**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**Form10-Q**

**(MarkOne)**

| x          |   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**  |
|------------|--------|-----------------------------------------------------------------------------------------------------|
|       |   |                                                                                                |
| ** ** |   | **For the  quarterly period ended March 3, 2007**                                                   |
|       |   |                                                                                                |
| ** ** |   | **OR**                                                                                              |
| ** ** |   | ** **                                                                                          |
| **o**      |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |

 

**CommissionFile Number       1-6807**

**FAMILYDOLLAR STORES, INC.**

(Exact name ofregistrant as specified in its charter)

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

 

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

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

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

Large AcceleratedFiler x   AcceleratedFiler o   Non-Accelerated Filer o

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).

Yes o   No x

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.

| **Class**                      |   | **Outstanding  at March 30, 2007** |
|--------------------------------|--------|------------------------------------|
| Common Stock,  $0.10 par value |   | 150,807,820  shares                |

 

 

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**FAMILY DOLLAR STORES, INC. ANDSUBSIDIARIES**

**INDEX**
| Part I -  Financial Information             |                                                                                                  |                                                                                                     |
|---------------------------------------------|-------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
|                                        |                                                                                                  |                                                                                                     |
|                                        | Item 1 - Consolidated  Condensed Financial Statements (unaudited):                                    |                                                                                                     |   |
|                                        |                                                                                                  |                                                                                                     |   |
|                                        |                                                                                                  | Consolidated  Condensed Balance Sheets - March 3, 2007 and August 26, 2006                               |   |   |
|                                        |                                                                                                  |                                                                                                     |   |   |
|                                        |                                                                                                  | Consolidated Condensed  Statements of Income - Quarter Ended March 3, 2007 and February 25,  2006        |   |   |
|                                        |                                                                                                  |                                                                                                     |   |   |
|                                        |                                                                                                  | Consolidated  Condensed Statements of Income - First Half Ended March 3, 2007 and  February 25, 2006     |   |   |
|                                        |                                                                                                  |                                                                                                     |   |   |
|                                        |                                                                                                  | Consolidated  Condensed Statements of Cash Flows - First Half Ended March 3, 2007 and  February 25, 2006 |   |   |
|                                        |                                                                                                  |                                                                                                     |   |   |
|                                        |                                                                                                  | Notes to  Consolidated Condensed Financial Statements                                                    |   |   |
|                                        |                                                                                                  |                                                                                                     |   |
|                                        | Item 2 -  Management’s Discussion and Analysis of Financial Condition and Results of  Operations |                                                                                                     |   |
|                                        |                                                                                                  |                                                                                                     |   |
|                                        | Item 3 -  Quantitative and Qualitative Disclosures About Market Risk                                  |                                                                                                     |   |
|                                        |                                                                                                  |                                                                                                     |   |
|                                        | Item 4 - Controls  and Procedures                                                                     |                                                                                                     |   |
|                                        |                                                                                                  |                                                                                                     |   |
| Part II - Other  Information and Signatures |                                                                                                  |                                                                                                     |
|                                        |                                                                                                  |                                                                                                     |   |
|                                        | Item 1 - Legal Proceedings                                                                            |                                                                                                     |   |
|                                        |                                                                                                  |                                                                                                     |   |
|                                        | Item  1A - Risk Factors                                                                               |                                                                                                     |   |
|                                        |                                                                                                  |                                                                                                     |   |
|                                        | Item 2 -  Unregistered Sales of Equity Securities and Use of Proceeds                                 |                                                                                                     |   |
|                                        |                                                                                                  |                                                                                                     |   |
|                                        | Item 5 - Other  Information                                                                           |                                                                                                     |   |
|                                        |                                                                                                  |                                                                                                     |   |
|                                        | Item  6 - Exhibits                                                                                    |                                                                                                     |   |
|                                        |                                                                                                  |                                                                                                     |   |
|                                        | Signatures                                                                                            |                                                                                                     |   |

 

2

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**PART I –FINANCIAL INFORMATION**

**Item 1.  ConsolidatedCondensed Financial Statements**

**FAMILYDOLLAR STORES, INC. AND SUBSIDIARIES**

**CONSOLIDATED CONDENSED BALANCE SHEETS**

**(Unaudited)**
| **(in thousands, except per share and share amounts)**                                                                                                                                                        | ** ** | **March 3, 2007** | ** ** | **August 26, 2006** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| **Assets**                                                                                                                                                                                                                                       |       |                        |       |                          |       |
| Current assets:                                                                                                                                                                                                                                  |       |                        |       |                          |       |
| Cash and cash  equivalents (Note 2)                                                                                                                                                                                                              |       | $                           | 83,715     |                          | $          | 79,727 |   |
| Investment  securities (Note 2)                                                                                                                                                                                                                  |       | 331,853                     |       | 136,505                       |       |
| Merchandise  inventories                                                                                                                                                                                                                         |       | 1,001,373                   |       | 1,037,859                     |       |
| Deferred income  taxes                                                                                                                                                                                                                           |       | 145,419                     |       | 133,468                       |       |
| Income tax refund  receivable                                                                                                                                                                                                                    |       | —                      |       | 2,397                         |       |
| Prepayments and  other current assets                                                                                                                                                                                                            |       | 55,733                      |       | 28,892                        |       |
| Total current  assets                                                                                                                                                                                                                            |       | 1,618,093                   |       | 1,418,848                     |       |
|                                                                                                                                                                                                                                             |       |                        |       |                          |       |
| Property and equipment,  net                                                                                                                                                                                                                     |       | 1,055,317                   |       | 1,077,608                     |       |
| Other assets                                                                                                                                                                                                                                     |       | 24,785                      |       | 26,573                        |       |
| ** **                                                                                                                                                                                                                                       |       | $                           | 2,698,195  |                          | $          | 2,523,029 |   |
| ** **                                                                                                                                                                                                                                       | ** ** | ** **                  | ** ** | ** **                    | ** ** |
| **Liabilities and Shareholders’  Equity**                                                                                                                                                                                                   |       |                        |       |                          |       |
| Current liabilities:                                                                                                                                                                                                                             |       |                        |       |                          |       |
| Accounts payable                                                                                                                                                                                                                                 |       | $                           | 546,441    |                          | $          | 556,531 |   |
| Accrued  liabilities                                                                                                                                                                                                                             |       | 451,468                     |       | 429,580                       |       |
| Income taxes  payable                                                                                                                                                                                                                            |       | 36,268                      |       | —                        |       |
| Total current  liabilities                                                                                                                                                                                                                       |       | 1,034,177                   |       | 986,111                       |       |
|                                                                                                                                                                                                                                             |       |                        |       |                          |       |
| Long-term debt (Note 4)                                                                                                                                                                                                                          |       | 250,000                     |       | 250,000                       |       |
| Deferred income taxes                                                                                                                                                                                                                            |       | 74,040                      |       | 78,525                        |       |
| Commitments and  contingencies                                                                                                                                                                                                                   |       |                        |       |                          |       |
|                                                                                                                                                                                                                                             |       |                        |       |                          |       |
| Shareholders’ equity:  (Notes 5 and 6)                                                                                                                                                                                                      |       |                        |       |                          |       |
| Preferred stock,  $1 par; authorized and unissued 500,000 shares                                                                                                                                                                                 |       |                        |       |                          |       |
| Common stock,  $.10 par; authorized 600,000,000 shares; issued 179,156,747 shares at March  3, 2007, and 178,559,411 shares at August 26, 2006; and outstanding  150,807,820 shares at March 3, 2007, and 150,210,484 shares at August 26,  2006 |       | 17,916                      |       | 17,856                        |       |
| Capital in  excess of par                                                                                                                                                                                                                        |       | 160,848                     |       | 140,829                       |       |
| Retained  earnings                                                                                                                                                                                                                               |       | 1,657,872                   |       | 1,546,366                     |       |
|                                                                                                                                                                                                                                             |       | 1,836,636                   |       | 1,705,051                     |       |
| Less: common  stock held in treasury, at cost (28,348,927 shares both at March 3, 2007, and  August 26, 2006)                                                                                                                                    |       | 496,658                     |       | 496,658                       |       |
| Total  shareholders’ equity                                                                                                                                                                                                                 |       | 1,339,978                   |       | 1,208,393                     |       |
|                                                                                                                                                                                                                                             |       | $                           | 2,698,195  |                          | $          | 2,523,029 |   |

 

