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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q



|x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended November 29, 2008

Or



| ̈ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------

Commission File Number: 1-6807

FAMILY DOLLAR STORES, INC.

(Exact name of registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 56-0942963                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer 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 mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.    Yes  x    No   ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated
filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):



|                        |  |                                                  |  |                           |  |  
|----------------------- |  | ------------------------------------------------ |  | ------------------------- |  | -
|Large accelerated filer |  | x                                                |  | Accelerated filer         |  |  ̈
|                        |  |                                                  | 
|Non-accelerated filer   |  |  ̈  (Do not check if a smaller reporting company) |  | Smaller reporting company |  |  ̈

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

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.



|                              |  |                                 
|----------------------------- |  | --------------------------------
|Class                         |  | Outstanding at December 26, 2008
|Common Stock, $0.10 par value |  | 139,912,748 shares              









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FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES

INDEX



|                                                                                                         |  |         
|-------------------------------------------------------------------------------------------------------- |  | --------
|                                                                                                         |  | Page No.
|Part I - Financial Information                                                                           |  | 3       
|                                                                                                         | 
|Item 1 - Consolidated Condensed Financial Statements (unaudited):                                        |  | 3       
|                                                                                                         | 
|Consolidated Condensed Balance Sheets  November 29, 2008, and August 30, 2008                           |  | 3       
|                                                                                                         | 
|Consolidated Condensed Statements of Income  Quarter Ended November 29, 2008, and December 1,
2007      |  | 4       
|                                                                                                         | 
|Consolidated Condensed Statements of Cash Flows  Quarter Ended November 29, 2008, and December 
1, 2007 |  | 5       
|                                                                                                         | 
|Notes to Consolidated Condensed Financial Statements                                                     |  | 6       
|                                                                                                         | 
|Item 2 - Managements Discussion and Analysis of Financial Condition and Results of
Operations           |  | 13      
|                                                                                                         | 
|Item 3 - Quantitative and Qualitative Disclosures About Market Risk                                      |  | 17      
|                                                                                                         | 
|Item 4 - Controls and Procedures                                                                         |  | 17      
|                                                                                                         | 
|Part II - Other Information and Signatures                                                               |  | 18      
|                                                                                                         | 
|Item 1 - Legal Proceedings                                                                               |  | 18      
|                                                                                                         | 
|Item 1A - Risk Factors                                                                                   |  | 18      
|                                                                                                         | 
|Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds                                     |  | 18      
|                                                                                                         | 
|Item 6 - Exhibits                                                                                        |  | 19      
|                                                                                                         | 
|Signatures                                                                                               |  | 20      



2



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##### Table of Contents

PART I  FINANCIAL INFORMATION



|Item 1. | Consolidated Condensed Financial Statements
|------- | -------------------------------------------

FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)



|                                                                                                                                                                                                                                                     |  |                  |           |   |                |   |           |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | --------- | - | -------------- | - | --------- | -
|(in thousands, except per share and share amounts)                                                                                                                                                                                                   |  | November 29,2008 |           |   | August 30,2008 |  
|Assets                                                                                                                                                                                                                                               |  |                  |           |   |                |   |           |  
|Current assets:                                                                                                                                                                                                                                      |  |                  |           |   |                |   |           |  
|Cash and cash equivalents                                                                                                                                                                                                                            |  | $                | 152,571   |   |                | $ | 158,502   |  
|Merchandise inventories                                                                                                                                                                                                                              |  |                  | 1,091,947 |   |                |   | 1,032,685 |  
|Deferred income taxes                                                                                                                                                                                                                                |  |                  | 94,821    |   |                |   | 87,715    |  
|Income tax refund receivable                                                                                                                                                                                                                         |  |                  |          |   |                |   | 7,007     |  
|Prepayments and other current assets                                                                                                                                                                                                                 |  |                  | 57,529    |   |                |   | 58,182    |  
|                                                                                                                                                                                                                                                     |  |                  |           |   |                |   |           |  
|Total current assets                                                                                                                                                                                                                                 |  |                  | 1,396,868 |   |                |   | 1,344,091 |  
|                                                                                                                                                                                                                                                     |  |                 
|Property and equipment, net                                                                                                                                                                                                                          |  |                  | 1,060,560 |   |                |   | 1,071,883 |  
|Investment securities                                                                                                                                                                                                                                |  |                  | 216,819   |   |                |   | 222,104   |  
|Other assets                                                                                                                                                                                                                                         |  |                  | 23,963    |   |                |   | 23,704    |  
|                                                                                                                                                                                                                                                     |  |                  |           |   |                |   |           |  
|                                                                                                                                                                                                                                                     |  | $                | 2,698,210 |   |                | $ | 2,661,782 |  
|                                                                                                                                                                                                                                                     |  |                  |           |   |                |   |           |  
|Liabilities and Shareholders Equity                                                                                                                                                                                                                 |  |                  |           |   |                |   |           |  
|Current liabilities:                                                                                                                                                                                                                                 |  |                  |           |   |                |   |           |  
|Accounts payable                                                                                                                                                                                                                                     |  | $                | 553,905   |   |                | $ | 570,699   |  
|Accrued liabilities                                                                                                                                                                                                                                  |  |                  | 479,301   |   |                |   | 496,820   |  
|Income taxes                                                                                                                                                                                                                                         |  |                  | 29,809    |   |                |   | 1,466     |  
|                                                                                                                                                                                                                                                     |  |                  |           |   |                |   |           |  
|Total current liabilities                                                                                                                                                                                                                            |  |                  | 1,063,015 |   |                |   | 1,068,985 |  
|                                                                                                                                                                                                                                                     |  |                 
|Long-term debt                                                                                                                                                                                                                                       |  |                  | 250,000   |   |                |   | 250,000   |  
|Deferred income taxes                                                                                                                                                                                                                                |  |                  | 48,674    |   |                |   | 50,998    |  
|Income taxes                                                                                                                                                                                                                                         |  |                  | 39,618    |   |                |   | 37,716    |  
|Commitments and contingencies                                                                                                                                                                                                                        |  |                  |           |   |                |   |           |  
|                                                                                                                                                                                                                                                     |  |                 
|Shareholders equity:                                                                                                                                                                                                                                |  |                  |           |   |                |   |           |  
|Preferred stock, $1 par; authorized and unissued 500,000 shares                                                                                                                                                                                      |  |                  |           |   |                |   |           |  
|Common stock, $.10 par; authorized 600,000,000 shares; issued 144,340,177 shares at November 29, 2008, and 144,132,321 shares at
August 30, 2008, and outstanding 139,912,398 shares at November 29, 2008, and 139,704,542 shares at August 30, 2008 |  |                  | 14,434    |   |                |   | 14,413    |  
|Capital in excess of par                                                                                                                                                                                                                             |  |                  | 170,709   |   |                |   | 166,669   |  
|Retained earnings                                                                                                                                                                                                                                    |  |                  | 1,212,450 |   |                |   | 1,170,652 |  
|Accumulated other comprehensive loss                                                                                                                                                                                                                 |  |                  | (7,901    | ) |                |   | (4,862    | )
|                                                                                                                                                                                                                                                     |  |                  |           |   |                |   |           |  
|                                                                                                                                                                                                                                                     |  |                  | 1,389,692 |   |                |   | 1,346,872 |  
|                                                                                                                                                                                                                                                     |  |                  |           |   |                |   |           |  
|Less: common stock held in treasury, at cost (4,427,779 shares at November 29, 2008, and at August 30, 2008)                                                                                                                                         |  |                  | 92,789    |   |                |   | 92,789    |  
|                                                                                                                                                                                                                                                     |  |                  |           |   |                |   |           |  
|Total shareholders equity                                                                                                                                                                                                                           |  |                  | 1,296,903 |   |                |   | 1,254,083 |  
|                                                                                                                                                                                                                                                     |  |                  |           |   |                |   |           |  
|                                                                                                                                                                                                                                                     |  | $                | 2,698,210 |   |                | $ | 2,661,782 |  
|                                                                                                                                                                                                                                                     |  |                  |           |   |                |   |           |  

See notes to the consolidated condensed financial statements.



