The following discussion summarizes the significant factors affecting our consolidated results of operations and financial condition for fiscal 2008, fiscal 2007 and fiscal 2006 and our expectations for fiscal 2009. You should read this discussion in conjunction with our Consolidated Financial Statements and the Notes to Consolidated Financial Statements which are included in this Report. Our discussion contains forward-looking statements which are based upon our current expectations and which involve risks and uncertainties. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth in the "Cautionary Statement Regarding Forward Looking Statements" in the General Information section of this Report and the "Risk Factors" listed in Part I, Item 1A of this Report.

Our fiscal year generally ends on the Saturday closest to August 31 of each year, which generally results in an extra week every six years. Fiscal 2008 was a 52-week year, compared with a 53-week year in fiscal 2007. The second quarter of fiscal 2008 included 13 weeks compared with 14 weeks in the second quarter of fiscal 2007.

Fiscal 2008 Overview

Fiscal 2008 was a challenging year for our customers, as higher energy prices and inflation outpaced wage growth, unemployment rates increased, and consumer confidence fell dramatically. In addition, turmoil in the financial markets led to significant uncertainty throughout the economy. As a result, our customers increased their purchases of lower-margin consumable merchandise and constrained purchases of higher-margin discretionary merchandise, which pressured sales and cost of sales. Despite the challenging economic environment, we were able to produce solid results during fiscal 2008 due to our ability to adapt quickly to the changing environment. We adjusted our merchandise assortment to focus on consumable categories, lowered inventory levels related to discretionary merchandise to manage inventory risk, and worked aggressively to reduce our expenses. We also received some benefit to sales during the fourth quarter of fiscal 2008 as a result of the government stimulus program and additional advertising. As a result of these efforts, our performance in the second half of fiscal 2008 was stronger than our performance in the first half of fiscal 2008.

During fiscal 2008, as compared with fiscal 2007, our net sales increased 2.2% to $7.0 billion, our net income decreased 4.0% to $233.1 million, and our diluted net income per common share increased 2.5% to $1.66. The results for fiscal 2008 as compared with fiscal 2007 were negatively impacted by the loss of one week during the reporting period, as discussed above. Sales in comparable stores (stores open more than 13 months) for fiscal 2008, which were reported for the 52-week period ending August 30, 2008, compared with the 52-week period ending September 1, 2007, increased 1.2%. We believe that the difficult economic environment faced by our customers, including higher energy prices and inflationary pressures, contributed to the low single-digit comparable stores sales growth. The various components affecting our results for fiscal 2008 are discussed in more detail below.

During fiscal 2008, we continued to invest in our strategic initiatives designed to increase revenues and improve financial returns as discussed below:

• As part of our Food Strategy, we installed refrigerated coolers in approximately 500 stores. As of August 30, 2008, approximately 5,600 stores had coolers for the sale of refrigerated food. In addition, we expanded the selling space for food in approximately 2,750 additional stores, and approximately 2,400 stores now accept food stamps.

• We continued to develop our global sourcing group, which helped to strengthen the quality and value of merchandise within our Treasure Hunt Strategy and lower our costs.

• As part of our Concept Renewal effort, we continued to incorporate improvements in store layout and design into new stores, and we renovated several markets to better understand the sustainability of performance improvements resulting from new layout and design elements.

• As part of our Store of the Future Project, we introduced new technology in approximately 1,650 stores, bringing the total number of stores with the Store of the Future platform to approximately 2,400 stores as of August 30, 2008.

• In connection with our Project Accelerate initiative, we began utilizing a new merchandise financial planning tool to support key merchandising decisions, and we implemented new category management processes. In addition, we created a structured framework for pricing decisions that enabled us to better balance the need for profitability with the customer's perception of value.

Fiscal 2009 Outlook

During fiscal 2009, we plan to focus on driving revenues, mitigating risk and managing costs through the following key initiatives:

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

• To strengthen the Family Dollar brand with customers and to reinforce the values we offer, we plan to increase our marketing and promotional events.

• We plan to continue the roll-out of our Store of the Future initiative, upgrading the technology platform in approximately 1,300 additional stores. We expect that roughly half of our stores will be able to accept credit cards during the fiscal 2009 holiday season.

• To improve the customer's shopping experience, we plan to renovate approximately 200 stores, leveraging key Concept Renewal principles.

• We will begin the implementation of new assortment planning processes and space management tools as part of the continuation of our Project Accelerate initiative.

• Through our price optimization work, the expansion of our private label offering and global sourcing efforts, we plan to continue to mitigate pricing pressure from rising commodity and raw material costs.