## See notes tothe consolidated condensed financial statements.

3

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**FAMILYDOLLAR STORES, INC. AND SUBSIDIARIES**

**CONSOLIDATED CONDENSED STATEMENTS OF INCOME**

**(Unaudited)**
| ** **                                                            | ** ** | **Quarter Ended**      | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------|------------|
| **(in thousands, except per share amounts)** | ** ** | **March 3, 2007** | ** ** | **February 25, 2006** | ** ** |
| Net sales                                                             |       | $                           | 1,947,380  |   | $ | 1,735,683 |   |
|                                                                  |       |                        |       |   |   |
| Cost and  expenses:                                                   |       |                        |       |   |   |
| Cost of sales                                                         |       | 1,294,870                   |       | 1,165,194 |   |
| Selling, general and administrative                                   |       | 509,204                     |       | 438,177 |   |
| Litigation charge                                                     |       | —                      |       | 45,000 |   |
| Cost of sales  and operating expenses                                 |       | 1,804,074                   |       | 1,648,371 |   |
|                                                                  |       |                        |       |   |   |
| Operating profit                                                      |       | 143,306                     |       | 87,312 |   |
|                                                                  |       |                        |       |   |   |
| Interest income                                                       |       | 3,508                       |       | 2,198 |   |
|                                                                  |       |                        |       |   |   |
| Interest expense  (Note 4)                                            |       | 4,667                       |       | 2,956 |   |
|                                                                  |       |                        |       |   |   |
| Income before  income taxes                                           |       | 142,147                     |       | 86,554 |   |
|                                                                  |       |                        |       |   |   |
| Income taxes                                                          |       | 51,604                      |       | 32,025 |   |
|                                                                  |       |                        |       |   |   |
| Net income                                                            |       | $                           | 90,543     |   | $ | 54,529 |   |
|                                                                  |       |                        |       |   |   |
| Net income per  common share – basic (Note 7)                    |       | $                           | 0.60       |   | $ | 0.35 |   |
| Average shares – basic (Note 7)                                  |       | 150,656                     |       | 155,293 |   |
|                                                                  |       |                        |       |   |   |
| Net income per  common share – diluted (Note 7)                  |       | $                           | 0.60       |   | $ | 0.35 |   |
| Average shares – diluted (Note 7)                                |       | 150,925                     |       | 156,755 |   |
|                                                                  |       |                        |       |   |   |
| Dividends declared per  common share                                  |       | $                           | 0.115      |   | $ | 0.105 |   |

 

Seenotes to the consolidated condensed financial statements.

4

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**FAMILYDOLLAR STORES, INC. AND SUBSIDIARIES**

**CONSOLIDATED CONDENSED STATEMENTS OF INCOME**

**(Unaudited)**
| ** **                                                            | ** ** | **First Half Ended** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------|------------|
| **(in thousands, except per share amounts)** | ** ** | **March 3, 2007**    | ** ** | **February 25, 2006** | ** ** |
| Net sales                                                             |       | $                              | 3,547,644  |   | $ | 3,247,140 |   |
|                                                                  |       |                           |       |   |   |
| Cost and  expenses:                                                   |       |                           |       |   |   |
| Cost of sales                                                         |       | 2,342,252                      |       | 2,168,448 |   |
| Selling, general and administrative                                   |       | 970,959                        |       | 863,468 |   |
| Litigation charge                                                     |       | —                         |       | 45,000 |   |
| Cost of sales  and operating expenses                                 |       | 3,313,211                      |       | 3,076,916 |   |
|                                                                  |       |                           |       |   |   |
| Operating profit                                                      |       | 234,433                        |       | 170,224 |   |
|                                                                  |       |                           |       |   |   |
| Interest income                                                       |       | 4,955                          |       | 3,049 |   |
|                                                                  |       |                           |       |   |   |
| Interest expense  (Note 4)                                            |       | 10,173                         |       | 5,149 |   |
|                                                                  |       |                           |       |   |   |
| Income before  income taxes                                           |       | 229,215                        |       | 168,124 |   |
|                                                                  |       |                           |       |   |   |
| Income taxes                                                          |       | 84,548                         |       | 62,206 |   |
|                                                                  |       |                           |       |   |   |
| Net income                                                            |       | $                              | 144,667    |   | $ | 105,918 |   |
|                                                                  |       |                           |       |   |   |
| Net income per  common share – basic (Note 7)                    |       | $                              | 0.96       |   | $ | 0.67 |   |
| Average shares – basic (Note 7)                                  |       | 150,562                        |       | 157,311 |   |
|                                                                  |       |                           |       |   |   |
| Net income per  common share – diluted (Note 7)                  |       | $                              | 0.96       |   | $ | 0.67 |   |
| Average shares – diluted (Note 7)                                |       | 151,185                        |       | 158,772 |   |
|                                                                  |       |                           |       |   |   |
| Dividends declared per  common share                                  |       | $                              | 0.22       |   | $ | 0.20 |   |

 

 Seenotes to the consolidated condensed financial statements.

5

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**FAMILYDOLLAR STORES, INC. AND SUBSIDIARIES**

**CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS**

**(Unaudited)**
| ** **                                                                         | ** ** | **First Half Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| **(in thousands)**                                                            | ** ** | **March 3, 2007**    | ** ** | **February 25, 2006** | ** ** |
| **Cash  flows from operating activities:**                                         |       |                           |       |   |   |
| Net income                                                                         |       | $                              | 144,667    |   | $ | 105,918 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                           |       |   |   |
| Depreciation and amortization                                                      |       | 71,299                         |       | 64,983 |   |
| Deferred income taxes                                                              |       | (16,436                        | )          | (35,255 | ) |
| Stock-based compensation                                                           |       | 4,832                          |       | 3,412 |   |
| Loss on disposition of property and equipment                                      |       | 1,736                          |       | 3,350 |   |
| Changes in operating assets and liabilities:                                       |       |                           |       |   |   |
| Merchandise inventories                                                            |       | 36,486                         |       | 74,280 |   |
| Income tax refund receivable                                                       |       | 2,397                          |       | — |   |
| Prepayments and other current assets                                               |       | (26,841                        | )          | (27,170 | ) |
| Other assets                                                                       |       | 1,788                          |       | 930 |   |
| Accounts payable and accrued liabilities                                           |       | 4,754                          |       | 68,998 |   |
| Income taxes payable                                                               |       | 36,268                         |       | 22,532 |   |
|                                                                               |       | 260,950                        |       | 281,978 |   |
|                                                                               |       |                           |       |   |   |
| **Cash  flows from investing activities:**                                         |       |                           |       |   |   |
| Purchases of investment securities                                                 |       | (709,727                       | )          | (248,805 | ) |
| Sales of investment securities                                                     |       | 514,379                        |       | 52,700 |   |
| Capital expenditures                                                               |       | (50,942                        | )          | (97,799 | ) |
| Proceeds from dispositions of property and equipment                               |       | 198                            |       | 507 |   |
|                                                                               |       | (246,092                       | )          | (293,397 | ) |
|                                                                               |       |                           |       |   |   |
| **Cash  flows from financing activities:**                                         |       |                           |       |   |   |
| Issuance of long-term debt                                                         |       | —                         |       | 250,000 |   |
| Payment of debt issuance costs                                                     |       | —                         |       | (958 | ) |
| Repurchases of common stock                                                        |       | —                         |       | (201,398 | ) |
| Changes in cash overdrafts                                                         |       | 5,478                          |       | (11,029 | ) |
| Proceeds from employee stock options                                               |       | 14,597                         |       | 1,220 |   |
| Excess tax benefits from stock-based compensation                                  |       | 649                            |       | 41 |   |
| Payment of dividends                                                               |       | (31,594                        | )          | (30,450 | ) |
|                                                                               |       | (10,870                        | )          | 7,426 |   |
|                                                                               |       |                           |       |   |   |
| **Net  change in cash and cash equivalents**                                       |       | 3,988                          |       | (3,993 | ) |
| **Cash  and cash equivalents at beginning of period**                              |       | 79,727                         |       | 105,175 |   |
| **Cash and cash equivalents at  end of period**                                    |       | $                              | 83,715     |   | $ | 101,182 |   |

 

## See notes to the consolidated condensed financial statements.

6

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

## **NOTES TO CONSOLIDATED CONDENSED FINANCIALSTATEMENTS**

1.               In the opinion of the Company, theaccompanying unaudited consolidated condensed financial statements contain alladjustments (consisting of only normal recurring accruals unless otherwisestated) necessary to present fairly the Company’s financial position as ofMarch 3, 2007; the results of operations for the second quarter and first halfended March 3, 2007 (“second quarter and first half of fiscal 2007”), andFebruary 25, 2006 (“second quarter and first half of fiscal 2006”); and thecash flows for the first half of fiscal 2007 and first half of fiscal2006.  For further information, refer tothe consolidated financial statements and footnotes included in the Company’sAnnual Report on Form 10-K for the fiscal year ended August 26, 2006 (“fiscal2006”).

**The results of operations for thesecond quarter and first half of fiscal 2007 are not necessarily indicative ofthe results to be expected for the full year.**

**Certain reclassifications of theamounts for the second quarter and first half of fiscal 2006 have been made toconform to the presentation for the second quarter and first half of fiscal2007.**

2.               The Company considers all highly liquidinvestments with an original maturity of three months or less to be “cashequivalents.”  The carrying amount of theCompany’s cash equivalents approximates fair value due to the short maturitiesof these investments and consists primarily of money-market funds and other overnightinvestments.  The Company maintains cashdeposits with major banks, which from time to time may exceed federally insuredlimits.  The Company periodicallyassesses the financial condition of the institutions and believes that the riskof any loss is minimal.

