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Form 10-Q

SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

(Mark One)

|ý                                                | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|------------------------------------------------ | ----------------------------------------------------------------------------------------
|For the quarterly period ended November 30, 2002
|OR                                              
|o                                                | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-6807

FAMILY DOLLAR STORES, INC.(Exact name of registrant as specified in its charter)

DELAWARE(State or other jurisdiction of
incorporation or organization)

56-0942963(I.R.S. Employer (Identification No.)P.O. Box 1017, 10401 Old Monroe Road
Charlotte, North Carolina(Address of principal executive offices)

28201-1017(Zip Code)


Registrant's telephone number, including area code704-847-6961

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes ý    No o

Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange
Act). Yes ý    No o

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

Class

Outstanding at December 31, 2002Common Stock, $.10 par value

171,979,955 shares


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FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES

INDEX

|          |                                                                                                      |                                                                                       | Page No.
|--------- | ---------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------- | --------
|Part I   | Financial Information                                                                                |                                                                                       |         
|          | Item 1                                                                                              | Consolidated Condensed Financial Statements:                                          |         
|          | Consolidated Condensed Balance SheetsNovember 30, 2002 and August 31, 2002                          |                                                                                       | 2       
|          | Consolidated Condensed Statements of IncomeQuarter Ended November 30, 2002 and
December 1, 2001     |                                                                                       | 3       
|          | Consolidated Condensed Statements of Cash FlowsQuarter Ended November 30, 2002 and
December 1, 2001 |                                                                                       | 4       
|          | Notes to Consolidated Condensed Financial Statements                                                 |                                                                                       | 5-7     
|          | Item 2                                                                                              | Management's Discussion and Analysis of Financial Condition and Results of Operations |         
|          | Item 4                                                                                              | Controls and Procedures                                                               |         
|Part II  | Other Information and Signatures                                                                     |                                                                                       |         
|          | Item 1                                                                                              | Legal Proceedings                                                                     |         
|          | Item 6                                                                                              | Exhibits and Reports on Form 8-K                                                      |         
|          | Signatures                                                                                           |                                                                                       | 14      
|          | Certifications                                                                                       |                                                                                       | 15-16   

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FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES        CONSOLIDATED CONDENSED BALANCE SHEETS  (Unaudited)

|                                      |                                                                                                                                                  | November 30,
2002          |           | August 31,
2002
|------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------- | --------- | ---------------
|
|Assets                                |                                                                                                                                                  |                            |           |                
|Current assets:                       |                                                                                                                                                  |                            |           |                
|                                      | Cash and cash equivalents (Note 2)                                                                                                               |                            | $         | 160,369        
|                                      | Merchandise inventories                                                                                                                          |                            |           | 810,524        
|                                      | Deferred income taxes                                                                                                                            |                            |           | 52,034         
|                                      | Income tax refund receivable                                                                                                                     |                            |           |               
|                                      | Prepayments and other current assets                                                                                                             |                            |           | 20,755         
|                                      |                                                                                                                                                  |                            |           |                
|                                      |                                                                                                                                                  | Total current assets       |           |                
|Property and equipment, net           |                                                                                                                                                  |                            | 691,073   |                
|Other assets                          |                                                                                                                                                  |                            | 13,024    |                
|                                      |                                                                                                                                                  |                            |           |                
|                                      |                                                                                                                                                  | $                          | 1,747,779 |                
|                                      |                                                                                                                                                  |                            |           |                
|Liabilities and Shareholders' Equity  |                                                                                                                                                  |                            |           |                
|Current liabilities:                  |                                                                                                                                                  |                            |           |                
|                                      | Accounts payable and accrued liabilities                                                                                                         |                            | $         | 492,578        
|                                      | Income taxes payable                                                                                                                             |                            |           | 26,844         
|                                      |                                                                                                                                                  |                            |           |                
|                                      |                                                                                                                                                  | Total current liabilities  |           |                
|Deferred income taxes                 |                                                                                                                                                  |                            | 68,869    |                
|                                      |                                                                                                                                                  |                            |           |                
|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 185,980,813 shares at November 30, 2002, and 185,830,901 shares at August 31, 2002 |                            |           | 18,598         
|                                      | Capital in excess of par                                                                                                                         |                            |           | 66,228         
|                                      | Retained earnings                                                                                                                                |                            |           | 1,164,315      
|                                      |                                                                                                                                                  |                            |           |                
|                                      |                                                                                                                                                  |                            | 1,249,141 |                
|                                      | Less common stock held in treasury, at cost (14,005,003 shares at November 30, 2002 and 12,501,666 at August 31, 2002)(Note 6)                   |                            |           | 89,653         
|                                      |                                                                                                                                                  |                            |           |                
|                                      |                                                                                                                                                  | Total shareholders' equity |           |                
|                                      |                                                                                                                                                  |                            |           |                
|                                      |                                                                                                                                                  | $                          | 1,747,779 |                
|                                      |                                                                                                                                                  |                            |           |                

