility          |       | 29.00                      | %          | 29.00                              | %          |
| Weighted average  risk-free interest rate |       | 4.60                       | %          | 4.57                               | %          |
| Expected life of  options (years)         |       | 4.48                       |       | 4.49                               |       |

 

The expected dividend yieldis based on the projected annual dividend payment per share divided by thestock price on the grant date.  Expectedstock price volatility is derived from an analysis of the historical andimplied volatility of the Company’s publicly traded stock.  The risk-free interest rate is based on theU.S. Treasury rates on the grant date with maturity dates approximating theexpected life of the option on the grant date. The expected life of the options is based on an analysis of historicaland expected future exercise behavior, as well as certain demographiccharacteristics.  These assumptions areevaluated and revised for future grants, as necessary, to reflect marketconditions and experience.  There were nosignificant changes made to the methodology used to determine the assumptionsduring the third quarter and first three quarters of fiscal 2007.  The weighted-average grant-date fair value ofstock options granted during the third quarter and first three quarters offiscal 2007 were $8.57 and $7.87, respectively. The following table summarizes the transactions under the stock optionplans during the first three quarters of fiscal 2007.

| (in thousands, except per share amounts) | ** ** | **Options  Outstanding** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------|------------|--------------------------------------------|------------|
| Balance at  August 26, 2006                                       |       | 5,757                    |       | $                                          | 29.54      |   |
| Granted                                                           |       | 686                      |       | 29.33                                      |       |
| Exercised                                                         |       | (1,096                   | )          | 27.21                                      |       |
| Cancelled                                                         |       | (525                     | )          | 27.30                                      |       |
| Balance at June 2, 2007                                           |       | 4,822                    |       | $                                          | 30.28      |   |

 

The total intrinsic value ofstock options exercised during the third quarter and first three quarters offiscal 2007 was $2.5 million and $4.2 million, respectively.  As of June 2, 2007, there was approximately$9.0 million of unrecognized compensation cost related to outstanding stockoptions.  The unrecognized compensationcost will be recognized over a weighted-average period of approximately 1.3years.

*PerformanceShare Rights*

Performance share rights give employees the right to receive shares ofthe Company’s common stock at a future date based on the Company’s performancerelative to a peer group.  Performance ismeasured based on two pre-tax metrics: Return on Equity and Income Growth.  The Compensation Committee of the Board ofDirectors establishes the peer group and performance metrics.  The performance share rights vest at the endof the performance period (generally three years) and the shares are issuedshortly thereafter.  The actual number ofshares issued can range from 0% to 200% of the employee’s target awarddepending on the Company’s performance relative to the peer group.  The following table summarizes thetransactions under the performance share rights program during the first threequarters of fiscal 2007.

8

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| (in thousands, except per share amounts) | ** ** | **Performance  Share Rights  Outstanding** | ** ** | **Weighted  Average  Grant-Date  Fair Value** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------------------------------|------------|----------------------------------------------------|------------|
| Nonvested -  August 26, 2006                                      |       | 251                                             |       | $                                                  | 24.17      |   |
| Granted                                                           |       | 256                                             |       | 29.40                                              |       |
| Vested                                                            |       | (69                                             | )          | 24.16                                              |       |
| Cancellations                                                     |       | (9                                              | )          | 26.94                                              |       |
| Adjustments                                                       |       | 10                                              |       | N/A                                                |       |
| Nonvested – June 2,  2007                                    |       | 439                                             |       | $                                                  | 27.17      |   |

 

The grant-date fair value ofthe performance share rights is based on the stock price on the grantdate.  Compensation cost is recognized ona straight-line basis, net of estimated forfeitures, over the requisite serviceperiod and adjusted quarterly to reflect the ultimate number of shares expectedto be issued.  The adjustments ofperformance share rights outstanding in the table above represents theperformance adjustment for shares vested during the period.  As of June 2, 2007, there was approximately$8.0 million of unrecognized compensation cost related to outstandingperformance share rights, based on the Company’s most recent performance analysis.  The unrecognized compensation cost will berecognized over a weighted-average period of approximately 1.7 years.

*SpecialCommittee Review of Historical Stock Option Granting Procedures*

On September 25, 2006, the Company filed a Form 8-Kwith the Securities and Exchange Commission (the “SEC”) in which the Companyadvised that it was named as a nominal defendant in a lawsuit filed in theSuperior Court of North Carolina, Mecklenburg County, alleging that certain ofthe Company’s stock option grants were “backdated.”  In connection with the lawsuit, the Company’sBoard of Directors formed a Special Committee (the “Special Committee”),consisting solely of independent directors who were not named as defendants inthe lawsuit, to conduct an independent investigation of the Company’s stockoption granting practices, evaluate the lawsuit and take such actions withrespect to the lawsuit and related matters as the Special Committee deemedappropriate.  The Special Committee wasadvised in its review by independent legal counsel, Richards, Layton &Finger, P.A., and by independent accounting experts.  The Special Committee’s five month reviewincluded 35 interviews of 21 current or former officers, directors andemployees of the Company, as well as the review of documents andelectronically-stored information amounting to hundreds of thousands of pagesof documents and data.

On March 7, 2007, the Company filed a Form 8-Kannouncing that, based on its review of the principal factual findings of theSpecial Committee, the Company determined it did not properly account forcertain stock options granted during the period from fiscal 1995 to fiscal2006.  As a result, the Company recordeda cumulative charge of $10.5 million during the fourth quarter of fiscal 2006to correct the errors.  See Note 10 tothe Consolidated Financial Statements included in the Company’s Annual Reporton Form 10-K for fiscal 2006 for more information.

On June 26, 2007, the Company filed a Form 8-Kannouncing that it had reached an agreement for settlement of all stockholderderivative actions alleging that certain stock option grants had been “backdated,”subject to court approval.  See Note 8for more information on the stockholder derivative actions and relatedsettlement.

6.               During the third quarter of fiscal 2007, theCompany purchased 4.1 million shares of its common stock at a cost of $131.9million.  The shares were repurchased inthe open market or pursuant to Rule 10b5-1 of the Securities Exchange Act of1934, as amended (the “Exchange Act”). The Company did not purchase any shares of its common stock during thefirst half of fiscal 2007.  During thefirst three quarters of fiscal 2006, the Company purchased 13.9 million sharesof its common stock at a cost of $334.2 million.

All such shares were purchased pursuant to sharerepurchase authorizations approved by the Board of Directors.  As of June 2, 2007, the Company hadoutstanding authorizations to purchase a total of approximately 2.0 million additionalshares.  On June 19, 2007, the Companyannounced that the Board of Directors authorized the purchase of up to anadditional 5.0 million shares of its common stock from time to time as marketconditions warrant.  Shares purchasedunder the share repurchase authorizations, with the exception of the sharespurchased during fiscal 2006 with the proceeds of the Notes, are held intreasury or have been reissued under the Family Dollar 2000 Outside DirectorsPlan.  Shares purchased during fiscal2006 with the proceeds of the Notes were canceled and returned to the status ofauthorized but unissued shares.