The items classified asinvestment securities are principally auction rate securities and variable ratedemand notes.  The Company classifies allinvestment securities as available-for-sale. Securities accounted for as available-for-sale are required to bereported at fair value with unrealized gains and losses, net of taxes, excludedfrom net income and shown separately as a component of accumulated othercomprehensive income within shareholders’ equity.  The securities that the Company has classifiedas available-for-sale generally trade at par and as a result typically do nothave any realized or unrealized gains or losses.

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

4.               On December 19, 2006, the Company enteredinto separate agreements in connection with its unsecured Senior Notes (the “Notes”)and its unsecured revolving credit facility. The agreements extended the delivery date for the fiscal 2006 auditedfinancial statements, the unaudited financial statements for the first quarterof fiscal 2007 and the corresponding compliance certificates to March 31, 2007,and waived any Defaults or Events of Default that would have occurred due tothe failure of the Company to deliver such information in connection with theNotes and credit facility.  As discussedin Note 5 below, the Company formed a Special Committee of the Board ofDirectors to investigate the Company’s stock option granting practices.  As a result, the Company was unable to fileits Annual Report on Form 10-K for fiscal 2006 and its Quarterly Report on Form10-Q for the first quarter of fiscal 2007 by the required deadlines.  During March 2007, the Company delivered theappropriate financial statements and compliance certificates and is now incompliance with all covenants under both the Notes and credit facility.  As of the end of the first half of fiscal2007, the Company had outstanding long-term debt of $250.0 million related tothe Notes.  The Company had no borrowingsagainst its credit facility during the first half of fiscal 2007.

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

During the second quarterand first half of fiscal 2007, the Company recognized stock-based compensationexpense (related to stock options and performance share rights) of $2.8 millionand $5.5 million, respectively.  Duringthe second quarter and first half of fiscal 2006, the Company recognizedstock-based compensation expense (related to stock options and performanceshare rights) of $1.9 million and $3.4 million, respectively.  These amounts were included within selling,general, and administrative expenses on the Consolidated Condensed Statementsof Income.

7

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*StockOptions*

The Company’s stock option plans provide forgrants of stock options to key employees at prices not less than the fairmarket value of the Company’s common stock on the grant date.  The Company’s practice for a number of yearshas been to make a single annual grant to all employees participating in thestock option program and to generally make other grants only in connection withemployment or promotions.  Options expirefive years from the grant date and are exercisable to the extent of 40% afterthe second anniversary of the grant and an additional 30% at each of thefollowing two anniversary dates on a cumulative basis.  Compensation cost is recognized on a straight-linebasis, net of estimated forfeitures, over the requisite service period.  The Company used the Black-Scholesoption-pricing model to estimate the grant-date fair value of each optiongranted before and after the adoption of SFAS 123R on August 28, 2005.  The fair values of options granted during thefirst quarter and the first half of fiscal 2007 were estimated using thefollowing weighted-average assumptions:

|                                           | ** ** | **Quarter Ended**      | ** ** | **First Half Ended** | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|--------------------------------|------------|
| ** **                                | ** ** | **March 3, 2007** | ** ** | **March 3, 2007**    | ** ** |
| Expected  dividend yield                  |       | 1.76                        | %          | 1.78                           | %          |
| Expected stock  price volatility          |       | 29.00                       | %          | 29.00                          | %          |
| Weighted average  risk-free interest rate |       | 4.66                        | %          | 4.57                           | %          |
| Expected life of  options (years)         |       | 4.48                        |       | 4.49                           |       |

 

The expected dividend yield is based on theprojected annual dividend payment per share divided by the stock price on thegrant date.  Expected stock pricevolatility is derived from an analysis of the historical and implied volatilityof the Company’s publicly traded stock. The risk-free interest rate is based on the U.S. Treasury rates on thegrant date with maturity dates approximating the expected life of the option onthe grant date.  The expected life of theoptions is based on an analysis of historical and expected future exercisebehavior, as well as certain demographic characteristics.  These assumptions are evaluated and revisedfor future grants, as necessary, to reflect market conditions andexperience.  There were no significantchanges made to the methodology used to determine the assumptions during thesecond quarter and first half of fiscal 2007. The weighted-average grant-date fair value of stock options grantedduring the second quarter and first half of fiscal 2007 were $8.11 and $7.85,respectively.  The following tablesummarizes the transactions under the stock option plans during the first halfof fiscal 2007.

| (in thousands, except per share amounts) | ** ** | **Options  Outstanding** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------|------------|--------------------------------------------|------------|
| Balance at August 26, 2006                                        |       | 5,757                    |       | $                                          | 29.54      |   |
| Granted                                                           |       | 672                      |       | 29.28                                      |       |
| Exercised                                                         |       | (552                     | )          | 26.45                                      |       |
| Cancelled                                                         |       | (459                     | )          | 26.89                                      |       |
| Balance at March  3, 2007                                         |       | 5,418                    |       | $                                          | 30.05      |   |

 

The total intrinsic value of stock optionsexercised during the second quarter and first half of fiscal 2007 was $0.9million and $1.7 million, respectively. As of March 3, 2007, there was approximately $10.5 million ofunrecognized compensation cost related to outstanding stock options.  The unrecognized compensation cost will berecognized over a weighted-average period of approximately 1.4 years.

*PerformanceShare Rights*

Performance share rights give employees theright to receive shares of the Company’s common stock at a future date based onthe Company’s performance relative to a peer group.  Performance is measured based on two pre-taxmetrics: Return on Equity and Income Growth. The Compensation Committee of the Board of Directors establishes thepeer group and performance metrics.  Theperformance share rights vest at the end of the performance period (generallythree years) and the shares are issued shortly thereafter.  The actual number of shares issued can rangefrom 0% to 200% of the employee’s target award depending on the Company’sperformance relative to the peer group. The following table summarizes the transactions under the performanceshare rights program during the first half of fiscal 2007.

8

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| **(in thousands, except per share amounts)** | ** ** | **Performance  Share Rights  Outstanding** | ** ** | **Weighted  Average  Grant-Date  Fair Value** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------------------------|------------|----------------------------------------------------|------------|
| Nonvested -  August 26, 2006                                          |       | 261                                             |       | $                                                  | 24.17      |   |
| Granted                                                               |       | 249                                             |       | 29.32                                              |       |
| Vested                                                                |       | (68                                             | )          | 24.16                                              |       |
| Cancellations                                                         |       | (5                                              | )          | 26.78                                              |       |
| Adjustments                                                           |       | (4                                              | )          | N/A                                                |       |
| Nonvested - March 3,  2007                                            |       | 433                                             |       | $                                                  | 27.10      |   |

 

The grant-date fair value of the performanceshare rights is based on the stock price on the grate date.  Compensation cost is recognized on astraight-line basis, net of estimated forfeitures, over the requisite serviceperiod and adjusted quarterly to reflect the ultimate number of shares expectedto be issued.  The adjustments ofperformance share rights outstanding in the table above represents changes inthe number of shares expected to be issued. As of March 3, 2007, there was approximately $7.8 million ofunrecognized compensation cost related to outstanding performance share rights,based on the Company’s most recent performance analysis.  The unrecognized compensation cost will berecognized over a weighted-average period of approximately 2.0 years.

*SpecialCommittee Review of Historical Stock Option Granting Procedures*

On September 25, 2006, the Company filed a Form 8-K with the Securitiesand Exchange Commission (the “SEC”) in which the Company advised that it wasnamed as a nominal defendant in a lawsuit filed in the Superior Court of NorthCarolina, Mecklenburg County, alleging that certain of the Company’s stockoption grants were “backdated.”  Inconnection with the lawsuit, the Company’s Board of Directors formed a SpecialCommittee (the “Special Committee”), consisting solely of independent directorswho were not named as defendants in the lawsuit, to conduct an independentinvestigation of the Company’s stock option granting practices, evaluate thelawsuit and take such actions with respect to the lawsuit and related mattersas the Special Committee deemed appropriate. The Special Committee was advised in its review by independent legalcounsel, Richards, Layton & Finger, P.A., and by independent accountingexperts.  The Special Committee’s fivemonth review included 35 interviews of 21 current or former officers, directorsand employees of the Company, as well as the review of documents andelectronically-stored information amounting to hundreds of thousands of pagesof documents and data.

On March 7, 2007, the Company filed a Form 8-K announcing that, basedon its review of the principal factual findings of the Special Committee, theCompany determined it did not properly account for certain stock optionsgranted during the period from fiscal 1995 to fiscal 2006.   As aresult, the Company recorded a cumulative charge during the fourth quarter offiscal 2006 to correct the errors.  SeeNote 10 to the Consolidated Financial Statements included in the Company’sAnnual Report on Form 10 - K for fiscal 2006 formore information.  The impact of theseaccounting adjustments on the first half of fiscal 2007 was not material.