See
notes to consolidated condensed financial statements

2

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FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES        CONSOLIDATED CONDENSED STATEMENTS OF INCOME  (Unaudited)

|                                             |                                              | Quarter Ended
|-------------------------------------------- | -------------------------------------------- | -------------
|
|
|Net sales                                    |                                              | $            
|Cost and expenses:                           |                                              |              
|                                             | Cost of sales                                |              
|                                             | Selling, general and administrative expenses |              
|                                             |                                              |              
|                                             |                                              |              
|                                             |                                              |              
|Income before provision for taxes on income  |                                              |              
|Provision for taxes on income                |                                              |              
|                                             |                                              |              
|Net income                                   |                                              | $            
|                                             |                                              |              
|Net income per common shareBasic (Note 6)   |                                              | $            
|                                             |                                              |              
|Average sharesBasic (Note 6)                |                                              |              
|                                             |                                              |              
|Net income per common shareDiluted (Note 6) |                                              | $            
|                                             |                                              |              
|Average sharesDiluted (Note 6)              |                                              |              
|                                             |                                              |              
|Dividends per common share                   |                                              | $            
|                                             |                                              |              

See
notes to consolidated condensed financial statements.

3

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FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES        CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS  (Unaudited)

|                                                  |                                                                                   | Quarters Ended                                |                                         
|------------------------------------------------- | --------------------------------------------------------------------------------- | --------------------------------------------- | ----------------------------------------
|
|
|Cash flows from operating activities:             |                                                                                   |                                               |                                         
|                                                  | Net income                                                                        |                                               | $                                       
|                                                  | Adjustments to reconcile net income to net cash provided by operating activities: |                                               |                                         
|                                                  |                                                                                   | Depreciation and amortization                 |                                         
|                                                  |                                                                                   | Deferred income taxes                         |                                         
|                                                  |                                                                                   | Loss on disposition of property and equipment |                                         
|                                                  |                                                                                   | Changes in operating assets and liabilities:  |                                         
|                                                  |                                                                                   |                                               | Merchandise inventories                 
|                                                  |                                                                                   |                                               | Income tax refund receivable            
|                                                  |                                                                                   |                                               | Prepayments and other current assets    
|                                                  |                                                                                   |                                               | Other assets                            
|                                                  |                                                                                   |                                               | Accounts payable and accrued liabilities
|                                                  |                                                                                   |                                               | Income taxes payable                    
|                                                  |                                                                                   |                                               |                                         
|                                                  |                                                                                   |                                               | 21,158                                  
|                                                  |                                                                                   |                                               |                                         
|Cash flows from investing activities:             |                                                                                   |                                               |                                         
|                                                  | Capital expenditures                                                              |                                               |                                         
|                                                  | Proceeds from dispositions of property and equipment                              |                                               |                                         
|                                                  |                                                                                   |                                               |                                         
|                                                  |                                                                                   |                                               | (28,027                                 
|                                                  |                                                                                   |                                               |                                         
|Cash flows from financing activities:             |                                                                                   |                                               |                                         
|                                                  | Net notes payable borrowings                                                      |                                               |                                         
|                                                  | Net purchases of stock for treasury                                               |                                               |                                         
|                                                  | Exercise of employee stock options                                                |                                               |                                         
|                                                  | Payment of dividends                                                              |                                               |                                         
|                                                  |                                                                                   |                                               |                                         
|                                                  |                                                                                   |                                               | (53,027                                 
|                                                  |                                                                                   |                                               |                                         
|Net change in cash and cash equivalents           |                                                                                   |                                               | (59,896                                 
|Cash and cash equivalents at beginning of period  |                                                                                   |                                               | 220,265                                 
|                                                  |                                                                                   |                                               |                                         
|Cash and cash equivalents at end of period        |                                                                                   | $                                             | 160,369                                 
|                                                  |                                                                                   |                                               |                                         
|Supplemental disclosure of cash flow information: |                                                                                   |                                               |                                         
|                                                  | Cash paid during the period for:                                                  |                                               |                                         
|                                                  |                                                                                   | Interest                                      |                                         
|                                                  |                                                                                   | Income taxes                                  |                                         