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FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)



|                                         |  |                  |           |                 |   |          
|---------------------------------------- |  | ---------------- | --------- | --------------- | - | ---------
|                                         |  | Quarter Ended   
|(in thousands, except per share amounts) |  | November 29,2008 |           | December 1,2007
|Net sales                                |  | $                | 1,753,833 |                 | $ | 1,683,043
|                                         |  |                 
|Cost and expenses:                       |  |                  |           |                 |   |          
|Cost of sales                            |  |                  | 1,139,380 |                 |   | 1,107,018
|Selling, general and administrative      |  |                  | 522,049   |                 |   | 490,885  
|                                         |  |                  |           |                 |   |          
|Cost of sales and operating expenses     |  |                  | 1,661,429 |                 |   | 1,597,903
|                                         |  |                  |           |                 |   |          
|                                         |  |                 
|Operating profit                         |  |                  | 92,404    |                 |   | 85,140   
|                                         |  |                 
|Interest income                          |  |                  | 3,599     |                 |   | 2,085    
|                                         |  |                 
|Interest expense                         |  |                  | 3,217     |                 |   | 4,611    
|                                         |  |                  |           |                 |   |          
|                                         |  |                 
|Income before income taxes               |  |                  | 92,786    |                 |   | 82,614   
|                                         |  |                 
|Income taxes                             |  |                  | 33,497    |                 |   | 30,668   
|                                         |  |                  |           |                 |   |          
|                                         |  |                 
|Net income                               |  | $                | 59,289    |                 | $ | 51,946   
|                                         |  |                  |           |                 |   |          
|                                         |  |                 
|Net income per common share  basic      |  | $                | 0.42      |                 | $ | 0.37     
|                                         |  |                  |           |                 |   |          
|Weighted average shares  basic          |  |                  | 139,817   |                 |   | 140,936  
|                                         |  |                  |           |                 |   |          
|                                         |  |                 
|Net income per common share  diluted    |  | $                | 0.42      |                 | $ | 0.37     
|                                         |  |                  |           |                 |   |          
|Weighted average shares  diluted        |  |                  | 140,237   |                 |   | 141,324  
|                                         |  |                  |           |                 |   |          
|                                         |  |                 
|Dividends declared per common share      |  | $                | 0.125     |                 | $ | 0.115    
|                                         |  |                  |           |                 |   |          

See notes to the consolidated condensed financial statements.



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FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                                  |  |                  |         |   |                 |   |          |  
|--------------------------------------------------------------------------------- |  | ---------------- | ------- | - | --------------- | - | -------- | -
|                                                                                  |  | Quarter Ended    |        
|(in thousands)                                                                    |  | November 29,2008 |         |   | December 1,2007 |  
|Cash flows from operating activities:                                             |  |                  |         |   |                 |   |          |  
|Net income                                                                        |  | $                | 59,289  |   |                 | $ | 51,946   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                  |         |   |                 |   |          |  
|Depreciation and amortization                                                     |  |                  | 37,815  |   |                 |   | 38,058   |  
|Deferred income taxes                                                             |  |                  | (7,085  | ) |                 |   | (27,696  | )
|Stock-based compensation                                                          |  |                  | 2,673   |   |                 |   | 2,536    |  
|Loss on disposition of property and equipment                                     |  |                  | 1,652   |   |                 |   | 1,466    |  
|Changes in operating assets and liabilities:                                      |  |                  |         |   |                 |   |          |  
|Merchandise inventories                                                           |  |                  | (59,262 | ) |                 |   | (55,915  | )
|Income tax refund receivable                                                      |  |                  | 7,007   |   |                 |   | 44,394   |  
|Prepayments and other current assets                                              |  |                  | 653     |   |                 |   | (5,479   | )
|Other assets                                                                      |  |                  | (259    | ) |                 |   | 72       |  
|Accounts payable and accrued liabilities                                          |  |                  | (65,137 | ) |                 |   | (66,777  | )
|Income taxes                                                                      |  |                  | 29,790  |   |                 |   | 72,132   |  
|                                                                                  |  |                  |         |   |                 |   |          |  
|                                                                                  |  |                  | 7,136   |   |                 |   | 54,737   |  
|                                                                                  |  |                  |         |   |                 |   |          |  
|                                                                                  |  |                 
|Cash flows from investing activities:                                             |  |                  |         |   |                 |   |          |  
|Purchases of investment securities                                                |  |                  |        |   |                 |   | (535,655 | )
|Sales of investment securities                                                    |  |                  | 400     |   |                 |   | 602,925  |  
|Capital expenditures                                                              |  |                  | (28,167 | ) |                 |   | (36,563  | )
|Proceeds from dispositions of property and equipment                              |  |                  | 23      |   |                 |   | 173      |  
|                                                                                  |  |                  |         |   |                 |   |          |  
|                                                                                  |  |                  | (27,744 | ) |                 |   | 30,880   |  
|                                                                                  |  |                  |         |   |                 |   |          |  
|                                                                                  |  |                 
|Cash flows from financing activities:                                             |  |                  |         |   |                 |   |          |  
|Revolving credit facility borrowings                                              |  |                  |        |   |                 |   | 404,300  |  
|Repayment of revolving credit facility borrowings                                 |  |                  |        |   |                 |   | (350,800 | )
|Repurchases of common stock                                                       |  |                  |        |   |                 |   | (80,709  | )
|Change in cash overdrafts                                                         |  |                  | 30,797  |   |                 |   | (34,285  | )
|Proceeds from exercise of stock options                                           |  |                  | 1,344   |   |                 |   | 81       |  
|Payment of dividends                                                              |  |                  | (17,464 | ) |                 |   | (16,320  | )
|                                                                                  |  |                  |         |   |                 |   |          |  
|                                                                                  |  |                  | 14,677  |   |                 |   | (77,733  | )
|                                                                                  |  |                  |         |   |                 |   |          |  
|                                                                                  |  |                 
|Net change in cash and cash equivalents                                           |  |                  | (5,931  | ) |                 |   | 7,884    |  
|Cash and cash equivalents at beginning of period                                  |  |                  | 158,502 |   |                 |   | 87,176   |  
|                                                                                  |  |                  |         |   |                 |   |          |  
|Cash and cash equivalents at end of period                                        |  | $                | 152,571 |   |                 | $ | 95,060   |  
|                                                                                  |  |                  |         |   |                 |   |          |  

See notes to the consolidated condensed financial statements.