6.               During fiscal 2006, the Company purchasedin the open market 15.4 million shares of its common stock at a cost of $367.3million.  The Company did not purchaseany shares of its common stock during the second quarter and first half of fiscal2007.  As of March 3, 2007, the Companyhad outstanding authorizations to purchase a total of approximately 6.1 millionshares.

7.               Basicnet income per common share is computed by dividing net income by the weightedaverage number of shares outstanding during each period.  Diluted net income per common share giveseffect to all securities representing potential common shares that weredilutive and outstanding during the period. The exercise prices for certain of the outstanding stock options thatthe Company has awarded exceed the average market price of the Company’s commonstock.  Such stock options areantidilutive (options for 1.6 million for both the quarter and first half endedMarch 3, 2007, and options for 5.3 million and 5.4 million for the quarter andfirst half ended February 25, 2006, respectively) and were not included in thecomputation of diluted net income per share. In the calculation of diluted net income per common share, the denominatorincludes the number of additional common shares that would have beenoutstanding if the Company’s outstanding stock options and performance sharerights had been exercised.

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**The following table sets forththe computation of basic and diluted net income per common share:**
|                                                                       | ** ** | **Quarter Ended**  | ** ** | **First Half Ended** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------|------------|--------------------------------|------------|
| **(in thousands, except per share amounts)** | ** ** | **March 3,  2007** | ** ** | **February 25,  2006**    | ** ** | **March 3,  2007** | ** ** | **February 25,  2006** | ** ** |
| **Basic Net Income Per Share:**                                       |       |                    |       |                           |       |   |   |   |   |
| Net income                                                            |       | $                       | 90,543     |                           | $          | 54,529 |   | $ | 144,667 |   | $ | 105,918 |   |
| Weighted average number of shares outstanding                         |       | 150,656                 |       | 155,293                        |       | 150,562 |   | 157,311 |   |
| Net income per common share - basic                                   |       | $                       | 0.60       |                           | $          | 0.35 |   | $ | 0.96 |   | $ | 0.67 |   |
|                                                                  |       |                    |       |                           |       |   |   |   |   |
| **Diluted Net Income Per Share:**                                     |       |                    |       |                           |       |   |   |   |   |
| Net income                                                            |       | $                       | 90,543     |                           | $          | 54,529 |   | $ | 144,667 |   | $ | 105,918 |   |
| Weighted average number of shares outstanding                         |       | 150,656                 |       | 155,293                        |       | 150,562 |   | 157,311 |   |
| Effect of dilutive securities - stock options                         |       | —                  |       | —                         |       | 382 |   | — |   |
| Effect of dilutive securities - performance share  rights             |       | 269                     |       | 105                            |       | 241 |   | 31 |   |
| Effect of dilutive securities - forward contract                      |       | —                  |       | 1,357                          |       | — |   | 1,430 |   |
| Average shares - diluted                                              |       | 150,925                 |       | 156,755                        |       | 151,185 |   | 158,772 |   |
| Net income per  common share - diluted                                |       | $                       | 0.60       |                           | $          | 0.35 |   | $ | 0.96 |   | $ | 0.67 |   |

 

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

The case has proceeded as a collective action under the Fair LaborStandards Act (“FLSA”).  The Complaint alleged that the Company violatedthe FLSA by classifying the named plaintiffs and other similarly situatedcurrent and former Store Managers as “exempt” employees who are not entitled toovertime compensation.

A jury trial in this case was held in June 2005, in Tuscaloosa,Alabama, and ended with the judge declaring a mistrial after the jury wasunable to reach a unanimous decision in the matter.  The case wassubsequently retried to a jury in Tuscaloosa, Alabama, which found that theCompany should have classified the Store Manager plaintiffs as hourly employeesentitled to overtime pay rather than as salaried exempt managers and awardeddamages.  Subsequently, the Court ruled the Company did not act in goodfaith in classifying the plaintiffs as exempt, and after making adjustments tothe damages award based upon the filing of personal bankruptcy by certainplaintiffs, the Court entered a judgment for approximately $33.3 million. The Company and the plaintiffs have filed post-trial motions, which havesuspended the entry of a final judgment.  The Company posted a bond tostay execution on any judgment which may be finally entered.  In addition,the Court ruled that it will consider the plaintiffs’ motion for an award ofattorneys’ fees and expenses at the conclusion of the Company’s appeal. The Company plans to appeal if the Court denies the pending post-trial motionsand enters a final judgment.

The Company recognized $45.0 million as a litigation charge in thesecond quarter of fiscal 2006 with respect to this litigation.  During theappellate process, the Company will not be required to pay the amount of thejudgment.  Accordingly, this charge will not have any impact on cash flowwhile the Company pursues its appellate rights with respect to this judgment.

In general, the Company continues to believe that the Store Managersare “exempt” employees under the FLSA and have been properly compensated andthat the Company has meritorious positions on appeal that should enable itultimately to prevail.  However, the outcome of any litigation isinherently uncertain.  Resolution of this matter could have a materialadverse effect on the Company’s financial position, liquidity or results ofoperation.

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On August 24, 2006, a shareholder derivative complaint was filed in theSuperior Court of North Carolina, Mecklenburg County, by Rebecca Mitchellagainst the Company as a nominal defendant and certain of its current andformer officers and directors as individual defendants.  The complaintasserted claims under state law in connection with allegations that certain ofthe Company’s stock option grants were “backdated.”  This complaint was subsequentlyconsolidated with a second, nearly identical complaint filed by Jeffrey Alasinaand transferred to the North Carolina Business Court.  On January 4, 2007,the plaintiffs filed a consolidated amended complaint in the case, which is nowcaptioned  In re Family Dollar Stores,Inc. Derivative Litigation, Master File No. 06-CVS-16796 in the GeneralCourt of Justice, Superior Court Division, Mecklenburg County.  Theconsolidated amended complaint names the Company as a nominal defendant andHoward R. Levine, R. James Kelly, R. David Alexander, Jr., George R. Mahoney,Jr., John J. Scanlon, C. Martin Sowers, Charles S. Gibson, Jr., Gilbert A.LaFare, Samuel N. McPherson, Mark R. Bernstein, James G. Martin, and Sharon A.Decker as individual defendants.  The consolidated amended complaintcontains claims for an accounting, breach of fiduciary duty, restitution/unjustenrichment, and recission in connection with the Company’s allegedbackdating.  The consolidated amended complaint seeks unspecified damages,disgorgement, equitable relief, and costs, including attorneys’ fees.

On December 15, 2006, a shareholder derivative complaint was filed inthe United States District Court for the Western District of North Carolina,Case No. 3:06CV510-W, by Dorothy M. Lee against the Company as a nominaldefendant and certain of its current and former officers and directors, HowardR. Levine, Leon Levine, R. James Kelly, R. David Alexander, Jr., Charles S.Gibson, Jr., C. Martin Sowers, George R. Mahoney, Jr., Mark R. Bernstein,Sharon Allred Decker, Edward C. Dolby, Glenn A. Eisenberg, James G. Martin, andDale C. Pond, as individual defendants.  The complaint asserted claimsunder state and federal law in connection with allegations that certain of theCompany’s stock option grants were “backdated.”  On December 20, 2006, asecond, nearly identical complaint was filed by Stanford H. Arden in the UnitedStates District Court for the Western District of North Carolina, Case No.3:06CV523-C.  The complaints each contain claims for violations of section14(a) of the Exchange Act, an accounting, breach of fiduciary duty, abuse ofcontrol, gross mismanagement, constructive fraud, corporate waste, unjustenrichment, recission, and breach of fiduciary duty for insider selling and misappropriationof information in connection with the Company’s alleged backdating of stockoption grants.  The complaints each seek unspecified money damages, anaccounting, corporate governance and internal control reforms, imposition of aconstructive trust over the defendants’ stock options, punitive damages, andcosts, including attorneys’ fees. On March 23, 2007, the Courtadvised that these two federal actions were to be consolidated under thecaption  In re Family DollarStores, Inc. Derivative Litigation, Case No. 3106CV510-W.

As previously disclosed, the Company has formed a Special Committee toinvestigate the Company’s stock option granting practices and to makedeterminations regarding appropriate remedial measures and what actions theCompany should take with respect to the pending shareholder derivativelitigation.  See Note 5 for more information.

The Company is involved in numerous other legal proceedings and claimsincidental to its business, including litigation related to alleged failures tocomply with various state and federal employment laws, some of which are or maybe pled as class or collective actions, and litigation related to allegedpersonal or property damage, as to which the Company carries insurance coverageand/or, pursuant to Statement of Financial Accounting Standards No. 5, “Accountingfor Contingencies,” has established reserves as set forth in the Company’sfinancial statements.  While the ultimate outcome cannot be determined,the Company currently believes that these proceedings and claims, bothindividually and in the aggregate, should not have a material adverse effect onthe Company’s financial position, liquidity or results of operations. However, the outcome of any litigation is inherently uncertain and, if decided adverselyto the Company, the Company may be subject to liability that could have amaterial adverse effect on the Company’s financial position, liquidity orresults of operations.