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7.               Basicnet income per common share is computed by dividing net income by the weightedaverage number of shares outstanding during each period.  Diluted net income per common share gives effectto all securities representing potential common shares that were dilutive andoutstanding during the period.  Theexercise prices for certain of the outstanding stock options that the Companyhas awarded exceed the average market price of the Company’s common stock.  Such stock options are antidilutive (optionsfor 1.5 million shares for both the quarter and first three quarters ended June2, 2007, and options for 4.9 million shares and 5.1 million shares for thequarter and first three quarters ended May 27, 2006, respectively) and were notincluded in the computation of diluted net income per share.  In the calculation of diluted net income percommon share, the denominator includes the number of additional common sharesthat would have been outstanding if the Company’s outstanding stock options andperformance share rights had been exercised.

**The following table sets forth the computation ofbasic and diluted net income per common share:**
|                                                                       | ** ** | **Quarter Ended**     | ** ** | **Three Quarters Ended** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------|------------|------------------------------------|------------|
| **(in thousands, except per share amounts)** | ** ** | **June 2, 2007** | ** ** | **May 27, 2006**         | ** ** | **June 2, 2007** | ** ** | **May 27, 2006** | ** ** |
| **Basic  Net Income Per Share:**                                      | ** ** | ** **                 | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                            |       | $                          | 60,374     |                               | $          | 56,914 |   | $ | 205,041 |   | $ | 162,832 |   |
| Weighted average  number of shares outstanding                        |       | 149,758                    |       | 154,260                            |       | 150,300 |   | 156,294 |   |
| Net income per  common share – basic                             |       | $                          | 0.40       |                               | $          | 0.37 |   | $ | 1.36 |   | $ | 1.04 |   |
|                                                                  |       |                       |       |                               |       |   |   |   |   |
| **Diluted  Net Income Per Share:**                                    | ** ** | ** **                 | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                            |       | $                          | 60,374     |                               | $          | 56,914 |   | $ | 205,041 |   | $ | 162,832 |   |
| Weighted average  number of shares outstanding                        |       | 149,758                    |       | 154,260                            |       | 150,300 |   | 156,294 |   |
| Effect of  dilutive securities – stock options                   |       | 401                        |       | 129                                |       | 303 |   | 7 |   |
| Effect of  dilutive securities – performance share rights        |       | 336                        |       | 177                                |       | 311 |   | 64 |   |
| Weighted average  shares – diluted                               |       | 150,495                    |       | 154,566                            |       | 150,914 |   | 156,365 |   |
| Net income per common  share – diluted                           |       | $                          | 0.40       |                               | $          | 0.37 |   | $ | 1.36 |   | $ | 1.04 |   |

 

8.               On January 30,2001, Janice Morgan and Barbara Richardson, two individuals who have held theposition of Store Manager for subsidiaries of the Company, filed a Complaintagainst the Company in the United States District Court for the NorthernDistrict of Alabama.  Thereafter, pursuant to the Court’s ruling, noticeof the pendency of the lawsuit was sent to approximately 13,000 current andformer Store Managers holding the position on or after July 1, 1999. Approximately 2,550 of those receiving such notice filed consent forms andjoined the lawsuit as plaintiffs, including approximately 2,300 former StoreManagers and approximately 250 then current employees.  After rulings bythe Court on motions to dismiss certain plaintiffs filed by the Company andmotions to reconsider filed by plaintiffs, 1,424 plaintiffs remained in thecase at the commencement of trial.

The case has proceeded as a collective action underthe Fair Labor Standards Act (“FLSA”).  The Complaint alleged that theCompany violated the FLSA by classifying the named plaintiffs and othersimilarly situated current and former Store Managers as “exempt” employees whoare not entitled to overtime compensation.

A jury trial in this case was held in June 2005, inTuscaloosa, Alabama, and ended with the judge declaring a mistrial after thejury was unable to reach a unanimous decision in the matter.  The case wassubsequently retried to a jury in Tuscaloosa, Alabama, which found that theCompany should have classified the Store Manager plaintiffs as hourly employeesentitled to overtime pay rather than as salaried exempt managers and awardeddamages.  Subsequently, the Court ruled the Company did not act in goodfaith in classifying the plaintiffs as exempt, and after making adjustments tothe damages award based upon the filing of personal bankruptcy by certainplaintiffs, the Court entered a judgment for approximately $33.3 million.  As a result of post-trial motions filed byboth parties, on April 16, 2007, the court entered a final modifiedjudgment for approximately $35.6 million. The Company has appealed this final judgment and posted a bond to stayexecution on the judgment pending such appeal.  The Court ruled that it willconsider the plaintiffs’ motion for an award of attorneys’ fees and expenses atthe conclusion of the Company’s appeal.

The Company recognized $45.0 million as a litigationcharge in the second quarter of fiscal 2006 with respect to thislitigation.  During the appellate process, the Company will not berequired to pay the amount of the judgment.  Accordingly, this charge willnot have any impact on cash flow while the Company pursues its appellate rightswith respect to this judgment.

In general, theCompany continues to believe that the Store Managers are “exempt” employeesunder the FLSA and have been properly compensated and that the Company hasmeritorious positions on appeal that should enable it ultimately to 

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prevail.  However, the outcome of any litigationis inherently uncertain.  Resolution of this matter could have a materialadverse effect on the Company’s financial position, liquidity or results ofoperation.

On August 24, 2006, a shareholder derivative complaintwas filed in the Superior Court of North Carolina, Mecklenburg County, byRebecca Mitchell against the Company as a nominal defendant and certain of itscurrent and former officers and directors as individual defendants.  Thecomplaint asserted claims under state law in connection with allegations thatcertain of the Company’s stock option grants were “backdated.”  Thiscomplaint was subsequently consolidated with a second, nearly identicalcomplaint filed by Jeffrey Alasina and transferred to the North CarolinaBusiness Court.  On January 4, 2007, the plaintiffs filed a consolidatedamended complaint in the case, which is now captioned  *In re Family DollarStores, Inc. Derivative Litigation*, Master File No. 06-CVS-16796 inthe General Court of Justice, Superior Court Division, MecklenburgCounty.  The consolidated amended complaint names the Company as a nominaldefendant and Howard R. Levine, R. James Kelly, R. David Alexander, Jr., GeorgeR. Mahoney, Jr., John J. Scanlon, C. Martin Sowers, Charles S. Gibson, Jr.,Gilbert A. LaFare, Samuel N. McPherson, Mark R. Bernstein, James G. Martin, andSharon A. Decker as individual defendants.  The consolidated amendedcomplaint contains claims for an accounting, breach of fiduciary duty,restitution/unjust enrichment, and rescission in connection with the Company’salleged backdating.  The consolidated amended complaint seeks unspecifieddamages, disgorgement, equitable relief, and costs, including attorneys’ fees.