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FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS



|1. | In the opinion of the Company, the accompanying unaudited consolidated condensed financial statements contain all adjustments (consisting of only normal recurring accruals)
necessary to present fairly the Companys financial position as of November 29, 2008; the results of operations for the first quarter ended November 29, 2008 (first quarter of fiscal 2009), and December 1, 2007
(first quarter of fiscal 2008); and the cash flows for the first quarter of fiscal 2009 and first quarter of fiscal 2008. For further information, refer to the consolidated financial statements and footnotes included in the
Companys Annual Report on Form 10-K for the fiscal year ended August 30, 2008 (fiscal 2008).
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
results of operations for the first quarter of fiscal 2009 are not necessarily indicative of the results to be expected for the full year.

Certain reclassifications of the amounts for the first quarter of fiscal 2008 have been made to conform to the presentation for the first quarter of fiscal 2009.

The preparation of the Companys Consolidated Condensed Financial Statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.



|2. | In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (SFAS 157). SFAS 157
defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 is effective for the first annual period beginning after
November 15, 2007. The effective date has been delayed for non-financial assets and liabilities to the first annual period beginning after November 15, 2008. The Company adopted SFAS 157 during the first quarter of fiscal 2009. The
adoption of SFAS 157 did not have a material impact on the Companys Consolidated Condensed Financial Statements.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

SFAS
157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS 157 establishes a fair value hierarchy which prioritizes
the inputs used to measure fair value into three levels, with Level 1 being of the highest priority.



| |  |  | Level 1  Quoted prices in active markets for identical assets or liabilities.
| | - |  | ------------------------------------------------------------------------------



| |  |  | Level 2  Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted
prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, or inputs that
are derived principally from or corroborated by observable market data by correlation or other means.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3  Inputs that are unobservable for the asset or liability.
| | - |  | ------------------------------------------------------------------

The unobservable inputs in Level 3 can only be used to measure fair value to the extent that observable inputs in Level 1 and Level 2 are not available.
The following table represents the Companys fair value hierarchy for its financial assets that are required to be measured at fair value as of November 29, 2008:



|                        |  |                   |         |         |   |         |  |         |   |  |   |        
|----------------------- |  | ----------------- | ------- | ------- | - | ------- |  | ------- | - |  | - | -------
|                        |  | November 29, 2008
|(in thousands)          |  | Fair Value        |         | Level 1 |   | Level 2 |  | Level 3
|Cash equivalents:       |  |                   |         |         |   |         |  |         |   |  |   |        
|Money market funds      |  | $                 | 51,600  |         | $ | 51,600  |  | $       |  |  | $ |       
|Investment securities:  |  |                   |         |         |   |         |  |         |   |  |   |        
|Auction rate securities |  |                   | 216,819 |         |   |        |  |         |  |  |   | 216,819
|                        |  |                   |         |         |   |         |  |         |   |  |   |        
|Total                   |  | $                 | 268,419 |         | $ | 51,600  |  | $       |  |  | $ | 216,819
|                        |  |                   |         |         |   |         |  |         |   |  |   |        



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Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The carrying amount of the Companys cash equivalents approximates fair value due
to the short maturities of these investments and consists primarily of money market funds and other overnight investments.

Investment
Securities

The Company accounts for its investment securities in accordance with SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities. All of the Companys investments are currently classified as available-for-sale due to the fact that the Company does not intend to hold the securities to maturity and does not purchase the
securities for the purpose of selling them in the short-term to make a profit on short-term differences in price. Available-for-sale securities are carried at estimated fair value, with unrealized gains and losses, if any, reported as a component of
shareholders equity.

The Companys investment securities currently consist of auction rate securities that were measured at
fair value using Level 3 inputs. While the underlying securities generally have long-term nominal maturities that exceed one year, the interest rates reset periodically in scheduled auctions (generally every 7-35 days). The Company generally has the
opportunity to sell its investments during such periodic auctions subject to the availability of buyers.

Beginning in the second quarter
of fiscal 2008, issues in the global credit and capital markets led to failed auctions with respect to substantially all of the Companys auction rate securities. A failed auction typically occurs when the number of securities submitted for
sale in the auction exceeds the number of purchase bids. As of November 29, 2008, all of the Companys $229.6 million par value investments were subject to failed auctions. As a result of the failed auctions, the interest rates on the
investments reset to the established rates per the applicable investment offering statements. The Company will not be able to liquidate the investments until a successful auction occurs, a buyer is found outside the auction process, the securities
are called or refinanced by the issuer, or the securities mature.

The Company does not currently expect to liquidate any auction rate
securities going forward through the normal auction process. However, the Company does expect to be able to liquidate its remaining auction rate securities at par through issuer calls or refinancings, settlements with broker dealers, or upon
maturity. During the first quarter of fiscal 2009, the Company liquidated $0.4 million of auction rate securities at par as a result of an issuer call. Since the auctions began failing in the second quarter of fiscal 2008, the Company has liquidated
$10.4 million of its auction rate securities at par as a result of issuer calls or refinancings.

The Companys investments were
classified as long-term assets on the Consolidated Condensed Balance Sheet as of November 29, 2008, due to the continued failure of the auction process and the continued uncertainty regarding the timing of future liquidity. The Company believes
operating cash flows and existing credit facilities will provide sufficient liquidity for the Companys ongoing operations and growth initiatives.

The credit quality of the Companys auction rate securities portfolio remains high (83% AAA-rated, 2% AA-rated, and 15% A-rated as of November 29, 2008), with substantially all of the securities being
tax-exempt bonds, which are collateralized by federally guaranteed student loans. Historically, the carrying value (par value) of the auction rate securities approximated fair market value due to the resetting rates, and the Company had no
cumulative gross unrealized or realized gains or losses from these investments prior to fiscal 2008. However, due to the liquidity issues noted above, the Company recorded a temporary gross unrealized loss of $12.7 million ($7.9 million, net of
taxes) as of November 29, 2008. Because there is no active market for the Companys auction rate securities, the fair value of each security was determined through the use of a discounted cash flow analysis using Level 3 inputs. The terms
used in the analysis were based on managements estimate of the timing of future liquidity, which assumes that the securities will be called or refinanced by the issuer or settled with broker dealers prior to maturity. The discount rates used
in the analysis were based on market rates for similar tax-exempt securities with comparable ratings. Due to the uncertainty surrounding the timing of future liquidity, the discount rates were adjusted further to reflect the illiquidity of the
investments. The Companys valuation is sensitive to market conditions and managements judgment and can change significantly based on the assumptions used. A 100 basis point increase or decrease in the discount rate along with a 12-month
increase or decrease in the term could result in a gross unrealized loss ranging from $4.5 million to $25.1 million.