See
notes to consolidated condensed financial statements.

4

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FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES  NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

1.    In
the opinion of the Company, the accompanying unaudited consolidated condensed financial statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position as of November 30, 2002, and the results of operations and the cash flows for the quarters ended November 30, 2002, and
December 1, 2001. For further information, refer to the consolidated financial statements and footnotes included in the Company's annual report on Form 10-k for the year
ended August 31, 2002.

The
results of operations for the quarter ended November 30, 2002, are not necessarily indicative of the results to be expected for the full year.

The
Company manages its business on the basis of one reportable segment.

2.    The
Company considers all highly liquid investments with an original maturity of three months or less to be "cash equivalents." The carrying amount of the Company's cash
equivalents approximates fair value due to the short maturities of these investments. The Company maintains cash deposits with major banks which from time to time may exceed federally insured limits.
The Company periodically assesses the financial condition of the institutions and believes that the risk of any loss is minimal.

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

4.    The
Company has unsecured revolving credit facilities with banks for short-term borrowings of up to $200 million. One hundred million dollars of the
facilities expires on May 29, 2003, and the remaining $100 million expires on May 31, 2004. The Company expects that the facilities expiring on May 29, 2003, will be
extended. Borrowings under these facilities are at a variable interest rate based on short-term market interest rates. The Company may convert up to $100 million of the facilities
expiring on May 31, 2004, into either a five or seven year term loan, at the banks' variable prime rate.

5.    The
Company's non-qualified stock option plan provides for the granting of options to key employees to purchase shares of common stock at prices not less than
the fair market value on the date of grant. Options expire five years from the date of grant and are exercisable to the extent of 40% after the second anniversary of the grant and an additional 30% at
each of the following two anniversary dates on a cumulative basis.

5

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The
following is a summary of transactions under the plan during the quarters ended November 30, 2002 and December 1, 2001 (In thousands, except per share amounts).

|                      |           | Quarters Ended
|--------------------- | --------- | --------------
|
|
|Outstanding-beginning |           | 4,411         
|                      | Granted   |               
|                      | Exercised |               
|                      | Cancelled |               
|                      |           |               
|Outstanding-ending    |           | 5,780         
|                      |           |               
|Exercisable options   |           | 1,707         
|                      |           |               

6.    Basic
net income per common share is computed by dividing net income by the weighted average number of shares outstanding during each period. Diluted net income per
common share gives effect to all securities representing potential common shares that were dilutive and outstanding during the period. In the calculation of diluted net income per common share, the
denominator includes the number of additional common shares that would have been outstanding if the Company's outstanding stock options had been exercised.