On December 15, 2006, a shareholder derivativecomplaint was filed in the United States District Court for the WesternDistrict of North Carolina, Case No. 3:06CV510-W, by Dorothy M. Lee against theCompany as a nominal defendant and certain of its current and former officersand directors, Howard R. Levine, Leon Levine, R. James Kelly, R. David Alexander,Jr., Charles S. Gibson, Jr., C. Martin Sowers, George R. Mahoney, Jr., Mark R.Bernstein, Sharon Allred Decker, Edward C. Dolby, Glenn A. Eisenberg, James G.Martin, and Dale C. Pond, as individual defendants.  The complaintasserted claims under state and federal law in connection with allegations thatcertain of the Company’s stock option grants were “backdated.”  OnDecember 20, 2006, a second, nearly identical complaint was filed by StanfordH. Arden in the United States District Court for the Western District of NorthCarolina, Case No. 3:06CV523-C.  The complaints each contain claims forviolations of section 14(a) of the Exchange Act, an accounting, breach offiduciary duty, abuse of control, gross mismanagement, constructive fraud, corporatewaste, unjust enrichment, rescission, and breach of fiduciary duty for insiderselling and misappropriation of information in connection with the Company’salleged backdating of stock option grants.  The complaints each seekunspecified money damages, an accounting, corporate governance and internalcontrol reforms, imposition of a constructive trust over the defendants’ stockoptions, punitive damages, and costs, including attorneys’ fees.  On March 23, 2007, the Court enteredan order consolidating these two federal actions under the caption *In re Family Dollar Stores, Inc. Derivative Litigation*,Case No. 3106CV510-W.

As of June 25, 2007, the parties have settled bothconsolidated derivative actions, subject to approval of the Court.  The settlement terms generally provide forcertain corporate governance reforms, consisting principally of the following:(i) improved processes for the approval of stock option grants; (ii) adoptionof categorical standards for director independence; (iii) adoption of a majorityvote policy for uncontested elections of directors; (iv) the election of twoadditional independent directors; (v) provisions for recovery of cash bonuspayments made to executive officers in the event of any future financialrestatements resulting from intentional misconduct; and (vi) provisions forminimum stock ownership levels by Company officers.  In addition, the settlement includes theagreement of each of Howard R. Levine, Chairman and CEO, R. James Kelly,President and COO, George R. Mahoney, Jr., a director and former officer of theCompany, and C. Martin Sowers, a Company officer, that an aggregate of 210,000stock options held by them will be relinquished.  The complete settlement terms are set forth inthe Stipulation and Agreement of Compromise, Settlement and Release filed asExhibit 10.1 to the Company’s Form 8-K filed on June 26, 2007.  The Company recorded a charge of approximately$5.7 million in the third quarter of fiscal 2007 for previously unplanned costsand expenses related to the litigation and its settlement, including $3.5million for an expected award of attorneys’ fees to counsel for the plaintiffs.

The Company is involved in numerous other legalproceedings and claims incidental to its business, including litigation relatedto alleged failures to comply with various state and federal employment laws,some of which are or may be pled as class or collective actions, and litigationrelated to alleged personal or property damage, as to which the Company carriesinsurance coverage and/or, pursuant to Statement of Financial AccountingStandards No. 5, “Accounting for Contingencies,” has established reserves asset forth in the Company’s financial statements.  While the ultimateoutcome cannot be determined, the Company currently believes that theseproceedings and claims, both individually and in the aggregate, should not havea material adverse effect on the Company’s financial position, liquidity orresults of operations.  However, the outcome of any litigation isinherently uncertain and, if decided adversely to the Company, the Company maybe subject to liability that could have a material adverse effect on theCompany’s financial position, liquidity or results of operations.

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9.               The Company manages its business on thebasis of one reportable segment.  All ofthe Company’s operations are located in the United States.  The following information regarding classesof similar products is presented in accordance with SFAS No. 131, “Disclosuresabout Segments of an Enterprise and Related Information.”

|                               | ** ** | **Quarter Ended**     | ** ** | **Three Quarters Ended** | ** ** |
|-------------------------------|------------|----------------------------|------------|------------------------------------|------------|
| **(in thousands)**       | ** ** | **June 2, 2007** | ** ** | **May 27, 2006**         | ** ** | **June 2, 2007** | ** ** | **May 27, 2006** | ** ** |
| Classes of  similar products: |       |                       |       |                               |       |   |   |   |   |
| Consumables                   |       | $                          | 975,307    |                               | $          | 916,810 |   | $ | 3,023,300 |   | $ | 2,760,051 |   |
| Home Products                 |       | 238,257                    |       | 233,347                            |       | 806,758 |   | 757,219 |   |
| Apparel and Accessories       |       | 262,789                    |       | 239,493                            |       | 745,146 |   | 684,576 |   |
| Seasonal and Electronics      |       | 178,423                    |       | 179,866                            |       | 627,216 |   | 614,810 |   |
| Net sales                     |       | $                          | 1,654,776  |                               | $          | 1,569,516 |   | $ | 5,202,420 |   | $ | 4,816,656 |   |

 

Consumablesincludes household chemical and paper products, candy, snacks and other food,health and beauty aids, hardware and automotive supplies, and pet food andsupplies.  Home Products includesdomestic items such as blankets, sheets and towels as well as housewares andgiftware.  Apparel and Accessoriesincludes men’s, women’s, boys’, girls’ and infants’ clothing and shoes.  Seasonal and Electronics includes toys,stationery and school supplies, seasonal goods and electronics, includingpre-paid cellular phones and services.

**Item 2.    Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

**This discussion summarizes thesignificant factors affecting the consolidated results of operations andfinancial condition of the Company for the thirteen-week period ended June 2,2007, and the thirteen-week period ended May 27, 2006 (“third quarter of fiscal2007” and “third quarter of fiscal 2006”, respectively) and the forty-weekperiod ended June 2, 2007, and the thirty-nine-week period ended May 27, 2006 (“firstthree quarters of fiscal 2007” and “first three quarters of fiscal 2006”,respectively).  This discussion should beread in conjunction with, and is qualified by, the financial statementsincluded in this Report, the financial statements for the fiscal year endedAugust 26, 2006 (“fiscal 2006”), and Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (“MD&A”) contained in theCompany’s Annual Report on Form 10-K for fiscal 2006.  This discussion should also be read inconjunction with the “Cautionary Statement Regarding Forward Looking Statements”set forth following this MD&A, and the “Risk Factors” set forth in Part I,Item 1A of the Company’s Annual Report on Form 10-K for fiscal 2006, and inPart II, Item 1A of this Report.**

**Results of Operations**

Fiscal 2007 is a 53-week year, compared with a 52-weekyear in fiscal 2006.  The extra weekoccurred during the second quarter of fiscal 2007.  As a result, the first three quarters offiscal 2007 included 40 weeks compared to 39 weeks in the first three quartersof fiscal 2006.