7



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The following table summarizes the change in the fair value of the Companys auction rate securities
measured using Level 3 inputs during the first quarter of fiscal 2009:



|                                                       |  |            |         |  
|------------------------------------------------------ |  | ---------- | ------- | -
|(in thousands)                                         |  | Fair Value |        
|Balance at August 30, 2008                             |  | $          | 222,104 |  
|Unrealized loss included in other comprehensive income |  |            | (4,885  | )
|Net sales/settlements                                  |  |            | (400    | )
|                                                       |  |            |         |  
|Balance at November 29, 2008                           |  | $          | 216,819 |  
|                                                       |  |            |         |  

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities  Including an Amendment of FASB Statement No. 115 (SFAS 159). SFAS 159 permits all entities the option to measure many financial instruments and certain other items at fair value. If a
company elects the fair value option for an eligible item, then it will report unrealized gains and losses on those items at each subsequent reporting date. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company
did not elect the fair value option under SFAS 159.



|3. | On December 18, 2008, the Company entered into an unsecured revolving credit facility with a syndicate of lenders for short-term borrowings of up to $250 million. The credit
facility replaces the Companys $250 million unsecured revolving credit facility that was scheduled to mature on January 29, 2009. The credit facility has an initial term of 364 days and includes two one-year extensions that require lender
consent. The credit facility also includes a one year term-out option that does not require lender consent. Any borrowings under the credit facility accrue interest at a variable rate based on short-term market interest rates.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Company also maintains a $350 million unsecured revolving credit facility expiring on August 24, 2011. Any
borrowings under this credit facility also accrue interest at a variable rate based on short-term market interest rates. Outstanding standby letters of credit ($196.6 million as of November 29, 2008) reduce the borrowing capacity of the $350
million credit facility.

There were no borrowings under the credit facilities during the first quarter of fiscal 2009. The credit
facilities contain certain restrictive financial covenants, which include a consolidated debt to consolidated capitalization ratio, a fixed charge coverage ratio, and a priority debt to consolidated net worth ratio. As of November 29, 2008, the
Company was in compliance with all such covenants.



|4. | During the first quarter of fiscal 2009, the Company did not purchase any shares of its common stock. During the first quarter of fiscal 2008, the Company purchased 2.9 million
shares of its common stock at a cost of $80.7 million.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

All shares are purchased pursuant to share repurchase authorizations
approved by the Board of Directors. On November 5, 2007, the Company announced that the Board of Directors authorized the Company to purchase up to $150 million of the Companys common stock from time to time as market conditions warrant.
As of November 29, 2008, the Company had $133.0 million remaining under this authorization. Shares purchased under the share repurchase authorizations are generally held in treasury or have been canceled and returned to the status of authorized
but unissued shares.



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|5. | Basic net income per common share is computed by dividing net income by the weighted average number of shares outstanding during each period. Diluted net income per common share
gives effect to all securities representing potential common shares that were dilutive and outstanding during the period. Certain stock options and performance share rights were excluded from the calculation of diluted net income per common share
because their effects were antidilutive (3.5 million shares for the quarter ended November 29, 2008, and 3.9 million shares for the quarter ended December 1, 2007). In the calculation of diluted net income per common share, the
denominator includes the number of additional common shares that would have been outstanding if the Companys outstanding dilutive stock options and performance share rights had been exercised.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The following table sets forth the computation of basic and diluted net income per common share:



|                                                         |  |                  |         |                 |   |        
|-------------------------------------------------------- |  | ---------------- | ------- | --------------- | - | -------
|                                                         |  | Quarter Ended   
|(in thousands, except per share amounts)                 |  | November 29,2008 |         | December 1,2007
|Basic Net Income Per Share:                              |  |                  |         |                 |   |        
|Net income                                               |  | $                | 59,289  |                 | $ | 51,946 
|                                                         |  |                  |         |                 |   |        
|Weighted average number of shares outstanding            |  |                  | 139,817 |                 |   | 140,936
|                                                         |  |                  |         |                 |   |        
|Net income per common share  basic                      |  | $                | 0.42    |                 | $ | 0.37   
|                                                         |  |                  |         |                 |   |        
|                                                         |  |                 
|Diluted Net Income Per Share:                            |  |                  |         |                 |   |        
|Net income                                               |  | $                | 59,289  |                 | $ | 51,946 
|                                                         |  |                  |         |                 |   |        
|Weighted average number of shares outstanding            |  |                  | 139,817 |                 |   | 140,936
|Effect of dilutive securities  stock options            |  |                  | 132     |                 |   | 95     
|Effect of dilutive securities  performance share rights |  |                  | 288     |                 |   | 293    
|                                                         |  |                  |         |                 |   |        
|Weighted average shares  diluted                        |  |                  | 140,237 |                 |   | 141,324
|                                                         |  |                  |         |                 |   |        
|Net income per common share  diluted                    |  | $                | 0.42    |                 | $ | 0.37   
|                                                         |  |                  |         |                 |   |        



|6. | On January 30, 2001, Janice Morgan and Barbara Richardson, two individuals who have held the position of Store Manager for subsidiaries of the Company, filed a Complaint
against the Company in the United States District Court for the Northern District of Alabama. The Complaint alleged that the Company violated the Fair Labor Standards Act (FLSA) by classifying the named plaintiffs and other similarly
situated current and former Store Managers as exempt employees who are not entitled to overtime compensation. The court allowed the case to proceed as a collective action and notice of the pendency of the lawsuit was sent to
approximately 13,000 current and former Store Managers holding the position on or after July 1, 1999. Approximately 2,550 of those receiving such notice filed consent forms and joined the lawsuit as plaintiffs, including approximately
2,300 former Store Managers and approximately 250 then current employees. After rulings by the Court on motions to dismiss certain plaintiffs filed by the Company, 1,424 plaintiffs remained in the case at the commencement of trial.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A jury trial was held in June 2005, in Tuscaloosa, Alabama, and ended with the judge declaring a mistrial after the jury was
unable to reach a unanimous decision in the matter. The case was subsequently retried before another Tuscaloosa jury, which found that the Company should have classified the Store Manager plaintiffs as hourly employees entitled to overtime pay,
rather than as salaried exempt managers, and awarded damages. Subsequently, the Court ruled that the Company did not act in good faith in classifying the plaintiffs as exempt, and after making adjustments to the damages award based upon the filing
of personal bankruptcy by certain plaintiffs, the Court entered a final modified judgment for approximately $35.6 million. The District Court advised that it would consider the plaintiffs motion for an award of attorneys fees and
expenses at the conclusion of the appellate process.

The Company appealed this final
judgment to the United States Court of Appeals for the 11thCircuit. On December 16, 2008, the Court of Appeals issued a ruling affirming the
judgment of the District Court. The Company plans to petition the United States Supreme Court to grant certiorari for review of this ruling.

As of November 29, 2008, the Company had accrued liabilities of approximately $51.1 million with respect to this litigation, including $45.0 million recognized as a litigation charge in the second quarter of fiscal 2006 and $6.1
million related to previous charges and ongoing interest.

In general, the Company continues to believe that the Store Managers are
exempt employees under the FLSA and have been properly compensated. The Company believes that it has meritorious positions on appeal, but the outcome of any litigation is uncertain. Therefore, the Company has accrued liabilities with
respect to this litigation, as discussed above. While the Company is currently unable to quantify the impact of such a determination, if the Company determines that a reclassification of some or all of its Store Managers as non-exempt employees
under the FLSA is required, such action could have a material adverse effect on the Companys financial position, liquidity or results of operation.



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In addition to the Morgan case described above, since 2004, numerous cases have been filed by
other plaintiffs making similar allegations against the Company, i.e., that the Company violated the FLSA or similar state laws by classifying the named plaintiffs and other current and former Store Managers as exempt employees who are
not entitled to overtime compensation. The complaints in each action request that the cases proceed as collective actions under the FLSA or as class actions under state law and request recovery of overtime pay, liquidated damages, and
attorneys fees and court costs. Several of these cases have been dismissed or voluntarily withdrawn.