9.               The Company manages its business on thebasis of one reportable segment.  All ofthe Company’s operations are located in the United States.  The following information regarding classesof similar products is presented in accordance with SFAS No. 131, “Disclosuresabout Segments of an Enterprise and Related Information.”
|                              | ** ** | **Quarter Ended**      | ** ** | **First Half Ended**  | ** ** |
|------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| **(in thousands)**      | ** ** | **March 3, 2007** | ** ** | **February 25, 2006** | ** ** | **March 3, 2007** | ** ** | **February 25, 2006** | ** ** |
| Classes of similar products: |       |                        |       |                            |       |   |   |   |   |
| Consumables                  |       | $                           | 1,083,049  |                            | $          | 936,759 |   | $ | 2,047,993 |   | $ | 1,843,240 |   |
| Home Products                |       | 326,088                     |       | 290,552                         |       | 568,501 |   | 523,872 |   |
| Apparel and Accessories      |       | 259,455                     |       | 234,299                         |       | 482,357 |   | 445,083 |   |
| Seasonal and  Electronics    |       | 278,788                     |       | 274,073                         |       | 448,793 |   | 434,945 |   |
| Net sales                    |       | $                           | 1,947,380  |                            | $          | 1,735,683 |   | $ | 3,547,644 |   | $ | 3,247,140 |   |

 

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Consumables includes householdchemical and paper products, candy, snacks and other food, health and beautyaids, hardware and automotive supplies, and pet food and supplies.  Home Products includes domestic items such asblankets, sheets and towels as well as housewares and giftware.  Apparel and Accessories includes men’s, women’s,boys’, girls’ and infants’ clothing and shoes. Seasonal and Electronics includes toys, stationery and school supplies,seasonal goods and electronics, including pre-paid cellular phones andservices.

**Item 2.   Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

**This discussion summarizes thesignificant factors affecting the consolidated results of operations andfinancial condition of the Company for the fourteen-week period ended March 3,2007, and the thirteen-week period ended February 25, 2006 (“second quarter offiscal 2007” and “second quarter of fiscal 2006”, respectively) and thetwenty-seven-week period ended March 3, 2007, and the twenty-six-week periodended February 25, 2006 (“first half of fiscal 2007” and “first half of fiscal2006”, respectively).  This discussionshould be read in conjunction with, and is qualified by, the financialstatements included in this quarterly report, the financial statements for thefiscal year ended August 26, 2006 (“fiscal 2006”), and Management’s Discussionand Analysis of Financial Condition and Results of Operations (“MD&A”)contained in the Company’s Annual Report on Form 10-K for fiscal 2006.  This discussion should also be read inconjunction with the “Cautionary Statement Regarding Forward Looking Statements”set forth following this MD&A, and the “Risk Factors” set forth in Part I,Item 1A of the Company’s Annual Report on Form 10-K for fiscal 2006.**

**Results of Operations**

Fiscal 2007 is a 53-week year, compared with a 52-weekyear in fiscal 2006.  The second quarterof fiscal 2007 included 14 weeks compared with 13 weeks in the second quarterof fiscal 2006.  The first half of fiscal2007 included 27 weeks compared to 26 weeks in the first half of fiscal 2006.

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

During the first half of fiscal 2007, the Company’snet sales increased 9.3% to $3.5 billion, net income increased 36.6% to $144.7million and diluted net income per common share increased 43.3% to $0.96 ascompared to the first half of fiscal 2006. The results for the first half of fiscal 2007 included the benefit of anadditional week, as discussed above.  Inaddition, the first half of fiscal 2006 was negatively impacted by a $45.0million litigation charge (approximately $0.18 per diluted share).  Despite a lower than planned increase insales in comparable stores (stores open more than 13 months), the Company wasable to achieve its expected results for the first half of fiscal 2007 due toimprovements in cost of sales.  TheCompany continued to focus on inventory productivity during the first half offiscal 2007.  Inventory on a per storebasis at the end of the first half of fiscal 2007 was approximately 7.4% lowerthan inventory on a per store basis at the end of the first half of fiscal2006, excluding merchandise in transit to the distribution centers.  The various components affecting the Company’sresults for the first half of fiscal 2007 are discussed in more detail below.

During the first half of fiscal 2007, the Companycontinued to focus its efforts on key initiatives designed to supportsustainable and profitable growth, as discussed below.

·                              TheCompany installed refrigerated coolers in approximately 590 stores during thefirst half of fiscal 2007.  The coolersare part of an enhanced food strategy designed to increase customertraffic.  At the end of the first half offiscal 2007, approximately 4,390 stores had coolers for the sale of refrigeratedfood.  The Company currently expects tohave coolers in approximately 5,000 stores by the end of fiscal 2007.  During the first half of fiscal 2007, theCompany also increased its food assortment in approximately 2,000 stores.  In addition, the Company plans to installtechnology to facilitate the acceptance of food stamps in approximately 1,000stores by the end of fiscal 2007.

·                              MostUrban Initiative markets experienced improvements in store manager retention,inventory productivity and profitability during the first half of fiscal 2007as compared to the first half of fiscal 2006. The Company plans to continue to focus on driving better returns inthese markets and plans to implement a new technological platform inapproximately 800 Urban Initiative stores by the end of fiscal 2007.  The new platform is designed to facilitatebetter customer service and make stores easier to manage.

·                              Insupport of the Treasure Hunt strategy, the Company continues to: develop event-drivenprograms that create excitement for customers and employees; focus on improvinginventory flow and turns, resulting in better presentation of new products; andenhance the apparel assortment.

·                              Duringfiscal 2007, the Company plans to open approximately 300 stores and closeapproximately 45 stores.  The Companyalso plans to continue to refine its site selection process and increase itscross-functional focus on new store performance.  During the first half of fiscal 2007, theCompany opened 170 stores and closed 24 stores.

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·                              Duringthe first half of fiscal 2007, the Company continued to enhance its researchand development effort known as “Concept Renewal.”  The Concept Renewal effort involvesdeveloping new ideas and initiatives designed to sustain profitable growth.  As of March 3, 2007, the Company had two ConceptRenewal Stores to test new ideas, including store layouts and designelements.  The Company plans to haveapproximately ten Concept Renewal test stores by the end of fiscal 2007.  During the second quarter of fiscal 2007, theCompany began to incorporate many of its new design and layout elements intonew stores.

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

Based on operating results for the first half offiscal 2007, as discussed below, and the Company’s plans for the remainder ofthe year, the Company currently expects diluted net income per common share tobe between $1.63 and $1.69 for fiscal 2007, compared to $1.26 in fiscal2006.  Diluted net income per commonshare in fiscal 2006 includes the impact (approximately $0.18 per dilutedshare) of an adverse litigation judgment, as discussed in Note 8 to theConsolidated Condensed Financial Statements included in this Report, andcumulative charges (approximately $0.04 per diluted share) to record non-cashstock based compensation and income tax related interest expense, as discussedin Note 5 to the Consolidated Condensed Financial Statements included in thisReport and in Note 10 to the Consolidated Financial Statements included in theCompany’s Annual Report on Form 10-K for fiscal 2006.

**Second Quarter Results and Third Quarter Outlook**

# *Net Sales*

Net sales in the second quarter of fiscal 2007 were$1.9 billion, an increase of approximately 12.2% ($211.7 million), as comparedwith an increase of 9.4% ($148.9 million) in the second quarter of fiscal2006.  The increase was attributable, inpart, to increased sales in comparable stores (stores open more than 13 months)of 0.4% ($7.3 million), with the balance of the increase primarily relating tosales from new stores opened as part of the Company’s store growthprogram.  The increase in sales incomparable stores resulted from an increase in the average customertransaction, which offset a slight decline in customer traffic, as measured bythe number of register transactions in comparable stores.  Sales during the second quarter of fiscal2007 were strongest in Consumables and were weaker in Home Products and Appareland Accessories.  Sales of Seasonal andElectronics were impacted by increased sales of prepaid services, which arerecorded on a net basis.  As a result,only the markup on the sales of these products is recorded as revenue.

The Company distributedtwo advertising circulars during the second quarter of both fiscal 2007 andfiscal 2006.  The circulars are designedto stimulate traffic and inform customers about the Company’s Treasure Huntmerchandise, seasonal values and competitive prices on core consumables.