**2007 Year-to-date Results and Fiscal 2007 Outlook**

During the first three quarters of fiscal 2007, theCompany’s net sales increased 8.0% to $5.2 billion, net income increased 25.9%to $205.0 million and diluted net income per common share increased 30.8% to$1.36 as compared to the first three quarters of fiscal 2006.  The results for the first three quarters offiscal 2007 included the benefit of an additional week, as discussedabove.  In addition, the first threequarters of fiscal 2006 was negatively impacted by a $45.0 million pre-taxlitigation charge (approximately $0.18 per diluted share).  Improvements in cost of sales as a percentageof net sales, partially offset the effect of a lower than planned increase insales in comparable stores (stores open more than 13 months) during the firstthree quarters of fiscal 2007.  TheCompany continued to focus on inventory productivity during the first threequarters of fiscal 2007.  Inventory on aper store basis at the end of the first three quarters of fiscal 2007 wasapproximately 8.6% lower than inventory on a per store basis at the end of thefirst three quarters of fiscal 2006, excluding merchandise in transit to thedistribution centers.  The variouscomponents affecting the Company’s results for the first three quarters offiscal 2007 are discussed in more detail below.

During the first three quarters of fiscal 2007, theCompany continued to focus its efforts on key initiatives designed to supportsustainable and profitable growth, as discussed below.

·       TheCompany installed refrigerated coolers in approximately 900 stores during thefirst three quarters of fiscal 2007.  Thecoolers are part of an enhanced food strategy designed to increase customertraffic.  At the end of the first threequarters of fiscal 2007, approximately 4,700 stores had coolers for the sale ofrefrigerated food.  The Company currentlyexpects to have coolers in more than 5,000 stores by the end of fiscal2007.  During the first three quarters of

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fiscal 2007, the Companyalso updated its food schematic in all stores to reflect a greater emphasis onquick-prep and ready-to-eat products, increased the food assortment inapproximately 2,000 stores and installed technology to facilitate theacceptance of food stamps in approximately 300 stores.  The Company currently plans to install thenew technology in up to 750 stores by the end of fiscal 2007.

·       TheCompany continues to focus on driving better returns in the Urban Initiativemarkets.  Most Urban Initiative marketsexperienced improvements in store manager retention and inventory productivityduring the first three quarters of fiscal 2007 as compared to the first threequarters of fiscal 2006, and the Company continues to focus on improvingprofitability in these markets.  Duringthe first three quarters of fiscal 2007, the Company installed a newtechnological platform in approximately 240 Urban Initiative stores.  The new platform is designed to facilitatebetter customer service, facilitate the acceptance of food stamps and otherforms of payment, and make the stores easier to manage.  The Company plans to implement the newplatform in approximately 600 Urban Initiative stores by the end of fiscal2007.

·     Insupport of the Treasure Hunt strategy, the Company continues to: developevent-driven programs that create excitement for customers and employees; focuson improving inventory flow and turns, resulting in better presentation of newproducts; and enhance the apparel assortment.

·     Duringfiscal 2007, the Company plans to open approximately 300 stores and closeapproximately 45 stores.  The Companycontinues to refine its site selection process and increase itscross-functional focus on new store performance.  During the first three quarters of fiscal2007, the Company opened 232 stores and closed 37 stores.

·     Duringthe first three quarters of fiscal 2007, the Company continued to enhance itsresearch and development effort known as “Concept Renewal.”  The Concept Renewal effort involvesdeveloping new ideas and initiatives designed to sustain profitablegrowth.  As of June 2, 2007, the Companyhad 12 Concept Renewal stores to test new ideas, including store layouts anddesign elements.  During the secondquarter of fiscal 2007, the Company began to incorporate many of its new designand layout elements into new stores.

·     TheCompany initiated an effort known as “Project Accelerate” during the firstquarter of fiscal 2007.  ProjectAccelerate is a strategic, multi-year initiative designed to optimize theCompany’s merchandising and supply chain processes and will include priceoptimization, category management, space management, and assortment planningenhancements.

Based on operating results for the first threequarters of fiscal 2007, as discussed below, and the Company’s plans for theremainder of the year, the Company currently expects diluted net income percommon share to be between $1.62 and $1.65 for fiscal 2007, compared to $1.26in fiscal 2006.  Diluted net income percommon share in fiscal 2006 includes the impact (approximately $0.18 perdiluted share) of an adverse litigation judgment, as discussed in Note 8 to theConsolidated Condensed Financial Statements included in this Report, andcumulative charges (approximately $0.04 per diluted share) to record non-cashstock-based compensation and income tax related interest expense, as discussedin Note 5 to the Consolidated Condensed Financial Statements included in thisReport and in Note 10 to the Consolidated Financial Statements included in theCompany’s Annual Report on Form 10-K for fiscal 2006.

**Third Quarter Resultsand Fourth Quarter Outlook**

# *NetSales*

Net sales in the third quarter of fiscal 2007 were$1.7 billion, an increase of approximately 5.4% ($85.3 million), as comparedwith an increase of 9.9% ($141.6 million) in the third quarter of fiscal2006.  The increase in the third quarterof fiscal 2007 was attributable, in part, to increased sales in comparablestores (stores open more than 13 months) of 1.5% ($22.2 million), with thebalance of the increase primarily relating to sales from new stores opened aspart of the Company’s store growth program. The increase in sales in comparable stores resulted from an increase inthe average customer transaction, which offset a slight decline in customertraffic, as measured by the number of register transactions in comparablestores.  Sales increases during the thirdquarter of fiscal 2007 were stronger in Apparel and Accessories and Consumablesand were weaker in Home Products.  Appareland Accessories was positively impacted by improved in-store presentations,enhanced product quality, and the introduction of highly-recognized nationalbrands.  The Consumables performance wasdriven primarily by sales of food in connection with the Company’s enhancedfood strategy.  Sales of Seasonal andElectronics were impacted by increased sales of prepaid services, which arerecorded on a net basis (only the markup on the sales of these products isrecorded as revenue).

The Company distributedone advertising circular during the third quarter of fiscal 2007 to customersof approximately half of the chain.  TheCompany did not distribute any advertising circulars during the third quarterof fiscal 2006.  The circulars aredesigned to stimulate traffic and inform customers about the Company’s TreasureHunt merchandise, seasonal values and competitive prices on core consumables.

**Theaverage number of stores in operation during the third quarter of fiscal 2007was 5.1% higher than the average number of stores in operation during the thirdquarter of fiscal 2006.**

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*Cost ofSales*

Cost of sales increased approximately 3.5% in thethird quarter of fiscal 2007 compared with the third quarter of fiscal2006.  This increase primarily reflectedthe additional sales volume between years. Cost of sales, as a percentage of net sales, was 65.1% in the third quarterof fiscal 2007 and 66.4% in the third quarter of fiscal 2006.  Theimprovement in cost of sales, as a percentage of net sales, was due to theeffect of an increase in sales of prepaid services, which are reported on a netbasis, as discussed above, stronger sales of higher margin merchandise, andbetter merchandise markup.  Inventoryshrinkage, markdown expense, and freight expense, all as a percentage of netsales, were relatively unchanged.