The first two of those
remaining cases are Grace v. Family Dollar Stores, Inc. and Ward v. Family Dollar, Inc., both pending in the U.S. District Court for the Western District of North Carolina, Charlotte Division (the N.C. Federal Court). In
those cases, the court has returned orders finding that the plaintiffs were not similarly situated and, therefore, that neither nationwide notice nor collective treatment under the FLSA is appropriate. Hence, the Grace and Ward cases
are proceeding as approximately 80 individual plaintiff cases.

In addition to Grace and Ward, a total of twelve other same
or similar class or collective cases are now pending, all of which are before the N.C. Federal Court. All of these cases have been either transferred by U.S. District Courts in various states to the N.C. Federal Court or were the subject
of an order entered by the United States Judicial Panel on MultiDistrict Litigation transferring the cases which were originally filed in the United States District Courts in various states to the N.C. Federal Court for coordination of discovery
with the other pending cases.

While discovery in all of the cases has been stayed for the conduct of settlement discussions between the
parties, the Company anticipates that discovery in the Grace and Ward cases will move forward on the merits of the individuals exemption claims and discovery in the remaining cases will be conducted regarding a determination
whether the plaintiffs are similarly situated such that the cases should proceed as collective actions, or, in the case of the actions brought under state law, as class actions.

As noted above, in general, the Company continues to believe that its Store Managers are exempt employees under the FLSA and have been and
are being properly compensated under both federal and state laws. The Company further believes that these actions are not appropriate for collective or class action treatment. The Company intends to vigorously defend the claims in these actions.
While the N.C. Federal Court has previously found that the Grace and Ward actions are not appropriate for collective action treatment, at this time it is not possible to predict whether one or more of the remaining cases may be
permitted to proceed collectively on a nationwide or other basis. No assurances can be given that the Company will be successful in the defense of these actions, on the merits or otherwise.

On October 14, 2008, a complaint was filed in the U.S. District Court in Birmingham, Alabama captioned Scott, et al v. Family Dollar Stores,
Inc. alleging discriminatory pay practices with respect to the Companys female store managers. This case was pled as a putative class action or collective action under applicable statutes on behalf of all Family Dollar female store
managers. The plaintiffs seek recovery of compensatory and punitive money damages, recovery of attorneys fees and equitable relief. The case has been transferred to the N.C. Federal Court. The Company intends to vigorously defend the
allegations in the Scott case, however no assurances can be given that the Company will be successful in the defense of this action.

The Company is involved in numerous other legal proceedings and claims incidental to its business, including, as noted above, litigation related to 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 litigation related to alleged personal or property damage, as to which the Company carries insurance coverage and/or, pursuant to SFAS No. 5, Accounting for Contingencies, has
established reserves as set forth in the Companys financial statements. While the ultimate outcome cannot be determined, the Company currently believes that these proceedings and claims, both individually and in the aggregate, should not
have a material adverse effect on the Companys financial position, liquidity or results of operations, except as noted above. However, the outcome of any litigation is inherently uncertain and, if decided adversely to the Company, or if
the Company determines that settlement of such actions is appropriate, the Company may be subject to liability that could have a material adverse effect on the Companys financial position, liquidity or results of operations.



10



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##### Table of Contents

|7. | The Company adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48) effective
September 2, 2007. FIN 48 clarifies the accounting for uncertain income tax positions in an enterprises financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48 prescribes a minimum
recognition threshold a tax position is required to meet before being recognized in the financial statements. This pronouncement also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. Effective with the adoption of FIN 48, the Company classifies accrued interest expense and penalties related to uncertain tax positions as a component of income tax expense.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

During the first quarter of fiscal 2009, liabilities for unrecognized tax benefits increased by $1.3 million and accrued interest and penalties increased
by $0.8 million. As of November 29, 2008, the Company had a liability for uncertain tax positions of $41.2 million, of which $17.1 million would, if recognized, affect the Companys effective tax rate.

On a quarterly and annual basis, the Company accrues for the effects of open uncertain tax positions and the related interest and penalties. The Company
is subject to U.S. federal income tax as well as income tax in multiple state and local jurisdictions. As of November 29, 2008, the Company was subject to income tax examinations for its U.S. federal income taxes for fiscal years ending
subsequent to 2005. With few exceptions, the Company is subject to state and local income tax examinations for fiscal years ending subsequent to 2004.

The amount of future unrecognized tax positions may be reduced because the statute of limitations has expired or the tax position is resolved with the taxing authority. It is reasonably possible that during the next
12 months the unrecognized tax benefit may be reduced by a range of zero to $9.3 million due to audits by taxing authorities. Such unrecognized tax benefits relate primarily to state tax issues.



|8. | As of November 29, 2008, the Company recorded unrealized losses related to its auction rate securities, as discussed in Note 2. The unrealized losses are shown net of tax in
the comprehensive income table below.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                         |  |                   |        |   |                  |   |       
|---------------------------------------- |  | ----------------- | ------ | - | ---------------- | - | ------
|                                         |  | Quarter Ended    
|(in thousands)                           |  | November 29, 2008 |        |   | December 1, 2007
|Net income                               |  | $                 | 59,289 |   |                  | $ | 51,946
|                                         |  |                  
|Other comprehensive income (loss):       |  |                   |        |   |                  |   |       
|Unrealized loss on investment securities |  |                   | (7,901 | ) |                  |   |      
|                                         |  |                   |        |   |                  |   |       
|Comprehensive income                     |  | $                 | 51,388 |   |                  | $ | 51,946
|                                         |  |                   |        |   |                  |   |       



|9. | The Company manages its business on the basis of one reportable segment. All of the Companys operations are located in the United States. The following information
regarding classes of similar products is presented in accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                             |  |                   |           |                  |   |          
|---------------------------- |  | ----------------- | --------- | ---------------- | - | ---------
|                             |  | Quarter Ended    
|(in thousands)               |  | November 29, 2008 |           | December 1, 2007
|Classes of similar products: |  |                   |           |                  |   |          
|Consumables                  |  | $                 | 1,155,054 |                  | $ | 1,023,275
|Home Products                |  |                   | 233,592   |                  |   | 248,653  
|Apparel and Accessories      |  |                   | 186,100   |                  |   | 216,468  
|Seasonal and Electronics     |  |                   | 179,087   |                  |   | 194,647  
|                             |  |                   |           |                  |   |          
|Net sales                    |  | $                 | 1,753,833 |                  | $ | 1,683,043
|                             |  |                   |           |                  |   |          



11



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##### Table of Contents

The following table describes the Companys product categories in more detail:



|                         |  |                                                                      
|------------------------ |  | ---------------------------------------------------------------------
|Consumables              |  | Household chemicals                                                  
|                         |  | Paper products                                                       
|                         |  | Candy, snacks and other food                                         
|                         |  | Health and beauty aids                                               
|                         |  | Hardware and automotive supplies                                     
|                         |  | Pet food and supplies                                                
|                         | 
|Home Products            |  | Domestics, including blankets, sheets and towels                     
|                         |  | Housewares                                                           
|                         |  | Giftware                                                             
|                         |  | Home décor                                                           
|                         | 
|Apparel and Accessories  |  | Mens clothing                                                       
|                         |  | Womens clothing                                                     
|                         |  | Boys and girls clothing                                            
|                         |  | Infants clothing                                                    
|                         |  | Shoes                                                                
|                         |  | Fashion accessories                                                  
|                         | 
|Seasonal and Electronics |  | Toys                                                                 
|                         |  | Stationery and school supplies                                       
|                         |  | Seasonal goods                                                       
|                         |  | Personal electronics, including pre-paid cellular phones and services



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##### Table of Contents

|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

The following discussion summarizes the significant factors affecting our consolidated results of operations and financial condition for the thirteen-week
periods ended November 29, 2008, and December 1, 2007 (first quarter of fiscal 2009 and first quarter of fiscal 2008, respectively). This discussion should be read in conjunction with, and is qualified by, the
financial statements included in this Report, the financial statements for the fiscal year ended August 30, 2008 (fiscal 2008), and Managements Discussion and Analysis of Financial Condition and Results of Operations
(MD&A) contained in our Annual Report on Form 10-K for fiscal 2008. This discussion should also be read in conjunction 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 our Annual Report on Form 10-K for fiscal 2008.