On
October 9, 2002, the Company announced that the Board of Directors authorized the purchase of up to 5 million shares of its outstanding common stock from time to time as
market conditions warrant. As of November 30, 2002, the Company had purchased in the open market, 1,503,400 shares at a cost of $44.7 million.

The
following table sets forth the computation of basic and diluted net income per common share (In thousands, except per share amounts):

Quarter EndedNovember 30,
2002

December 1,
2001Basic Net Income Per Share:Net Income

$
57,478

$
50,207Weighted Average Number of Shares Outstanding


173,077


172,252Net Income Per Common ShareBasic

$
0.33

$
0.29Diluted Net Income Per Share:Net Income

$
57,478

$
50,207Weighted Average Number of Shares Outstanding


173,077


172,252Effect of Dilutive SecuritiesStock Options


865


1,345Average SharesDiluted


173,942


173,597Net Income Per Common ShareDiluted

$
0.33

$
0.29


6

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7.    On
January 30, 2001, Janice Morgan and Barbara Richardson, two individuals who have held the position of Store Manager for subsidiaries of the Company, filed a
Complaint against the Company in the United States District Court for the Northern District of Alabama. The Complaint has been amended to add as plaintiffs five more individuals who had held the
position of Store Manager for subsidiaries of the Company. Thereafter, notice of the pendency of the lawsuit was sent to 797 current and former Store Managers holding the position on or after
July 1, 1999. Approximately 180 of those have filed consent forms and joined the lawsuit as plaintiffs. The Court thereafter granted the plaintiffs' motion for permission to send notice of the
pendency of the lawsuit to all other current and former Store Managers holding the position on or after July 1, 1999, and as of January 3, 2003, 893 additional Store Managers have filed
consent forms and joined the lawsuit as plaintiffs. The opt-in period ends on February 25, 2003. The Complaint alleges that the Company violated the Fair Labor Standards Act by
classifying the plaintiffs and other similarly situated current and former Store Managers as "exempt" employees who are not entitled to overtime compensation. Plaintiffs seek to recover for
themselves, and also for other similarly situated current and former Store Managers who may wish to join this collective action, unpaid overtime compensation, prejudgment interest, liquidated damages,
an award of attorneys' fees, costs and expenses, and such other relief as the Court may deem proper. The lawsuit is currently in the early discovery phase and the amount of any potential loss cannot
be determined at this time. The Company is vigorously defending this action. While the outcome of any litigation is inherently uncertain, the Company believes that the Store Managers are "exempt"
employees under the Fair Labor Standards Act and have been properly compensated and that the Company has meritorious defenses that should enable it to ultimately prevail.

7

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MANAGEMENT'S DISCUSSION AND ANALYSIS  OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion summarizes the significant factors affecting the consolidated results of operations and financial condition of the Company for the periods ended
November 30, 2002 and December 1, 2001. This discussion should be read in conjunction with the Consolidated Condensed Financial Statements and Notes to Consolidated Condensed Financial
Statements included in this quarterly report. For further information, refer to the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in the Company's annual
report on Form 10-K for the year ended August 31, 2002.

Liquidity and Capital Resources

The Company's working capital decreased $0.8 million from $525.1 million at August 31, 2002 to $524.3 million at November 30,
2002. Changes in working capital and cash and cash equivalents during the first quarter of fiscal 2003 and fiscal 2002 were primarily the result of earnings, seasonal increases in merchandise
inventories, capital expenditures and, in fiscal 2003, repurchases of the Company's Common Stock. The first quarter of fiscal 2003 was also impacted by a change in the retail calendar and the
elimination of an advertising circular. These changes reduced sales in the first quarter of fiscal 2003 and negatively impacted the Company's working capital and operating cash flow as compared to the
first quarter of fiscal 2002. With these factors in mind and also considering the uncertain economic environment, the Company planned its sales of seasonal goods conservatively. At the end of the
first quarter of fiscal 2003 per store inventories were at approximately the same level as at the end of the first quarter of fiscal 2002. Cash and cash equivalents at the end of the first quarter of
fiscal 2003 were also impacted by increased accounts payable leverage resulting from improved inventory turnover and higher levels of in-transit merchandise compared to the end of the
first quarter of fiscal 2002.