***Selling, General and Administrative Expenses***

Selling, general and administrative (“SG&A”)expenses increased 11.2% in the third quarter of fiscal 2007, compared with thethird quarter of fiscal 2006.  Theincreases in these expenses were due primarily to additional costs arising fromthe continued growth in the number of stores in operation.  SG&A expenses, as a percentage of netsales, were 29.3% in the third quarter of fiscal 2007 and 27.7% in the thirdquarter of fiscal 2006.  As a result oflow single-digit comparable store sales growth and the effect of an increase insales of prepaid services, most costs in the third quarter of fiscal 2007 weredeleveraged.  Increased occupancy costs(approximately 0.8% of net sales), increased professional fees (approximately0.5% of net sales), and increased insurance costs (approximately 0.2% of netsales) accounted for most of the increase. The increase in occupancy costs, as a percentage of net sales, was dueto higher store rental expenses (including property tax, insurance, and commonarea maintenance reimbursements) and increased store maintenance and repaircosts.  The Company expects to mitigateagainst increases in occupancy costs in the future through investments in newfacilities management processes.  Theincrease in professional fees, as a percentage of net sales, resulted fromexpenses related to the defense and settlement of the Company’s stockholderderivative actions and costs associated with the Company’s Project Accelerateinitiative.  See Note 8 to theConsolidated Condensed Financial Statements included in this Report for moreinformation on the Company’s stockholder derivative actions.  The increase in insurance costs is due tohigher medical expenses resulting from the implementation of an enhancedemployee medical benefit program.

***Interest Income***

**Interest income increased $1.1million in the third quarter of fiscal 2007 compared with the third quarter offiscal 2006.  The increase in interestincome was due to an increase in investments and interest rates.**

***Interest Expense***

Interest expense remainedrelatively unchanged during the third quarter of fiscal 2007 compared with thethird quarter of fiscal 2006.

***Income Taxes***

The effective tax rate was35.0% for the third quarter of fiscal 2007 compared with 37.7% for the thirdquarter of fiscal 2006.  The decrease inthe effective tax rate was primarily the result of the positive impact of aretroactive reinstatement of federal jobs tax credits, an increase intax-exempt interest income and the effect of changes in reserves for stateincome tax contingencies.

*Fourth Quarter Outlook*

For the fourth quarter of fiscal 2007, the Companyexpects comparable store sales to increase 1 to 3% as a result of the Company’senhanced food strategy and the impact from “Treasure Hunt” merchandisesales.  The Company believes that cost ofsales, as a percentage of net sales, during the fourth quarter of fiscal 2007will decrease as compared to fiscal 2006 due to better merchandise markup andthe effect of an increase in sales of prepaid services.  These factors are expected to offset highermarkdowns and the effect of low single-digit comparable store salesgrowth.  The Company believes thatSG&A expense, as a percentage of net sales, will increase as compared tofiscal 2006 due to continued investments in the Company’s ongoing initiativesand low single-digit comparable store sales growth.  Using these assumptions, the Company expectsthat diluted net income per common share will be between $0.26 and $0.29 forthe fourth quarter of fiscal 2007, compared to $0.21 in the fourth quarter offiscal 2006.  Diluted net income percommon share in the fourth quarter of fiscal 2006 includes the impact ofcumulative charges (approximately $0.04 per diluted share) to record non-cashstock-based compensation and income tax related expense, as discussed in Note 5to the Consolidated Condensed Financial Statements included in this Report andin Note 10 to the Consolidated Financial Statements included in the Company’sAnnual Report on Form 10-K for fiscal 2006.

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**Year-to-date Results**

# *Net Sales*

Net sales in the first three quarters of fiscal 2007were $5.2 billion, an increase of approximately 8.0% ($385.8 million), ascompared with an increase of 9.6% ($421.7 million) in the first three quartersof fiscal 2006.  The increase in thefirst three quarters of 2007 was attributable, in part, to increased sales incomparable stores (stores open more than 13 months) of 0.9% ($42.6 million),with the balance of the increase primarily relating to sales from new storesopened as part of the Company’s store growth program.  The increase in sales in comparable storesresulted from an increase in the average customer transaction, which offset aslight decline in customer traffic, as measured by the number of registertransactions in comparable stores.  Salesincreases during the first three quarters of fiscal 2007 were strongest inConsumables and Apparel and Accessories and were weaker in Home Products.  The Consumables performance was drivenprimarily by sales of food in connection with the Company’s enhanced foodstrategy.  Apparel and Accessories waspositively impacted by improved in-store presentations, enhanced productquality, and the introduction of highly-recognized national brands.  Sales of Seasonal and Electronics wereimpacted by increased sales of prepaid services, which are recorded on a netbasis (only the markup on the sales of these products is recorded as revenue).

The Company distributedfour advertising circulars during the first three quarters of fiscal 2007, comparedwith three advertising circulars during the first three quarters of fiscal2006.  The circulars are designed tostimulate traffic and inform customers about the Company’s Treasure Huntmerchandise, seasonal values and competitive prices on core consumables.

The average number ofstores in operation during the first three quarters of fiscal 2007 was 5.1%higher than the average number of stores in operation during the first threequarters of fiscal 2006.  The Company had6,368 stores in operation at the end of the first three quarters of fiscal2007, compared with 6,073 stores in operation at the end of the first threequarters of fiscal 2006, representing an increase of 4.9%.

*Cost of Sales*

Cost of sales increased approximately 6.5% in thefirst three quarters of fiscal 2007 compared with the first three quarters offiscal 2006.  This increase primarilyreflected the additional sales volume between years.  Cost of sales, as a percentage of net sales,was 65.7% in the first three quarters of fiscal 2007 and 66.6% in the firstthree quarters of fiscal 2006.  The improvement in cost of sales, as apercentage of net sales, was due to the effect of an increase in sales ofprepaid services, which are reported on a net basis, as discussed above,stronger sales of higher margin merchandise, better merchandise markup, andlower inventory shrinkage.  Theseimprovements were offset slightly by higher markdown expense.  Freight expense, as a percentage of netsales, was substantially unchanged.  TheCompany continues to focus on improving inventory productivity which itbelieves impacts inventory shrinkage and store manager retention trends.

***Selling, General andAdministrative Expenses***

SG&A expenses increased 12.0% in the first threequarters of fiscal 2007, compared with the first three quarters of fiscal2006.  The increases in these expenseswere due primarily to additional costs arising from the continued growth in thenumber of stores in operation.  SG&Aexpenses, as a percentage of net sales, were 28.0% in the first three quartersof fiscal 2007 and 27.0% in the first three quarters of fiscal 2006.  As a result of low single-digit comparablestore sales growth and the effect of an increase in sales of prepaid services,most costs in the first three quarters of fiscal 2007, including compensationexpense, were deleveraged.  Increasedprofessional fees (approximately 0.5% of net sales), increased occupancy costs(approximately 0.4% of net sales), and increased compensation expense(approximately 0.2% of net sales) were partially offset by a decrease ininsurance costs (approximately 0.2% of net sales).  The increase in professional fees, as apercentage of net sales, was due primarily to expenses associated with theCompany’s review of its stock option granting practices and the defense andsettlement of the related stockholder derivative actions.  See Note 5 to the Consolidated CondensedFinancial Statements included in this Report and Note 10 to the ConsolidatedFinancial Statements included in the Company’s Annual Report on Form 10-K forfiscal 2006 for more information on the Company’s review of its stock optionpractices.  See Note 8 to theConsolidated Condensed Financial Statements included in this Report for moreinformation on the defense and settlement of the Company’s stockholderderivative actions.  The increase inoccupancy costs, as a percentage of net sales, was due to higher store rentalexpenses (including property tax, insurance, and common area maintenancereimbursements) and increased store maintenance and repair costs.  The Company expects to mitigate againstincreases in occupancy costs in the future through improvements in facilitiesmanagement processes.  The decrease ininsurance costs, as a percentage of net sales, was due to a reduction in workerscompensation expenses.  The Companybelieves that improvements in processes, lower inventory levels and increasedstore manager retention rates contributed to the reduction in workerscompensation costs.