Results of
Operations

First Quarter Results and Fiscal 2009 Outlook

During the first quarter of fiscal 2009, as compared with the first quarter of fiscal 2008, our net sales increased 4.2% to $1.8 billion, our net income increased 14.1% to $59.3 million, and our diluted net income per
common share increased 13.5% to $0.42. Sales in comparable stores (stores open more than 13 months) for the first quarter of fiscal 2009, which were reported for the 13-week period ending November 29, 2008, compared with the 13-week period
ending December 1, 2007, increased 2.1%. Despite the difficult economic environment, we were able to produce strong results during the first quarter of fiscal 2009 as a result of increased sales of consumable merchandise and improvements in
cost of sales, as a percentage of net sales. The various components affecting our results for the first quarter of fiscal 2009 are discussed in more detail below.

During the first quarter of fiscal 2009, we focused on driving revenues, mitigating risk and managing costs through the following key initiatives:



| |  |  | In conjunction with our Food Strategy, we continued the expansion of our assortment of traffic-driving consumables, providing customers with more of what they need
in a challenging economic environment.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | To strengthen the Family Dollar brand with customers and to reinforce the values we offer, we increased our marketing and promotional events.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We continued the roll-out of our Store of the Future initiative, upgrading the technology platform in approximately 600 additional stores. As of November 29,
2008, approximately 3,000 stores were operating on the Store of the Future platform. In todays economic environment, more families are relying on the federal governments food stamp program. To leverage this opportunity, we plan to
accelerate our Store of the Future roll-out to approximately 2,300 stores during fiscal 2009 to facilitate the acceptance of food stamps. At the end of fiscal 2009, we expect to have approximately 4,700 stores operating on the Store of the Future
platform.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Through our price optimization work, the continued development of our private label offering and global sourcing efforts, we worked to offset the impact of the
shift in the merchandise mix to more lower-margin consumable merchandise.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Reflecting the uncertainty that exists in the current economic environment, we continued our measured pace of new store openings so that we can focus on improving
our returns on existing assets. We opened 65 stores and closed 19 stores.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Based on the operating results for the first
quarter of fiscal 2009, as discussed below, and our plans for the remainder of the year, we currently expect diluted net income per common share to be between $1.63 and $1.81 for fiscal 2009, compared to $1.66 in fiscal 2008. We currently expect
diluted net income per common share to be between $0.48 and $0.52 for the second quarter of fiscal 2009, compared to $0.45 in the second quarter of fiscal 2008. We currently expect sales in comparable stores to increase 3% to 5% in the second
quarter of fiscal 2009 and 2% to 4% in fiscal 2009.

Net Sales

Net sales in the first quarter of fiscal 2009 were $1.8 billion, an increase of 4.2% ($70.8 million), as compared with an increase of 5.2% ($82.8 million) in the first quarter of fiscal 2008. The increase in the
first quarter of fiscal 2009 was attributable, in part, to increased sales in comparable stores (stores open more than 13 months) of 2.1%, with the balance of the increase primarily relating to sales from new stores opened as part of our store
growth program. The increase in sales in comparable stores resulted from an increase in customer traffic, as measured by the number of register transactions in comparable stores and an increase in the dollar value of the average customer
transaction. Sales during the first quarter of fiscal 2009 were strongest in Consumables, driven primarily by sales of food. Sales in more discretionary categories continued to be weak, reflecting the current economic environment. In addition, sales
during the first quarter of fiscal 2009 were adversely impacted by one less week of holiday sales (post-Thanksgiving sales) resulting from a later Thanksgiving this year and the movement of our first of the month advertising circular into the second
quarter of fiscal 2009.



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##### Table of Contents

The average number of stores in operation during the first quarter of fiscal 2009 was 2.2% higher than
the average number of stores in operation during the first quarter of fiscal 2008. We had 6,617 stores in operation at the end of the first quarter of fiscal 2009, compared with 6,477 stores in operation at the end of the first quarter of
fiscal 2008, representing an increase of 2.2%.

Cost of Sales

Cost of sales increased 2.9% in the first quarter of fiscal 2009 compared with the first quarter of fiscal 2008. This increase primarily reflected the additional sales volume between years. Cost of sales, as
a percentage of net sales, was 65.0% in the first quarter of fiscal 2009 and 65.8% in the first quarter of fiscal 2008. The decrease in cost of sales, as a percentage of net sales, was due primarily to lower seasonal markdowns, lower freight
expense, lower inventory shrinkage, and higher purchase mark-ups, which more than offset the effect of stronger sales of lower-margin consumable merchandise. Our continued focus on improving inventory productivity and managing inventory risk led to
lower seasonal markdowns. We believe that lower inventory levels, in conjunction with improvements in store manager retention, also contributed to improvements in inventory shrinkage. Freight expense benefited from lower diesel costs and increased
transportation productivity and efficiency. The increase in purchase mark-ups was due primarily to our price optimization work and global sourcing efforts.

Selling, General and Administrative Expenses

Selling, general and administrative (SG&A) expenses increased
6.3% in the first quarter of fiscal 2009, compared with the first quarter of fiscal 2008. The increases in these expenses were due primarily to additional costs arising from the continued growth in the number of stores in
operation. SG&A expenses, as a percentage of net sales, were 29.8% in the first quarter of fiscal 2009 and 29.2% in the first quarter of fiscal 2008. The increase in SG&A expenses, as a percentage of net sales, was due primarily to
an increase in insurance expense (approximately 0.6% of net sales) and an increase in occupancy costs (approximately 0.3% of net sales). Most other costs in the first quarter of fiscal 2009, including payroll expenses, were leveraged as a result of
a 2.1% increase in comparable store sales and our focus on expense control. The increase in insurance expense, as a percentage of net sales, is due primarily to the effect of a significant decrease in insurance expense during the first quarter of
fiscal 2008. We began to see a reduction in workers compensation and general liability expenses during the first quarter of fiscal 2008 as a result of improvements in processes, inventory productivity, and store manager retention. While we
continued to see favorable trends in the number of workers compensation and general liability claims during the first quarter of fiscal 2009, the impact on our insurance expense was not as favorable, primarily due to an increase in the
severity of the claims. In addition, property damage from hurricanes Gustav and Ike and a limited number of large medical claims resulted in higher insurance expense during the first quarter of fiscal 2009. We expect insurance expense, as a
percentage of net sales, to continue to increase during the remainder of fiscal 2009, as compared to fiscal 2008. The increase in occupancy costs, as a percentage of net sales, is due primarily to increases in store rental expenses, primarily
property taxes, and an increase in utility costs.