Capital
expenditures for the quarter ended November 30, 2002, were approximately $28.2 million, and are currently expected to be approximately $225 million for
fiscal 2003. The majority of planned capital expenditures for fiscal 2003 is related to the Company's new store expansion; existing store expansion, relocation and renovation; and to the construction
of a seventh full-service distribution center. The new store expansion and seventh distribution center require additional investment in merchandise inventories. In fiscal 2003, the Company
currently expects to open approximately 575 stores and close approximately 50 stores for a net addition of approximately 525 stores, compared with the opening of 525 stores and closing of 50 stores
for a net addition of 475 stores in fiscal 2002. The Company also currently plans to expand or relocate approximately 150 stores and renovate approximately 50 stores in
fiscal 2003, compared with the expansion or relocation of 121 stores and renovation of 42 stores in fiscal 2002. In the first quarter of fiscal 2003, the Company opened 91 stores, closed 29 stores,
expanded or relocated 30 stores and renovated 20 stores. In the first quarter of fiscal 2003, the Company opened a lesser number of new stores than planned. This was due in part to the longer than
expected time period needed to open stores in urban areas where the Company is locating an increasing percentage of its new stores. The Company occupies most of its stores under operating leases.
Store opening, closing, expansion, relocation, and renovation plans, as well as overall capital expenditure plans, are continuously reviewed and are subject to change. The Company had unsecured
revolving credit facilities with banks or short-term borrowings of up to $200 million. One hundred million dollars of the facilities expires on May 29, 2003 and the remaining
$100 million expires on May 31, 2004. The Company had no borrowings against these facilities during the quarter ended November 30, 2002. Cash flow from current operations is
expected to be sufficient to meet planned liquidity and capital resource needs, including store expansion and other capital spending programs and any repurchase of the Company's Common Stock. In
addition, the Company has available revolving credit facilities as discussed above.

8

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On
October 9, 2002, the Company announced that the Board of Directors authorized the purchase of up to 5 million shares of its outstanding Common Stock from time to time as
market conditions warrant. As of November 30, 2002, the Company had purchased in the open market, 1,503,400 shares at a cost of $44.7 million.

The
following table shows the Company's obligations and commitments as of November 30, 2002, to make future payments under contractual obligations (in thousands):

|                                   |  | Payments Due During One Year Fiscal Period Ending
|---------------------------------- |  | -------------------------------------------------
|
|Merchandise letters of credit      |  | $                                                
|Operating leases                   |  |                                                  
|Construction obligations           |  |                                                  
|                                   |  |                                                  
|Total Contractual Cash Obligations |  | $                                                
|                                   |  |                                                  

The following table shows the Company's other commercial commitments as of November 30, 2002 (in thousands):

Other Commercial Commitments

Total
Amounts
CommittedStandby letters of credit

$
32,175Surety bonds


5,969Total Commercial Commitments

$
38,144


A
substantial portion of the outstanding amount of standby letters of credit and surety bonds (which are primarily renewed on an annual basis) are used as surety for future premium and
deductible payments to the Company's workers' compensation and general liability insurance carrier. The
Company accrues for these future payment liabilities as described in the "Critical Accounting Policies" section of this discussion.