**Theaverage number of stores in operation during the second quarter of fiscal 2007was 5.3% higher than the average number of stores in operation during thesecond quarter of fiscal 2006.**

*Cost of Sales*

Cost of sales increased approximately 11.1% in thesecond quarter of fiscal 2007 compared with the second quarter of fiscal2006.  This increase primarily reflectedthe additional sales volume between years. Cost of sales, as a percentage of net sales, was 66.5% in the secondquarter of fiscal 2007 and 67.1% in the second quarter of fiscal 2006.  Theimprovement in cost of sales, as a percentage of net sales, was due to theeffect of an increase in sales of prepaid services, which are reported on a netbasis, as discussed above, better merchandise markup, and lower inventoryshrinkage.  These improvements werepartially offset by higher markdown expense. Freight expense, as a percentage of net sales, was substantially unchanged.  The Company continues to focus on improvinginventory productivity, including the continued refinement of the Company’sinventory replenishment system and the implementation of a more aggressivemarkdown strategy.  The Company believesthat the improvements in inventory productivity are positively impactinginventory shrinkage and store manager retention trends.

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

Selling, general and administrative (“SG&A”)expenses increased 16.2% in the second quarter of fiscal 2007, compared withthe second quarter of fiscal 2006.  Theincreases in these expenses were due primarily to additional costs arising fromthe continued growth in the number of stores in operation.  SG&A expenses, as a percentage of netsales, were 26.1% in the second quarter of fiscal 2007 and 25.2% in the secondquarter of fiscal 2006.  As a result ofrelatively flat comparable store sales growth and the effect of an increase insales of prepaid services, most costs in the second quarter of fiscal 2007,including compensation expense, were deleveraged.  Expenses associated with the Company’s reviewof its stock option granting practices (approximately 0.7% of net sales) and increased compensation expense (approximately0.5% of net sales) were partially offset by a decrease in insurance costs(approximately 0.3% of net sales).  SeeNote 5 to the Consolidated Condensed Financial Statements included in thisReport and Note 10 to the Consolidated Financial Statements included in theCompany’s Annual Report on Form 10-K for fiscal 2006 for more information onthe Company’s review of its stock option granting practices.  The decrease in insurance costs, as apercentage of net sales, was due to a reduction in health care and workerscompensation expenses.  The Companybelieves that improvements in processes, lower inventory levels and increasedstore manager retention rates contributed to the reduction in workerscompensation costs.

***Litigation Charge***

**During the second quarter offiscal 2006, the Company recorded a $45.0 million (approximately $0.18 perdiluted share) litigation charge associated with an adverse litigation judgmentin a case in Tuscaloosa, Alabama.  SeeNote 8 to the Consolidated Condensed Financial Statements included in this Reportfor more information.  All other legalexpenses incurred during the second quarter of both fiscal 2007 and fiscal 2006were recorded in SG&A.**

***Interest Income***

**Interest income increased $1.3million in the second quarter of fiscal 2007 compared with the second quarterof fiscal 2006.  The increase in interestincome was due to an increase in investments and interest rates.**

***Interest Expense***

Interest expense increased$1.7 million in the second quarter of fiscal 2007 compared with the secondquarter of fiscal 2006.  The increase ininterest expense was due primarily to interest on state income taxes.

***Income Taxes***

The effective tax rate was36.3% for the second quarter of fiscal 2007 compared with 37.0% for the secondquarter of fiscal 2006.  The decrease inthe effective tax rate was primarily the result of the positive impact of aretroactive reinstatement of federal jobs tax credits and the effect of changesin state income taxes.

*Third Quarter Outlook*

For the third quarter of fiscal 2007, the Companyexpects comparable store sales to increase 1-3% as a result of the rollout ofthe Company’s food strategy, the impact from “Treasure Hunt” merchandise salesand continued focus on driving better returns in the Urban Initiative markets,as well as sales of prepaid cellular phones and services.  The Company believes that cost of sales, as apercentage of net sales, during the third quarter of fiscal 2007 will decreaseas compared to fiscal 2006 due to better merchandise markup, lower inventoryshrinkage, lower freight expense, and the effect of an increase in sales ofprepaid services.  These factors areexpected to offset the continuing effect of the shift in the merchandise mix tomore lower-margin basic consumables.  TheCompany believes that SG&A expense, as a percentage of net sales, will increaseas compared to fiscal 2006 due to continued investments in the Company’songoing initiatives and low single-digit comparable store sales growth.  Using these assumptions, the Company expectsthat earnings per share will be between $0.39 and $0.43 for the third quarterof fiscal 2007.

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**Year-to-date Results**

# *Net Sales*

Net sales in the first half of fiscal 2007 were $3.5billion, an increase of approximately 9.3% ($300.5 million), as compared withan increase of 9.4% ($280.1 million) in the first half of fiscal 2006.  The increase was attributable, in part, toincreased sales in comparable stores (stores open more than 13 months) of 0.6%($20.4 million), with the balance of the increase primarily relating to salesfrom new stores opened as part of the Company’s store growth program.  The increase in sales in comparable storesresulted from an increase in the average customer transaction, which offset aslight decline in customer traffic, as measured by the number of registertransactions in comparable stores.  Salesduring the first half of fiscal 2007 were strongest in Consumables and wereweaker in Home Products and Apparel and Accessories.  Sales of Seasonal and Electronics wereimpacted by increased sales of prepaid services, which are recorded on a netbasis.  As a result, only the markup onthe sales of these products is recorded as revenue.

The Company distributedthree advertising circulars during the first half of both fiscal 2007 andfiscal 2006.  The circulars are designedto stimulate traffic and inform customers about the Company’s Treasure Huntmerchandise, seasonal values and competitive prices on core consumables.

**The average number of stores in operation during thefirst half of fiscal 2007 was 5.2% higher than the average number of stores inoperation during the first half of fiscal 2006. The Company had 6,319 stores in operation at the end of the first halfof fiscal 2007, compared with 6,002 stores in operation at the end of the firsthalf of fiscal 2006, representing an increase of 5.3%.**

*Cost of Sales*

Cost of sales increased approximately 8.0% in thefirst half of fiscal 2007 compared with the first half of fiscal 2006.  This increase primarily reflected theadditional sales volume between years. Cost of sales, as a percentage of net sales, was 66.0% in the first halfof fiscal 2007 and 66.8% in the first half of fiscal 2006.  Theimprovement in cost of sales, as a percentage of net sales, was due to theeffect of an increase in sales of prepaid services, which are reported on a netbasis, as discussed above, better merchandise markup, and lower inventoryshrinkage.  These improvements wereoffset slightly by higher markdown expense. Freight expense, as a percentage of net sales, was substantiallyunchanged.  The Company continues tofocus on improving inventory productivity, including the continued refinementof the Company’s inventory replenishment system and the implementation of amore aggressive markdown strategy.  TheCompany believes that the improvements in inventory productivity are positivelyimpacting inventory shrinkage and store manager retention trends.

***Selling, General andAdministrative Expenses***

SG&A expenses increased 12.4% in the first half offiscal 2007, compared with the first half of fiscal 2006.  The increases in these expenses were dueprimarily to additional costs arising from the continued growth in the numberof stores in operation.  SG&Aexpenses, as a percentage of net sales, were 27.4% in the first half of fiscal2007 and 26.6% in the first half of fiscal 2006.  As a result of  relatively flat comparable store sales growthand the effect of an increase in sales of prepaid services, most costs in thefirst half of fiscal 2007, including compensation expense, weredeleveraged.  Expenses associated with the Company’s review of its stock optiongranting practices (approximately 0.5% of net sales), increased occupancy costs(approximately 0.3% of net sales) and increased compensation expense(approximately 0.3% of net sales) were partially offset by a decrease ininsurance costs (approximately 0.3% of net sales).  See Note 5 to the Consolidated CondensedFinancial Statements included in this Report and Note 10 to the ConsolidatedFinancial Statements included in the Company’s Annual Report on Form 10-K forfiscal 2006 for more information on the Company’s review of its stock optiongranting practices.  The increase inoccupancy costs, as a percentage of net sales, was due primarily to higher rentexpense.  The decrease in insurancecosts, as a percentage of net sales, was due to a reduction in health care andworkers compensation expenses.  TheCompany believes that improvements in processes, lower inventory levels andincreased store manager retention rates contributed to the reduction in workerscompensation costs.

***Litigation Charge***

**During the first half of fiscal2006, the Company recorded a $45.0 million (approximately $0.18 per dilutedshare) litigation charge associated with an adverse litigation judgment in acase in Tuscaloosa, Alabama.  See Note 8to the Consolidated Condensed Financial Statements included in this Report formore information.  All other legalexpenses incurred during the first half of both fiscal 2007 and fiscal 2006were recorded in SG&A.**

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***Interest Income***

**Interest income increased $1.9million in the first half of fiscal 2007 compared with the first half of fiscal2006.  The increase in interest incomewas due to an increase in investments and interest rates.**

***Interest Expense***

Interest expense increased$5.0 million in the first half of fiscal 2007 compared with the first half offiscal 2006.  The increase in interestexpense was due primarily to interest on taxes as proposed by the InternalRevenue Service during their examination of the Company’s consolidated federalincome tax returns for fiscal 2005, fiscal 2004 and fiscal 2003 and interest onstate income taxes.