Interest Income

Interest income increased 72.6% ($1.5 million) in the first quarter of fiscal 2009 compared with the first quarter of fiscal 2008. The increase in interest income was due to an increase in investment securities
and interest rates.

Interest Expense

Interest expense decreased 30.2% ($1.4 million) in the first quarter of fiscal 2009 compared with the first quarter of fiscal 2008. There were no borrowings under our revolving credit facilities during the first quarter of fiscal 2009,
resulting in a decrease in interest expense. During the first quarter of fiscal 2008, we incurred $1.5 million in interest expense related to our revolving credit facilities.

Income Taxes

The effective tax rate was 36.1% for the first quarter of fiscal 2009 compared with
37.1% for the first quarter of fiscal 2008. The decrease in the effective tax rate was primarily the result of certain federal jobs tax credits available during the first quarter of fiscal 2009 but not available during the first quarter of
fiscal 2008, and an increase in tax-exempt interest income.



14



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##### Table of Contents

Liquidity and Capital Resources

We have consistently maintained a strong liquidity position. Cash provided by operating activities during the first quarter of fiscal 2009 was $7.1
million as compared to $54.7 million in the first quarter of fiscal 2008. These amounts have enabled us to fund our regular operating needs, capital expenditure program, cash dividend payments, and interest payments, as well as a significant portion
of our share repurchases. We believe operating cash flows and existing credit facilities will provide sufficient liquidity for our ongoing operations and growth initiatives.

On December 18, 2008, we entered into an unsecured revolving credit facility with a syndicate of lenders for short-term borrowings of up to $250
million. The credit facility replaces our $250 million unsecured revolving credit facility that was scheduled to mature on January 29, 2009. The credit facility has an initial term of 364 days and includes two one-year extensions that require
lender consent. The credit facility also includes a one year term-out option that does not require lender consent. Any borrowings under the credit facility accrue interest at a variable rate based on short-term market interest rates.

We also maintain a $350 million unsecured revolving credit facility expiring on August 24, 2011. Any borrowings under this credit facility also
accrue interest at a variable rate based on short-term market interest rates. Outstanding standby letters of credit ($196.6 million as of November 29, 2008) reduce the borrowing capacity of the $350 million credit facility.

There were no borrowings under the credit facilities during the first quarter of fiscal 2009. The credit facilities contain certain restrictive financial
covenants, which include a consolidated debt to consolidated capitalization ratio, a fixed charge coverage ratio, and a priority debt to consolidated net worth ratio. As of November 29, 2008, we were in compliance with all such covenants.

Our inventories at the end of the first quarter of fiscal 2009 were 2.7% lower than at the end of the first quarter of fiscal
2008. Inventory per store at the end of the first quarter of fiscal 2009 was approximately 4.5% lower than inventory per store at the end of the first quarter of fiscal 2008, excluding merchandise in transit to the distribution
centers. The decrease in inventory per store resulted from our continued focus on inventory productivity.

Capital expenditures for
the first quarter of fiscal 2009 were $28.2 million, compared with $36.6 million for the first quarter of fiscal 2008. Capital expenditures for fiscal 2009 are expected to be between $150 and $170 million and relate primarily to new store
openings; existing store expansions, relocations and renovations; distribution center improvements; and expenditures related to store technology infrastructure.

In the first quarter of fiscal 2009, we opened 65 stores, closed 19 stores and expanded, relocated, or renovated 12 stores. We occupy most of our stores under operating leases. Store opening, closing,
expansion, relocation, and renovation plans, as well as overall capital expenditure plans, are continuously reviewed and may change.

During the first quarter of fiscal 2009, we did not purchase any shares of our common stock. We purchased 2.9 million shares of our common stock during the first quarter of fiscal 2008 at a cost of $80.7 million. As of
November 29, 2008, we had outstanding authorizations to purchase a total of $133.0 million of our common stock.

Cash flows from operating
activities

Cash provided by operating activities decreased $47.6 million during the first quarter of fiscal 2009 as compared to the
first quarter of fiscal 2008. The decrease was due primarily to changes in the income tax refund receivable balance. We received a tax refund during the first quarter of fiscal 2008 in connection with the formation of our captive insurance
subsidiary. As a result, the income tax refund receivable balance decreased $44.4 million in the first quarter of fiscal 2008 compared to a decrease of $7.0 million during the first quarter of fiscal 2009.

Cash flows from investing activities

During the
first quarter of fiscal 2009, we had a cash outflow of $27.7 million, compared to a cash inflow of $30.9 million in the first quarter of fiscal 2008. The change is due primarily to changes in the purchase/sale of investment securities. Due to
liquidity issues surrounding our auction rate securities, we did not have any material purchases or sales of investment securities during the first quarter of fiscal 2009. However, during the first quarter of fiscal 2008, we sold a significant
amount of investments in order to pay down our credit facility borrowings and repurchase shares of our common stock. These sales offset our purchases of investment securities and our capital expenditures and created a cash inflow during the first
quarter of fiscal 2008. See Note 2 to the Consolidated Condensed Financial Statements included in this Report for more information on our auction rate securities.



15



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##### Table of Contents

Cash flows from financing activities

During the first quarter of fiscal 2009, we had a cash inflow of $14.7 million, compared to a cash outflow of $77.7 million during the first quarter of fiscal 2008. The change is due primarily to a change in cash
overdrafts and a change in revolving credit facility borrowings/repayments. During the first quarter of fiscal 2009, cash overdrafts increased $30.8 million, compared to a decrease of $34.3 million during the first quarter of fiscal 2008. In
addition, we did not incur any credit facility borrowings during the first quarter of fiscal 2009, compared to a net borrowing of $53.5 million in the first quarter of fiscal 2008.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value
measurements. SFAS 157 is effective for the first annual period beginning after November 15, 2007. The effective date has been delayed for non-financial assets and liabilities to the first annual period beginning after
November 15, 2008. We adopted SFAS 157 during the first quarter of fiscal 2009. See Note 2 to the Consolidated Condensed Financial Statements included in this Report for more information on our adoption of SFAS 157.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities  Including an
Amendment of FASB Statement No. 115 (SFAS 159). SFAS 159 permits all entities the option to measure many financial instruments and certain other items at fair value. If a company elects the fair value option for an eligible
item, then it will report unrealized gains and losses on those items at each subsequent reporting date. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We did not elect the fair value option under SFAS 159.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (SFAS 162). SFAS 162
identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting
principles (GAAP) in the United States (the GAAP hierarchy). SFAS 162 became effective November 15, 2008. The adoption of SFAS 162 did not have a material impact on our financial statements.

Critical Accounting Policies

Our financial
statements have been prepared in accordance with accounting policies generally accepted in the United States of America. Our discussion and analysis of our financial condition and results of operations are based on these financial statements. The
preparation of these financial statements requires the application of accounting policies in addition to certain estimates and judgments by our management. Our estimates and judgments are based on currently available information, historical results
and other assumptions we believe are reasonable. Actual results could differ from these estimates.

There have been no changes to the
Critical Accounting Policies outlined in our Annual Report on Form 10-K for fiscal 2008.