Results of Operations

Net sales

Net sales increased 13.5% in the quarter ended November 30, 2002, as compared with an increase of 19.1% in the quarter ended December 1, 2001. The
increase was attributable to increased sales in existing stores and to sales from new stores opened as part of the Company's store expansion program. The sales gains were achieved even though the
comparison in the last two weeks of November was difficult due to Thanksgiving falling later this year (November 28 versus November 22) leaving fewer shopping days after Thanksgiving in
November this year. The elimination of an advertising circular that was distributed last year at the end of November and the beginning of December also adversely affected sales at the end of November
this year. With the elimination of this circular, the Company now distributes only one circular per year. Additionally, the fourth week in the November reporting period last year ended on
December 1, giving last year a day of sales at the beginning of December when sales are typically strong. The calendar shifts particularly affected the sale of hardlines seasonal merchandise.
Sales of softlines also were impacted by the calendar shifts; however, colder weather in October and November this year compared to last year aided the sales of apparel and contributed to the increase
in softlines sales in existing stores.

Sales
in existing stores increased 3.0% in the quarter ended November 30, 2002, above the comparable period in the prior fiscal year, with sales of hardlines merchandise
increasing approximately

9

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3.1%, and sales of softlines merchandise increasing approximately 2.8%. In the first quarter of fiscal 2003, the customer count, as measured by the number of register transactions in existing stores
increased approximately 0.2%, and the average transaction increased approximately 2.6% to $8.70. Hardlines as a percentage of total sales increased to approximately 77.1% in the first quarter of
fiscal 2003 compared to approximately 77.0% in the first quarter of fiscal 2002. Softlines as a percentage of sales decreased to 22.9% in the first quarter of fiscal 2003 (with hanging apparel and
shoes representing 12.0%, basic apparel 4.4% and domestics 6.5%) compared to 23.0% in the first quarter of fiscal 2002 (with hanging apparel and shoes representing 11.7%, basic apparel 4.5% and
domestics 6.8%). By the end of the first quarter of fiscal 2003, most stores had anniversaried last year's program in which the Company eliminated approximately one-half of the shoe
inventories. Therefore, the sales of hardlines and softlines is now on a more comparative basis year over year. In the five weeks ended January 4, 2003, sales in existing stores increased
approximately 2.1%. The Company's current plan is for sales in existing stores in the balance of the second quarter ending March 1, 2003, as well as for the second half of fiscal 2003, to
increase in the 3% to 5% range. Hardlines merchandise includes primarily household chemical and paper products, health and beauty aids, candy, snack and other food, electronics, housewares and
giftware, toys, school supplies, hardware and automotive supplies. Softlines
merchandise includes men's, women's, boy's, girl's and infant's clothing and accessories, shoes, and domestic items such as blankets, sheets and towels.

The
average number of stores open during the first quarter of fiscal 2003 was 10.8% more than during the first quarter of fiscal 2002. The Company had 4,678 stores in operation at
November 30, 2002, as compared with 4,237 stores in operation at December 1, 2001, representing an increase of approximately 10.4%.

Cost of Sales

Cost of sales increased 13.2% in the quarter ended November 30, 2002, as compared with the quarter ended December 1, 2001. This increase primarily
reflected the additional sales volume between years. Cost of sales, as a percentage of net sales, was 65.6% in the quarter ended November 30, 2002, compared with 65.8% in the quarter ended
December 1, 2001. The decrease in the cost of sales percentage was due primarily to the favorable impact of supply chain initiatives which more than offset the adverse margin impact of a higher
proportion of basic consumables sales. The Company's plan is for the cost of sales percentages to be at approximately the same level for fiscal year 2003 compared to fiscal year 2002, anticipating
that the adverse margin impact of higher basic consumables sales will be offset by the continued favorable impact of supply chain improvements which are yielding savings in the areas of markdowns,
shrinkage and freight. The cost of sales percentages also are affected by changes in the effectiveness of the merchandise purchasing programs.