***Income Taxes***

The effective tax rate was36.9% for the first half of fiscal 2007, compared with 37.0% for the first halfof fiscal 2006.  The decrease in theeffective tax rate was primarily the result of the effect of changes in stateincome taxes.

**Liquidity and Capital Resources**

At the end of the first half of fiscal 2007, theCompany had working capital of $583.9 million, compared with $432.7 million asof August 26, 2006.  Changes in workingcapital during the first half of fiscal 2007 and fiscal 2006 were primarily theresult of earnings, changes in merchandise inventories, capital expenditures,changes in income taxes payable, and, in the first half of fiscal 2006,repurchases of the Company’s common stock. The Company’s inventories at the end of the first half of fiscal 2007were 1.5% lower than at the end of the first half of fiscal 2006.  Inventory on a per store basis at the end ofthe first half of fiscal 2007 was approximately 7.4% lower than inventory on aper store basis at the end of the first half of fiscal 2006, excludingmerchandise in transit to the distribution centers.  The decrease in inventory on a per storebasis is the result of the Company’s continued refinement of its replenishmentsystem and renewed focus on inventory productivity, which includes improvedplanning and flow of fashion merchandise and the use of more aggressive exitstrategies.  The decrease in inventorylevels has had a positive impact on merchandise presentation and store managerretention.

Capital expenditures for the first half of fiscal 2007were approximately $50.9 million and are currently expected to be approximately$155 million to $165 million for fiscal 2007. The majority of the planned capital expenditures for fiscal 2007 relateto the Company’s new store openings; existing store expansions, relocations andrenovations; and expenditures related to store-focused technologyinfrastructure.

In the first half of fiscal 2007, the Company opened170 stores, closed 24 stores and expanded, relocated, or renovated 9stores.  The Company occupies most of itsstores under operating leases.  Storeopening, closing, expansion, relocation, and renovation plans, as well asoverall capital expenditure plans, are continuously reviewed and are subject tochange.

During fiscal 2006, the Company purchased in the openmarket 15.4 million shares of its common stock at a cost of $367.3million.  The Company did not purchaseany shares of its common stock during the first half of fiscal 2007 but expectsto begin purchasing additional shares of its common stock during the secondhalf of fiscal 2007.  As of March 3,2007, the Company had outstanding authorizations to purchase a total ofapproximately 6.1 million shares.

The Company has an unsecured revolving credit facilitywith a syndicate of lenders for short-term borrowings of up to $350million.  Outstanding standby letters ofcredit ($123.0 million as of March 3, 2007) reduce the borrowing capacity ofthe credit facility.  The credit facilityexpires on August 24, 2011.  The Companyhad no outstanding borrowings against the credit facility during the first halfof fiscal 2007.  Cash flow from currentoperations and the available credit facility, as discussed above, are expectedto be sufficient to meet planned liquidity and operational capital resourceneeds, including store expansion and other capital spending programs, scheduledinterest payments, and any further repurchases of the Company’s common stock.

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On December 19, 2006, the Company entered intoseparate agreements in connection with its unsecured Senior Notes (the “Notes”)and its unsecured revolving credit facility. The agreements extended the delivery date for the fiscal 2006 auditedfinancial statements, the unaudited financial statements for the first quarterof fiscal 2007 and the corresponding compliance certificates to March 31, 2007,and waived any Defaults or Events of Default that would have occurred due tothe failure of the Company to deliver such information in connection with theNotes and credit facility.  As discussedin Note 5 to the Consolidated Condensed Financial Statements included in thisReport, the Company formed a Special Committee of the Board of Directors toinvestigate the Company’s stock option granting practices.  As a result, the Company was unable to fileits Annual Report on Form 10-K for fiscal 2006 and its Quarterly Report on Form10-Q for the first quarter of fiscal 2007 by the required deadlines.  During March 2007, the Company delivered theappropriate financial statements and compliance certificates and is incompliance with all covenants under both the Notes and credit facility.  As of the end of the first half of fiscal2007, the Company had outstanding long-term debt of $250.0 million related tothe Notes.

The following table shows the Company’s obligationsand commitments as of the end of the first half of fiscal 2007 to make futurepayments under contractual obligations:
|                                  | ** ** | **Payments Due During Period Ending** | ** ** |
|----------------------------------|------------|-----------------------------------------------------------|------------|
| **(in thousands)**          | ** ** | ** **                                                | ** ** | **February** | ** ** | **February** | ** ** | **February** | ** ** | **February** | ** ** | **February** | ** ** | ** ** | ** ** |
| **Contractual Obligations** | ** ** | **Total**                                                 | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **Thereafter** | ** ** |
| Long-term debt                   |       | $                                                         | 250,000    |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 16,200 |   | $ | 233,800 |   |
| Interest                         |       | 111,996                                                   |       | 13,387 |   | 13,387 |   | 13,387 |   | 13,387 |   | 13,034 |   | 45,414 |   |
| Merchandise letters of credit    |       | 95,196                                                    |       | 95,196 |   | — |   | — |   | — |   | — |   | — |   |
| Operating leases                 |       | 1,266,549                                                 |       | 287,442 |   | 253,984 |   | 212,226 |   | 167,231 |   | 121,264 |   | 224,402 |   |
| Construction obligations         |       | 6,123                                                     |       | 6,123 |   | — |   | — |   | — |   | — |   | — |   |
| Total                            |       | $                                                         | 1,729,864  |   | $ | 402,148 |   | $ | 267,371 |   | $ | 225,613 |   | $ | 180,618 |   | $ | 150,498 |   | $ | 503,616 |   |

 

At the end of the first half of fiscal 2007, approximately $37.4 millionof the merchandise letters of credit were included in accounts payable on theCompany’s Consolidated Condensed Balance Sheet. Most of the Company’s operating leases provide the Company with anoption to extend the term of the lease at designated rates.

The following table shows the Company’s other commercial commitments asof the end of the first half of fiscal 2007:
|                                                                     | ** ** | **Total Amounts** | ** ** |
|---------------------------------------------------------------------|------------|------------------------|------------|
| **Other Commercial Commitments (in thousands)** | ** ** | **Committed**          | ** ** |
| Standby letters  of credit                                          |       | $                      | 123,027    |   |
| Surety bonds                                                        |       | 44,935                 |       |
| Total Commercial  Commitments                                       |       | $                      | 167,962    |   |

 

**Thestandby letters of credit (which are primarily renewed on an annual basis) areused as surety for future premium and deductible payments to the Company’sworkers’ compensation and general liability insurance carrier.  The Company accrues for these future paymentliabilities as described in the “Critical Accounting Policies” section of “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” inthe Company’s Annual Report on Form 10-K for fiscal 2006.  Included in the outstanding amount of suretybonds is a $41.6 million bond obtained by the Company during the third quarterof fiscal 2006 in connection with an adverse litigation judgment, as discussedin Note 8 to the Consolidated Condensed Financial Statements included in thisReport.**

**Recent Accounting Pronouncements**

**In May 2005, the FASB issued SFASNo. 154, “Accounting Changes and Error Corrections” (“SFAS 154”).  SFAS 154 replaces Accounting Principles BoardOpinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting AccountingChanges in Interim Financial Statements.” SFAS 154 changes the requirements for the accounting for and reportingof a change in accounting principle. SFAS 154 is effective for accounting changes and corrections of errorsmade in fiscal years beginning after December 15, 2005.  The Company does not expect SFAS 154 to havea material impact on its Consolidated Financial Statements.**

**In July 2006, the FASB issuedInterpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”).  FIN 48 provides guidance regarding therecognition and measurement of tax positions and the related reporting anddisclosure requirements and will be effective for the Company beginning withits first quarter of fiscal 2008.  TheCompany has not yet determined the impact, if any, that FIN 48 will have on itsConsolidated Financial Statements.**

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

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

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

**Critical Accounting Policies**

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

**Cautionary Statement Regarding Forward-Looking Statements**

Certain statements contained in this Report, or inother public filings, press releases, or other written or oral communicationsmade by the Company or its representatives, which are not historical facts areforward-looking statements made pursuant to the safe harbor provisions of thePrivate Securities Litigation Reform Act of 1995.  These forward-looking statements address theCompany’s plans, activities or events which the Company expects will or mayoccur in the future and may include express or implied projections of revenueor expenditures; statements of plans and objectives for future operations,growth or initiatives; statements of future economic performance; or statementsregarding the outcome or impact of pending or threatened litigation.  These forward-looking statements may beidentified by the use of the words “plan,” “estimate,” “expect,” “anticipate,” “probably,”“should,” “project,” “intend,” “continue,” and other similar terms andexpressions.  Various risks,uncertainties and other factors may cause the Company’s actual results todiffer materially from those expressed or implied in any forward-lookingstatements.  Factors, uncertainties andrisks that may result in actual results differing from such forward-lookinginformation include, but are not limited to those listed in Part I, Item 1A ofthe Company’s Annual Report on Form 10-K for fiscal 2006, as well as otherfactors discussed throughout this Report, including, without limitation, thefactors described under “Critical Accounting Policies” in Part I, Item 2 above,or in other filings or statements made by the Company.  All of the forward-looking statements made bythe Company in this Report and other documents or statements are qualified bythese and other factors, risks and uncertainties.  Readers are cautioned not to place unduereliance on these forward-looking statements, which speak only as of the dateof this Report.  The Company does notintend to publicly update or revise its forward-looking statements even ifexperience or future changes make it clear that projected results expressed orimplied in such statements will not be realized, except as may be required bylaw.