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***Litigation Charge***

**During the first three quartersof fiscal 2006, the Company recorded a $45.0 million (approximately $0.18 perdiluted share) litigation charge associated with an adverse litigation judgmentin a case in Tuscaloosa, Alabama.  SeeNote 8 to the Consolidated Condensed Financial Statements included in thisReport for more information.  All otherlegal expenses incurred during the first three quarters of both fiscal 2007 andfiscal 2006 were recorded in SG&A.**

***Interest Income***

**Interest income increased $3.0million in the first three quarters of fiscal 2007 compared with the firstthree quarters of fiscal 2006.  Theincrease in interest income was due to an increase in investments and interestrates.**

***Interest Expense***

Interest expense increased$5.1 million in the first three quarters of fiscal 2007 compared with the firstthree quarters of fiscal 2006.  Theincrease in interest expense was due primarily to interest on taxes resultingfrom the Internal Revenue Service examination of the Company’s consolidatedfederal income tax returns for fiscal 2005, fiscal 2004 and fiscal 2003 andinterest on state income taxes.

***Income Taxes***

The effective tax rate was36.4% for the first three quarters of fiscal 2007, compared with 37.2% for thefirst three quarters of fiscal 2006.  Thedecrease in the effective tax rate was primarily the result of the positiveimpact of a retroactive reinstatement of federal jobs tax credits, an increasein tax-exempt interest income and the effect of changes in reserves for stateincome tax contingencies.

**Liquidity and Capital Resources**

At the end of the first three quarters of fiscal 2007,the Company had working capital of $517.0 million, compared with $455.1 millionat the end of the first three quarters of fiscal 2006 and $432.7 million as ofAugust 26, 2006.  Changes in workingcapital during the first three quarters of fiscal 2007 and fiscal 2006 wereprimarily the result of earnings, changes in merchandise inventories, capitalexpenditures, changes in income taxes payable, and repurchases of the Company’scommon stock.

The Company’s inventories at the end of the firstthree quarters of fiscal 2007 were 2.0% lower than at the end of the firstthree quarters of fiscal 2006.  Inventoryon a per store basis at the end of the first three quarters of fiscal 2007 wasapproximately 8.6% lower than inventory on a per store basis at the end of thefirst three quarters of fiscal 2006, excluding merchandise in transit to thedistribution centers.  The decrease ininventory on a per store basis is the result of the Company’s continuedrefinement of its replenishment system and renewed focus on inventoryproductivity, which includes improved planning and flow of fashion merchandiseand the use of more aggressive exit strategies. The Company believes the decrease in inventory levels has had a positiveimpact on merchandise presentation and store manager retention.

**Capital expenditures for the first three quarters offiscal 2007 were approximately $85.9 million, compared with $144.4 million forthe first three quarters of fiscal 2006. The decrease in capital expenditures is due primarily to lowerexpenditures related to new stores and the distribution network.  Capital expenditures are currently expectedto be approximately $120 million to $130 million for fiscal 2007.  The majority of the planned capitalexpenditures for fiscal 2007 relate to the Company’s new store openings;existing store expansions, relocations and renovations; and expendituresrelated to store-focused technology infrastructure.**

**Inthe first three quarters of fiscal 2007, the Company opened 232 stores, closed37 stores and expanded, relocated, or renovated 17 stores.  The Company occupies most of its stores underoperating leases.  Store opening,closing, expansion, relocation, and renovation plans, as well as overall capitalexpenditure plans, are continuously reviewed and are subject to change.**

During the third quarter of fiscal 2007, the Companypurchased 4.1 million shares of its common stock at a cost of $131.9million.  The shares were repurchased inthe open market or pursuant to Rule 10b5-1 of the Securities Exchange Act of1934, as amended.  The Company did notpurchase any shares of its common stock during the first half of fiscal2007.  During the first three quarters offiscal 2006, the Company purchased 13.9 million shares of its common stock at acost of $334.2 million.

The Company has anunsecured revolving credit facility with a syndicate of lenders for short-termborrowings of up to $350 million. Outstanding standby letters of credit ($128.3 million as of June 2,2007) reduce the borrowing capacity of

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the credit facility.  The creditfacility expires on August 24, 2011.  TheCompany had no outstanding borrowings against the credit facility during thefirst three quarters of fiscal 2007. Cash flow from operations and the available credit facility, asdiscussed above, are expected to be sufficient to meet planned liquidity andoperational capital resource needs, including store expansion and other capitalspending programs, scheduled interest payments, and any further repurchases ofthe Company’s common stock.

On December 19, 2006, the Company entered intoseparate agreements in connection with its unsecured Senior Notes (the “Notes”)and its unsecured revolving credit facility. The agreements extended the delivery date for the fiscal 2006 auditedfinancial statements, the unaudited financial statements for the first quarterof fiscal 2007 and the corresponding compliance certificates to March 31, 2007,and waived any Defaults or Events of Default that would have occurred due tothe failure of the Company to deliver such information in connection with theNotes and credit facility.  As discussedin Note 5 to the Consolidated Condensed Financial Statements included in thisReport, the Company formed a Special Committee of the Board of Directors toinvestigate the Company’s stock option granting practices.  As a result, the Company was unable to fileits Annual Report on Form 10-K for fiscal 2006 and its Quarterly Report on Form10-Q for the first quarter of fiscal 2007 by the required deadlines.  During March 2007, the Company delivered theappropriate financial statements and compliance certificates and is incompliance with all covenants under both the Notes and credit facility.  As of the end of the first three quarters offiscal 2007, the Company had outstanding long-term debt of $250.0 millionrelated to the Notes.