Selling, general and administrative expenses

Selling, general and administrative expenses increased 13.7% in the quarter ended November 30, 2002, as compared with the quarter ended December 1,
2001. The increase in these expenses was due primarily to additional costs arising from the continued growth in the number of stores in operation. Selling, general and administrative expenses, as a
percentage of net sales, were 26.2% in the quarter ended November 30, 2002, as compared with 26.1% in the quarter ended December 1, 2001. With the Company continuing to invest heavily in
its business, the 3.0% increase in existing store sales was not sufficient to produce leverage on expenses. Health care and worker's compensation costs also continue to increase at a rate higher than
the sales increase. For fiscal year 2003, the Company's plan is for selling, general and administrative expenses as a percentage of sales to be at approximately the same level as the percentage for
fiscal year 2002.

10

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Provision for taxes on income

The effective tax rate was 36.5% for the quarters ended November 30, 2002 and December 1, 2001. For fiscal year 2003, the Company's plan is for the
effective tax rate to remain at approximately the same level as the rate in fiscal 2002.

Critical Accounting Policies

Management believes the following accounting principles are critical because they involve significant judgments, assumptions, and estimates used in the
preparation of the Company's consolidated financial statements.

Merchandise Inventories:

Inventories are valued using the retail method, based on retail prices less markon percentages, which approximates the lower of first-in,
first-out (FIFO) cost or market. The Company records adjustment to inventory through cost of goods sold when permanent retail price reductions, or markdowns, are reflected in its stores.
In addition, management makes estimates and judgments regarding, among other things, initial markups, markdowns, future demand for specific product categories and market conditions, all of which can
significantly impact inventory valuation. If actual demand or market conditions are different than those projected by management, additional markdowns may be necessary. This risk is generally higher
for seasonal merchandise than for non-seasonal goods. The Company also provides for estimated inventory losses for damaged, lost or stolen inventory for the period from the physical
inventory to the financial statement date. These estimates are based on historical experience and other factors.

Property and equipment:

Property and equipment is stated at cost. Depreciation for financial reporting purposes is being provided principally by the straight-line method over
the estimated useful lives of the related assets. The valuation and classification of these assets and the assignment of useful depreciable lives involves significant judgments and the use of
estimates. The Company generally assigns no salvage value to property and equipment. Property and equipment is reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Historically, impairment losses on fixed assets have not been material to the Company's financial position and results of operations. Because the
Company leases substantially all of its stores under operating leases, the risk of impairment of fixed assets relates principally to the leasehold improvements and other store-level assets in the
event of closure.

Insurance Liabilities:

The Company is primarily self-insured for health care, property loss, workers' compensation and general liability costs. These costs are significant
primarily due to the large number of the Company's retail locations and employees. The Company's self-insurance liabilities are based on the total estimated costs of claims filed and
estimates of claims incurred but not reported, less amounts paid against such claims, and are not discounted. Management reviews current and historical claims data in developing its estimates. The
Company also uses information provided by outside actuaries with respect to workers' compensation and general liability claims. If the underlying facts and circumstances of the claims change or the
historical trend is not indicative of future trends, then the Company may be required to record additional expense or a reduction to expense which could be material to the reported financial condition
and results of operation.

11

---

Forward-Looking Statements

Certain statements contained herein and elsewhere in this Form 10-Q which are not historical facts are forward-looking statements made pursuant
to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements address the Company's plans and activities or events which the Company expects
will or may occur in the future such as future capital expenditures, store openings, closings, renovations, expansions and relocations, additional distribution facilities, sales, cost of sales,
expenses, the outcome of legal proceedings and other aspects of the Company's business and operations. A number of important factors could cause actual results to differ materially from those
expressed in any forward-looking statements, whether written or oral, made by or on behalf of the Company. Such factors include, but are not limited to, competitive factors and pricing pressures,
general economic conditions, the impact of acts of war or terrorism, changes in consumer demand and product mix, unusual weather that my temporarily impact sales, inflation, merchandise supply
constraints, general transportation delays or interruptions, dependence on imports, changes in currency exchange rates, tariffs, quotas, and freight rates, availability or real estate, costs and
delays associated with building, opening and operating new distribution facilities and stores, costs and potential problems associated with the implementation of new systems and technology, including
supply chain systems and electronic commerce, changes in energy prices and the impact on consumer spending and the Company's costs, legal proceedings and claims, changes in health care and other
insurance costs, and the effects of legislation on wage levels and entitlement programs. Consequently, all of the forward-looking statements made are qualified by these and other factors, risks and
uncertainties. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Form 10-Q. The Company does not
undertake to publicly update or revise its forward-looking statements even if experience or future changes make it clear that projected results expressed or implied in such statements will not be
realized.