# **Item 3.      Quantitativeand Qualitative Disclosures About Market Risk**

The Company is subject to market risk from exposure tochanges in interest rates based on its financing, investing and cash managementactivities.  The Company maintains anunsecured revolving credit facility at a variable rate of interest to meet theshort-term needs of its expansion program and seasonal inventoryincreases.  The Company had nooutstanding borrowings against this facility during the first half of fiscal2007.  The Company’s long-term debtassociated with the Notes bears interest at fixed rates.

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#### **Item 4.      Controls and Procedures**

As discussed in Note 5 to the Consolidated CondensedFinancial Statements included in this Report, a Special Committee of the Boardof Directors has reviewed the Company’s historical stock option practices and,as a result of such review, the Company recorded a charge in the fourth quarterof fiscal 2006 for certain non-cash stock-based compensation expense andrelated interest expense.  Management hasreviewed the Special Committee’s factual findings regarding the Company’s stockoption process, including findings regarding changes in the Company’s stockoption granting process instituted in fiscal 2005.  The Special Committee has not yet made itsdeterminations concerning remediation or what actions the Company should takewith respect to the pending shareholder litigation.

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

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

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**PART II - OTHER INFORMATION**

**Item 1.        LegalProceedings**

**The information in Note 8 to theConsolidated Condensed Financial Statements contained in Part I, Item 1 of theForm 10-Q is incorporated herein by this reference.**

**Item 1A.     RiskFactors**

**There have been no materialchanges in the Risk Factors outlined in the Company’s Annual Report on Form10-K for fiscal 2006.**

**Item 2.        UnregisteredSales of Equity Securities and Use of Proceeds**

The followingtable sets forth information with respect to purchases of shares of the Company’scommon stock made during the quarter ended March 3, 2007, by or on behalf ofthe Company or any “affiliated purchaser” as defined by Rule 10b-18(a)(3) ofthe Securities Exchange Act of 1934.
| **Period**                      | ** ** | **Total Number  of Shares  Purchased** | ** ** | **Average Price  Paid Per Share** | ** ** | **Total Number of  Shares Purchased as  Part of Publicly  Announced Plans or  Programs**(1) | ** ** | **Maximum Number  of Shares that May  Yet Be Purchased  Under the Plans or  Programs**(1) | ** ** |
|---------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------|------------|
| December (11/26/06 -  12/30/06) |       | —                                           |       | —                                           |       | —                                                                                                                              |       | 6,071,254                                                                                                                              |       |
| January (12/31/06 -  2/3/07)    |       | —                                           |       | —                                           |       | —                                                                                                                              |       | 6,071,254                                                                                                                              |       |
| February (2/4/07 -  3/3/07)     |       | —                                           |       | —                                           |       | —                                                                                                                              |       | 6,071,254                                                                                                                              |       |
| Total                           |       | —                                           |       | —                                           |       | —                                                                                                                              |       | 6,071,254                                                                                                                              |       |

 

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**(1)**        OnApril 13, 2005, the Company announced that the Board of Directors authorizedthe purchase of up to five million shares of its outstanding common stock fromtime to time as market conditions warrant. As of March 3, 2007, the Company had 1.1 million shares remaining underthis authorization.  On August 18, 2006,the Company announced that the Board of Directors authorized the purchase of upto an additional five million shares of its outstanding common stock from timeto time as market conditions warrant.  Asof March 3, 2007, the Company had not purchased any shares under thisauthorization.  There is no expirationdate governing the period during which the Company can make share repurchasespursuant to the above referenced authorizations.

**Between January 1, 2007, and February28, 2007, the Company issued 251,270 shares of the Company’s common stock, foran aggregate price of $6,991,823, to certain of the Company’s key employeesupon their exercise of options previously granted under the Family DollarStores, Inc. 1989 Non-Qualified Stock Option Plan. To the extent not covered byan effective registration statement, such issuances were made pursuant toSection 4(2) of the Securities Act of 1933, as amended, as transactions notinvolving a public offering due to lack of general solicitation or advertising,the status and knowledge of the key employee optionees and publicly availableinformation about the Company and its operations.**

**Item 5.        OtherInformation**

**The Company has set the time, dateand location for its 2007 annual meeting of stockholders (the “2007 AnnualMeeting”) as 2:00 p.m., local time, on June 19, 2007, at the office of theCompany, 10401 Monroe Road, Matthews, North Carolina 28201-1017.  April 25, 2007, is the record date for thedetermination of stockholders who will be entitled to notice of and votingrights at the 2007 Annual Meeting.**

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**Because the scheduled date for the2007 Annual Meeting is more than 30 days after the anniversary date of the 2006annual meeting of stockholders, proposals of stockholders intended to bepresented at the 2007 Annual Meeting, and to be included in the proxy statementand form of proxy pursuant to Rule 14a-8 under the Exchange Act, must be receivedby the Company on or before April 23, 2007. If the Company does not receive notice of any stockholder proposal on orbefore April 23, 2007, such proposal will be considered untimely pursuant toRules 14a-4 and 14a-5(e) under the Act, and the persons named in the proxiessolicited by the Board of Directors for the 2007 Annual Meeting may exercisediscretionary voting power with respect to such proposal.  Additionally, the Company’s Bylaws requirethat any stockholder who intends to make a nomination or bring any other matterbefore the 2007 Annual Meeting must deliver notice of such intent to theCompany not later than April 28, 2007. Any such proposals or notices should be in writing and should be sent bycertified mail, return receipt requested to the Secretary, Family DollarStores, Inc., P.O. Box 1017, Charlotte, North Carolina 28201-1017.**

**Item6.  Exhibits**
| (a)    |   | Exhibits incorporated by reference: |
|--------|--------|-------------------------------------|
|   |
|   |   | 10.1                                |   | Letter Agreement dated December 8, 2006, between the  Company, Family Dollar, Inc., Wachovia Bank, National Association as  Administrative Agent and the Lenders (filed as Exhibit 10 to the Company’s  report on Form 8-K filed December 14, 2006). |
|   |   |                                |   |   |
|   |   | 10.2                                |   | Consent dated December 19, 2006, between the  Company, Family Dollar, Inc., the Subsidiary Guarantors, Wachovia Bank,  National Association as Administrative Agent and the Lenders (filed as  Exhibit 10.1 to the Company’s Report on Form 8-K filed December 22, 2006). |
|   |   |                                |   |   |
|   |   | 10.3                                |   | Letter Agreement dated December 19, 2006, between  the Company, Family Dollar, Inc. and various institutional accredited  investors (filed as Exhibit 10.2 to the Company’s Report on Form 8-K filed  December 22, 2006). |
|   |   |                                |
| (b)    |   | Exhibits filed herewith:            |
|   |   |                                |
| *      |   | 10.4                                |   | Family Dollar Stores, Inc. 2006 Incentive Plan:  Guidelines for Long-Term Incentive Performance Share Rights Awards |
|   |   |                                |   |   |
|   |   | 31.1                                |   | Certification of Principal Executive Officer  Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act  of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|   |   |                                |   |   |
|   |   | 31.2                                |   | Certification of Principal Financial Officer  Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act  of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|   |   |                                |   |   |
|   |   | 32.1                                |   | Certification of Principal Executive Officer  Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |
|   |   |                                |   |   |
|   |   | 32.2                                |   | Certification of Principal Financial Officer  Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |
|        |        |                                     |  |  |  |

 

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* Exhibit represents amanagement contract or compensatory plan

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SIGNATURES

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

 
|                  |   | FAMILY DOLLAR STORES,  INC.              |
|-----------------------|--------|------------------------------------------|
|                  |   | (Registrant)                             |
|                  |   |                                     |
|                  |   |                                     |
| Date: April 12,  2007 |   | /s/ R. James Kelly                       |
|                  |   | R. JAMES KELLY                           |
|                  |   | President and  Chief Operating Officer - |
|                  |   | Interim Chief  Financial Officer         |
|                  |   |                                     |
|                  |   |                                     |
| Date: April 12,  2007 |   | /s/ C. Martin Sowers                     |
|                  |   | C. MARTIN SOWERS                         |
|                  |   | Senior Vice  President-Finance           |

 

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