The following table showsthe Company’s obligations and commitments as of the end of the first threequarters of fiscal 2007 to make future payments under contractual obligations:
|                                                       | ** ** | **Payments Due During Period Ending** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| **(in thousands)  Contractual Obligations** | ** ** | **Total**                                                 | ** ** | **May  2008** | ** ** | **May  2009** | ** ** | **May  2010** | ** ** | **May  2011** | ** ** | **May  2012** | ** ** | **Thereafter** | ** ** |
| Long-term debt                                        |       | $                                                         | 250,000    |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 16,200 |   | $ | 233,800 |   |
| Interest                                              |       | 105,303                                                   |       | 13,387 |   | 13,387 |   | 13,387 |   | 13,387 |   | 12,821 |   | 38,934 |   |
| Merchandise letters of credit                         |       | 171,889                                                   |       | 171,889 |   | — |   | — |   | — |   | — |   | — |   |
| Operating leases                                      |       | 1,270,452                                                 |       | 288,427 |   | 256,228 |   | 213,281 |   | 167,217 |   | 122,162 |   | 223,137 |   |
| Construction obligations                              |       | 5,079                                                     |       | 5,079 |   | — |   | — |   | — |   | — |   | — |   |
| Minimum royalties                                     |       | 17,100                                                    |       | 900 |   | 1,700 |   | 2,300 |   | 2,500 |   | 2,700 |   | 7,000 |   |
| Total                                                 |       | $                                                         | 1,819,823  |   | $ | 479,682 |   | $ | 271,315 |   | $ | 228,968 |   | $ | 183,104 |   | $ | 153,883 |   | $ | 502,871 |   |

 

At the end of the first three quarters of fiscal 2007, approximately$26.1 million of the merchandise letters of credit were included in accountspayable on the Company’s Consolidated Condensed Balance Sheet.  Most of the Company’s operating leasesprovide the Company with an option to extend the term of the lease at designatedrates.

The following table shows the Company’s othercommercial commitments as of the end of the first three quarters of fiscal2007:
| Other Commercial Commitments (in thousands) | ** ** | **Total Amounts  Committed** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------|------------|
| Standby letters of  credit                                      |       | $                                 | 128,341    |   |
| Surety bonds                                                    |       | 47,792                            |       |
| Total Commercial  Commitments                                   |       | $                                 | 176,133    |   |

 

**Thestandby letters of credit (which are primarily renewed on an annual basis) areused as surety for future premium and deductible payments to the Company’sworkers’ compensation and general liability insurance carrier.  The Company accrues for these future paymentliabilities as described in the “Critical Accounting Policies” section of “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” inthe Company’s Annual Report on Form 10-K for fiscal 2006.  Included in the outstanding amount of suretybonds is a $44.5 million bond obtained by the Company in connection with anadverse litigation judgment, as discussed in Note 8 to the ConsolidatedCondensed Financial Statements included in this Report**

**Recent Accounting Pronouncements**

**In July 2006, the FASB issuedInterpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”).  FIN 48 provides guidance regarding therecognition and measurement of tax positions and the related reporting anddisclosure requirements and will be effective for the Company beginning withits first quarter of fiscal 2008.  TheCompany is currently assessing the impact, if any, that FIN 48 will have on itsConsolidated Financial Statements.**

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**In September 2006, the FASBissued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”).  SFAS 157 defines fair value, establishes aframework for measuring fair value in generally accepted accounting principlesand expands disclosures about fair value measurements.  SFAS 157 is effective for the first annualperiod ending after November 15, 2007. The Company has not yet determined the impact, if any, that SFAS 157will have on its Consolidated Financial Statements.**

**In September 2006, the SEC issuedStaff Accounting Bulletin No. 108, “Considering the Effects of Prior YearMisstatements when Quantifying Misstatements in Current Year FinancialStatements” (“SAB 108”).  SAB 108provides guidance on the consideration of the effects of prior yearmisstatements in quantifying current year misstatements for the purpose of amateriality assessment.  SAB 108 requiresquantification of financial statement errors based on the effects of the erroron each of the company’s financial statements and the related financialstatement disclosures.  This approach isreferred to as the “dual approach” because it requires both the carryover andreversing effects of prior year misstatements to be quantified.  SAB 108 is effective for the first annualperiod ending after November 15, 2006. The Company is currently assessing the impact that SAB 108 will have onits Consolidated Financial Statements.**

**In February 2007, the FASB issuedSFAS No. 159, “The Fair Value Option for Financial Assets and FinancialLiabilities - Including an Amendment of FASB Statement No. 115” (“SFAS 159”).  SFAS 159 permits all entities the optionto measure many financial instruments and certain other items at fairvalue.  If a company elects the fairvalue option for an eligible item, then it will report unrealized gains andlosses on those items at each subsequent reporting date.  SFAS 159 is effective for fiscal yearsbeginning after November 15, 2007. The Company has not yet determined the impact, if any, that SFAS 159will have on its Consolidated Financial Statements.**

**Critical Accounting Policies**

**There have been no changes to theCritical Accounting Policies outlined in the Company’s Annual Report on Form10-K for fiscal 2006.**

**Cautionary Statement Regarding Forward-LookingStatements**

Certain statements contained in this Report, or inother public filings, press releases, or other written or oral communicationsmade by the Company or its representatives, which are not historical facts areforward-looking statements made pursuant to the safe harbor provisions of thePrivate Securities Litigation Reform Act of 1995.  These forward-looking statements address theCompany’s plans, activities or events which the Company expects will or mayoccur in the future and may include express or implied projections of revenueor expenditures; statements of plans and objectives for future operations,growth or initiatives; statements of future economic performance; or statementsregarding the outcome or impact of pending or threatened litigation.  These forward-looking statements may beidentified by the use of the words “plan,” “estimate,” “expect,” “anticipate,” “probably,”“should,” “project,” “intend,” “continue,” and other similar terms andexpressions.  Various risks,uncertainties and other factors may cause the Company’s actual results todiffer materially from those expressed or implied in any forward-lookingstatements.  Factors, uncertainties andrisks that may result in actual results differing from such forward-lookinginformation include, but are not limited to those listed in Part I, Item 1A ofthe Company’s Annual Report on Form 10-K for fiscal 2006 and in Part II, Item 1A of this Report, aswell as other factors discussed throughout this Report, including, withoutlimitation, the factors described under “Critical Accounting Policies” in PartI, Item 2 above, or in other filings or statements made by the Company.  All of the forward-looking statements made bythe Company in this Report and other documents or statements are qualified bythese and other factors, risks and uncertainties.  Readers are cautioned not to place unduereliance on these forward-looking statements, which speak only as of the dateof this Report.  The Company does notintend to publicly update or revise its forward-looking statements even ifexperience or future changes make it clear that projected results expressed orimplied in such statements will not be realized, except as may be required bylaw.

# **Item 3.****           ****Quantitative and Qualitative Disclosures About Market Risk**

The Company is subject tomarket risk from exposure to changes in interest rates based on its financing,investing and cash management activities. The Company maintains an unsecured revolving credit facility at a variablerate of interest to meet the short-term needs of its expansion program andseasonal inventory increases.  TheCompany had no outstanding borrowings against this facility during the firstthree quarters of fiscal 2007.  TheCompany’s long-term debt associated with the Notes bears interest at fixedrates.

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#### **Item 4.****            Controls andProcedures**

Basedon an evaluation by management of the Company (with the participation of theCompany’s Chief Executive Officer and Chief Financial Officer), as of the end of the period covered by thisreport, the Company’s Chief Executive Officer and Chief Financial Officerconcluded that the Company’s disclosure controls and procedures (as defined inRules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, asamended, (the “Exchange Act”)) were effective to provide reasonable assurancethat information required to be disclosed by the Company in reports that theCompany files or submits under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in SEC rules andforms and that such information is accumulated and communicated to the Company’smanagement, including the Chief Executive Officer and Chief Financial Officer,to allow timely decisions regarding required disclosures.