Item 4. Controls and Procedures

The Company's Chief Executive Officer and Chief Financial Officer (its principal executive officer and principal financial officer, respectively) have concluded,
based on their evaluation as of a date within 90 days prior to the filing date of this report, that the Company's disclosure controls and procedures are effective to ensure that information
required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such
reports is accumulated and communicated to the Company's management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.

There
were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of such evaluation,
including any corrective actions with regard to significant deficiencies and material weaknesses.

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PART IIOTHER INFORMATION

Item 1. Legal Proceedings

On January 30, 2001, Janice Morgan and Barbara Richardson, two individuals who have held the position of Store Manager for subsidiaries of the Company,
filed a Complaint against the Company in the United States District Court for the Northern District of Alabama. The Complaint has been amended to add as plaintiffs five more individuals who had held
the position of Store Manager for subsidiaries of the Company. Thereafter, notice of the pendency of the lawsuit was sent to 797 current and former Store Managers holding the position on or after
July 1, 1999. Approximately 180 of those have filed consent forms and joined the lawsuit as plaintiffs. The Court thereafter granted the plaintiffs' motion for permission to send notice of the
pendency of the lawsuit to all other current and former Store Managers holding the position on or after July 1, 1999, and as of January 3, 2003, 893 additional Store Managers have filed
consent forms and joined the lawsuit as plaintiffs. The opt-in period ends on February 25, 2003. The Complaint alleges that the Company violated the Fair Labor Standards Act by
classifying the plaintiffs and other similarly situated current and former Store Managers as "exempt" employees who are not entitled to overtime compensation. Plaintiffs seek to recover for
themselves, and also for other similarly situated current and former Store Managers who may wish to join this collective action, unpaid overtime compensation, prejudgment interest, liquidated damages,
an award of attorneys' fees, costs and expenses, and such other relief as the Court may deem proper. The lawsuit is currently in the early discovery phase and the amount of any potential loss cannot
be determined at this time. The Company is vigorously defending this action. While the outcome of any litigation is inherently uncertain, the Company believes that the Store Managers are "exempt"
employees under the Fair Labor Standards Act and have been properly compensated and that the Company has meritorious defenses that should enable it to ultimately prevail.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits filed herewith:



(b)
Reports on Form 8-K



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SIGNATURES

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

|                      |  | FAMILY DOLLAR STORES, INC.
(Registrant)                          
|--------------------- |  | -----------------------------------------------------------------
|Date: January 9, 2003 |  | /s/R. JAMES KELLYR. James Kelly Vice Chairman                    
|Date: January 9, 2003 |  | /s/C. MARTIN SOWERSC. Martin Sowers Senior Vice President-Finance

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CERTIFICATION

I, Howard R. Levine, certify that:



Date:
January 9, 2003

|/s/HOWARD R. LEVINEHoward R. Levine
President and Chief Executive Officer |  | 
|------------------------------------------------------------------------- |  | 

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CERTIFICATION

I, R. James Kelly, certify that:



Date:
January 9, 2003

|/s/R. JAMES KELLYR. James Kelly
Vice Chairman and Chief Financial Officer |  | 
|------------------------------------------------------------------------- |  | 

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