Cautionary Statement Regarding Forward-Looking Statements

Certain statements contained in this Report, or in other public filings, press releases, or other written or oral communications
made by Family Dollar or our representatives, which are not historical facts, are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements
address our plans, activities or events which we expect will or may occur in the future and may include express or implied projections of revenue or expenditures; statements of plans and objectives for future operations, growth or initiatives;
statements of future economic performance; or statements regarding the outcome or impact of pending or threatened litigation. These forward-looking statements may be identified by the use of the words plan, estimate,
expect, anticipate, probably, should, project, intend, continue, and other similar terms and expressions. Various risks, uncertainties and other factors may
cause our actual results to differ materially from those expressed or implied in any forward-looking statements. Factors, uncertainties and risks that may result in actual results differing from such forward-looking information include, but are
not limited to those listed in Part I, Item 1A of our Annual Report on Form 10-K for fiscal 2008, as well as other factors discussed throughout this Report, including, without limitation, the factors described under Critical Accounting
Policies in Part I, Item 2 above, or in other filings or statements made by us. All of the forward-looking statements in this Report and other documents or statements are qualified by these and other factors, risks and uncertainties.

You should not place undue reliance on the forward-looking statements included in this Report. We assume no obligation to update
publicly any forward-looking statements, even if experience or future changes make it clear that projected results expressed or implied in such statements will not be realized, except as may be required by law. In evaluating forward-looking
statements, you should consider these risks and uncertainties, together with the other risks described from time to time in our other reports and documents filed with the Securities and Exchange Commission (SEC).



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|Item 3. | Quantitative and Qualitative Disclosures about Market Risk
|------- | ----------------------------------------------------------

We are subject to market risk from exposure to changes in interest rates based on our financing, investing and cash management activities. We maintain unsecured revolving credit facilities at variable rates of interest to meet the
short-term needs of our expansion program and seasonal inventory increases. During the first quarter of fiscal 2009, we did not incur any interest expense related to our credit facilities. During the first quarter of fiscal 2008 we incurred $1.5
million in interest expense related to our credit facilities. Our long-term debt bears interest at fixed rates.

Our investment securities
currently include auction rate securities that are subject to failed auctions and are not currently liquid. As of November 29, 2008, we recorded a $12.7 million unrealized loss ($7.9 million net of taxes) related to these investments and
classified them as long-term assets on the Consolidated Condensed Balance Sheet. We believe that we will be able to liquidate our auction rate securities at par at some point in the future as a result of issuer calls or refinancings, settlements
with broker dealers, or upon maturity. However, volatility in the credit markets could continue to negatively impact the timing of future liquidity related to these investments and lead to additional adjustments to their carrying value. See Note 2
to the Consolidated Condensed Financial Statements included in this Report.



|Item 4. | Controls and Procedures
|------- | -----------------------

Based on an evaluation by
our management (with the participation of our Chief Executive Officer and Chief Financial Officer), as of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the Exchange Act)) were effective to provide reasonable assurance that information required to be disclosed by us in
reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.

We are continuously seeking
to improve the efficiency and effectiveness of our operations and of our internal controls. This results in refinements to processes throughout our Company. However, there has been no change in our internal control over financial reporting
(as defined in Exchange Act Rule 13a-15(f)) during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



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##### Table of Contents

PART II  OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

The information in Note 6 to the
Consolidated Condensed Financial Statements contained in Part I, Item 1 of the Form 10-Q is incorporated herein by this reference.



|Item 1A. | Risk Factors
|-------- | ------------

There have been no material changes
in the Risk Factors outlined in our Annual Report on Form 10-K for fiscal 2008.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------

The following table sets forth information with respect to purchases of shares of our common stock made during the quarter ended November 29, 2008, by us, on our behalf, or by any affiliated purchaser as defined by Rule
10b-18(a)(3) of the Securities Exchange Act of 1934.



|                               |  |                                |  |                             |   |                                                                                  |   |                                                                                    |          
|------------------------------ |  | ------------------------------ |  | --------------------------- | - | -------------------------------------------------------------------------------- | - | ---------------------------------------------------------------------------------- | ---------
|Period                         |  | Total Numberof SharesPurchased |  | Average PricePaid Per Share |   | Total Number ofShares Purchased asPart of PubliclyAnnounced Plans orPrograms
(1) |   | Maximum Numberof Shares that MayYet Be PurchasedUnder the Plans orPrograms (1) (2)
|September (8/31/08 - 10/04/08) |  |                               |  | $                           |  |                                                                                  |  |                                                                                    | 5,418,914
|October (10/5/08 - 11/1/08)    |  |                               |  |                             |  |                                                                                  |  |                                                                                    | 4,943,676
|November (11/2/08 - 11/29/08)  |  |                               |  |                             |  |                                                                                  |  |                                                                                    | 4,788,853
|                               |  |                                |  |                             |   |                                                                                  |   |                                                                                    |          
|Total                          |  |                               |  | $                           |  |                                                                                  |  |                                                                                    | 4,788,853
|                               |  |                                |  |                             |   |                                                                                  |   |                                                                                    |          



|(1) | On November 5, 2007, we announced that the Board of Directors authorized the purchase of up to $150 million of our
outstanding common stock from time to time as market conditions warrant. As of November 29, 2008, there was $133.0 million remaining under this authorization.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes amounts converted to shares using the closing
stock price as of the end of the fiscal month.
|--- | -----------------------------------------------------------------------------------------------------



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##### Table of Contents

|Item 6. | Exhibits
|------- | --------



| | (a) | Exhibits incorporated by reference:
| | --- | -----------------------------------



|       |  |                                                                                                                                                                                                                                                                                                                                 
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* 10.1 |  | Policy regarding Tax Adjustments for Certain Severance Benefits (filed as Exhibit 10.2 to the Companys Report on Form 8-K filed with the Securities and Exchange Commission
(SEC) on November 21, 2008)                                                                                                                      
|       | 
|* 10.2 |  | Form of Indemnification Agreement between the Company and its Directors (filed as Exhibit 10.1 to the Companys Report on Form 8-K filed with the SEC on November 21,
2008)                                                                                                                                                     
|       | 
|10.3   |  | $250 million 364-Day Credit Agreement between the Company and Family Dollar, Inc., as Borrowers and Wachovia Bank, National Association, as Administrative Agent and Swingline Lender, and
various other lenders named therein (filed as Exhibit 10 to the Companys Report on Form 8-K filed with the SEC on December 19, 2008)



| | (b) | Exhibits filed herewith:
| | --- | ------------------------



|       |  |                                                                                                                                                                                                       
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* 10.4 |  | Family Dollar Stores, Inc., 2006 Incentive Plan (as amended)                                                                                                                                          
|       | 
|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     |  | Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002                  



|* | Exhibit represents a management contract or compensatory plan
|- | -------------------------------------------------------------



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SIGNATURES

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



|                      |  |  |  |                                                
|--------------------- |  |  |  | -----------------------------------------------
|                      |  |  |  | FAMILY DOLLAR STORES, INC.                     
|                      |  |  |  | (Registrant)                                   
|                      |  | 
|Date: January 7, 2009 |  |  |  | /s/ Kenneth T. Smith                           
|                      |  |  |  | Kenneth T. Smith                               
|                      |  |  |  | Senior Vice President  Chief Financial Officer
|                      |  | 
|Date: January 7, 2009 |  |  |  | /s/ C. Martin Sowers                           
|                      |  |  |  | C. Martin Sowers                               
|                      |  |  |  | Senior Vice President  Finance                



20