The Company is continuously seeking to improve theefficiency and effectiveness of its operations and of its internalcontrols.  This results in refinements toprocesses throughout the Company. However, there has been no change in the Company’s internal control overfinancial reporting (as defined in Exchange Act Rule 13a-15(f)) during the mostrecent fiscal quarter that has materially affected, or is reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

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**PART II - OTHER INFORMATION**

**Item 1.**           Legal Proceedings

**The information in Note 8 to the ConsolidatedCondensed Financial Statements contained in Part I, Item 1 of the Form 10-Q isincorporated herein by this reference.**

**Item 1A.**        Risk Factors

Therisks described below, which update and should be read in conjunction with “RiskFactors” included in Part I, Item 1A of the Company’s Annual Report on Form10-K for fiscal 2006, could materially and adversely affect the Company’sbusiness, financial condition and results of operations.  The Company may also be adversely affected byrisks not currently known to management, or that management does not currentlyconsider to be material.

*Pricing pressures, including inflation and energyand food prices could affect the Company’s profitability.*

Increases in the cost ofgoods and services, including changes resulting from inflationary pressures,may reduce the Company’s profitability and/or sales.  The Company’s ability to pass on incrementalpricing changes may be limited due to operational and/or competitivefactors.  Increases in prices, includingchanges in energy and food prices, may impact the Company’s customer base bylimiting the amount of discretionary spending of its customers and may impactthe Company through increased costs of goods and/or increased operatingexpenses.

*Higher costs, delays, unanticipated impacts, and/orfailure to achieve targeted results associated with the implementation of newprograms, systems and technology could adversely affect the Company’s resultsof operations.*

The Company isundertaking a variety of operating initiatives and infrastructure initiativesrelated to supply chain systems, store technology including the installation ofnew point-of-sales systems and lease administration systems, coolerinstallations and related food programs, Urban Initiative programs, and realestate expansion goals.  The failure toproperly execute any of these initiatives could have an adverse impact on thefuture operating results of the Company.

*Litigation and/or investigations relating to theCompany’s stock option practices could adversely affect the Company.*

As described elsewhere inthis Report, the Company has entered into a settlement agreement with respectto certain shareholder derivative actions alleging that certain of the Company’sstock option grants were “backdated,” along with related claims.   See Item 3 – “Legal Proceedings.”  The settlement is subject to approval of thecourt and delays in or objections to the final approval of such settlementcould result in additional unanticipated expenses and uncertainty.  In addition, the Company continues to besubject to an informal inquiry by the Securities and Exchange Commissionrelated to the Company’s stock option practices.  Other litigation or governmentalinvestigations or proceedings, including actions resulting from the Company’sstock option practices, the results of the Company’s review of such practicesand related accounting charges, or the proposed settlement of the shareholderderivative actions could require management time and attention and/or cause theCompany to incur additional expenses, fines or penalties which could negativelyimpact the Company’s financial position and/or operations.

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**Item 2.**           Unregistered Sales of Equity Securities and Use ofProceeds

The following table setsforth information with respect to purchases of shares of the Company’s commonstock made during the quarter ended June 2, 2007, by or on behalf of theCompany or any “affiliated purchaser” as defined by Rule 10b-18(a)(3) of theSecurities Exchange Act of 1934.

| Period                   | ** ** | **Total Number  of Shares  Purchased** | ** ** | **Average  Price Paid  Per Share** | ** ** | **Total Number of  Shares Purchased as  Part of Publicly  Announced Plans or  Programs**(1) | ** ** | **Maximum Number  of Shares that May  Yet Be Purchased  Under the Plans or  Programs**(1) | ** ** |
|--------------------------|------------|--------------------------------------------------|------------|----------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------|------------|
| March (3/4/07 -  4/7/07) |       | —                                           |       | $                                            | —     |                                                                                                                                | —     |                                                                                                                                   | 6,071,254  |   |
| April (4/8/07 -  5/5/07) |       | 1,936,600                                        |       | 32.03                                        |       | 1,936,600                                                                                                                           |       | 4,134,654                                                                                                                              |       |
| May (5/6/07 -  6/2/07)   |       | 2,118,200                                        |       | 32.98                                        |       | 2,118,200                                                                                                                           |       | 2,016,454                                                                                                                              |       |
| Total                    |       | 4,054,800                                        |       | $                                            | 32.53      |                                                                                                                                | 4,054,800  |                                                                                                                                   | 2,016,454  |   |

 

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(1)          On April13, 2005, the Company announced that the Board of Directors authorized thepurchase of up to 5.0 million shares of its outstanding common stock from timeto time as market conditions warrant. The Company fully utilized this authorization during the third quarterof fiscal 2007.  On August 18, 2006, theCompany announced that the Board of Directors authorized the purchase of up toan additional 5.0 million shares of its outstanding common stock from time totime as market conditions warrant.  As ofJune 2, 2007, the Company had 2.0 million shares remaining under thisauthorization.  There is no expirationdate governing the period during which the Company can make share repurchasespursuant to the above referenced authorization.
|                                                                                            | **Item  6.** | **Exhibits**                                                                                                                                                                                             |
|--------------------------------------------------------------------------------------------|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                       |         |                                                                                                                                                                                                     |
|                 | (a)          | Exhibits filed herewith:                                                                                                                                                                                 |
|                                                                                       |         |
|                                                                                       |  *      | 10.1                                                                                                                                                                                                     | Summary of compensation arrangements of Kenneth T.  Smith, the Company’s Chief Financial Officer |
|                                                                                       |         |                                                                                                                                                                                                     |
|                                                                                       | 31.1         | Certification of Principal Executive Officer  Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act  of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|                                                                                       |         |                                                                                                                                                                                                     |
|                                                                                       | 31.2         | Certification of Principal Financial Officer  Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act  of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|                                                                                       |         |                                                                                                                                                                                                     |
|                                                                                       | 32.1         | Certification of Principal Executive Officer  Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002                                                   |
|                                                                                       |         |                                                                                                                                                                                                     |
|                                                                                       | 32.2         | Certification of Principal Financial Officer  Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002                                                   |
|                                                                                            |              |                                                                                                                                                                                                          |  |  |

 

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* Exhibit represents a management contract or compensatory plan

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SIGNATURES

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 
|        | FAMILY DOLLAR STORES, INC.                         |
|--------|----------------------------------------------------|
|   | (Registrant)                                       |
|   |                                               |
|   |                                               |
|   | Date: July 11,  2007                               | /s/ Kenneth T. Smith |   |
|   | KENNETH T. SMITH                                   |
|   | Senior Vice President - Chief Financial Officer    |
|   |                                               |
|   |                                               |
|   | Date: July 11,  2007                               | /s/ Howard R. Levine |   |
|   | HOWARD R. LEVINE                                   |
|   | Chairman of the  Board and Chief Executive Officer |

 

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