• Reflecting the uncertainty that exists in the current economic environment, we will continue our measured pace of new store openings so that we can focus on improving our returns on existing assets. We expect to open approximately 200 stores and close approximately 75 stores.

For fiscal 2009, we expect comparable store sales to increase 1% to 3% from the comparable 52-week period in fiscal 2008. We expect to see continued pressure on cost of sales, as a percentage of net sales, as our customers continue to focus on lower-margin consumable merchandise and as diesel costs remain volatile. We believe that benefits from lower markdowns, global sourcing and improved inventory shrinkage could offset much of this pressure. While we will maintain a strong focus on controlling our cost structure, we expect selling, general and administrative ("SG&A") expenses, as a percentage of net sales, to be primarily impacted by the level of comparable store sales growth. Based on these factors, we currently expect diluted net income per common share will be between $1.58 and $1.78 for fiscal 2009, compared to $1.66 in fiscal 2008.

Net Sales

Our net sales in fiscal 2008 were $7.0 billion, an increase of approximately 2.2% ($149.3 million), as compared with an increase of approximately 6.9% ($439.5 million) in fiscal 2007. The increases in fiscal 2008 and in fiscal 2007 were attributable, in part, to increased sales in comparable stores (stores open more than 13 months) of 1.2% ($76.9 million) and 0.9% ($58.5 million), respectively, with the balance of the increases primarily relating to sales from new stores opened as part of our store growth program. Sales during fiscal 2008 were negatively impacted by the loss of one week during the reporting period, as discussed above.

In fiscal 2008, the customer count, as measured by the number of register transactions in comparable stores, was approximately flat, and the average customer transaction increased approximately 1.5% to $9.70, compared to fiscal 2007. We continue to believe that our customer is consolidating trips in response to economic pressures and the volatility of gasoline prices. In fiscal 2007, the customer count decreased slightly and the average transaction increased approximately 1% compared to fiscal 2006.

Sales during fiscal 2008 were strongest in Consumables, driven primarily by sales of food in connection with our Food Strategy. Sales of more discretionary merchandise, including Apparel and Accessories, Home Products, and Seasonal and Electronics, were weaker. See Item 1 "Business-Merchandise" elsewhere in this Report for a breakdown of the percentage of sales attributable to each product category during the last three fiscal years.

Sales during fiscal 2007 were strongest in Consumables, driven primarily by sales of food resulting from the implementation of our Food Strategy, and were weaker in Apparel and Accessories and Home Products. Sales of Seasonal and Electronics were impacted by increased sales of prepaid services, which are recorded on a net basis (only the markup on the sales of prepaid services is recorded as revenue).

During fiscal 2008, we opened 205 stores and closed 64 stores for a net addition of 141 stores, compared with the opening of 300 stores and closing of 43 stores for a net addition of 257 stores during fiscal 2007. We also expanded or relocated 27 stores in fiscal 2008, compared with 10 stores that were expanded or relocated in fiscal 2007. In addition, we renovated 70 stores in fiscal 2008, compared with 22 stores that were renovated in fiscal 2007.

During challenging environments, our customers are especially sensitive to promotions as they manage with less spending capacity. We increased our advertising efforts during fiscal 2008 to emphasize the value we offer on both consumable and discretionary merchandise. Advertising costs, net of co-op recoveries from vendors were $15.3 million, $4.1 million and $3.3 million in fiscal 2008, fiscal 2007 and fiscal 2006, respectively. We traditionally advertise through circulars available in stores or circulars that are inserted in newspapers or mailed directly to consumers' residences. In addition, we use limited advertising, including radio and grand-opening circulars, to support the opening of new stores.

Cost of Sales

Cost of sales increased approximately 2.8% ($125.6 million) in fiscal 2008 compared with fiscal 2007 and approximately 5.5% ($235.8 million) in fiscal 2007 compared with fiscal 2006. These increases primarily reflected the additional sales volume in each of the years. Cost of sales, as a percentage of net sales, was 66.4% in fiscal 2008, 66.0% in fiscal 2007 and 66.9% in fiscal 2006. The increase in cost of sales, as a percentage of net sales, during fiscal 2008, was due primarily to increased sales of lower-margin consumable merchandise.

The decrease in cost of sales, as a percentage of net sales, during fiscal 2007 compared with fiscal 2006, was due to the effect of an increase in sales of prepaid services, which are reported on a net basis, a more favorable merchandise sales mix, better merchandise markup and lower inventory shrinkage. These improvements were partially offset by higher markdown expense.

SG&A expenses increased approximately 2.4% ($47.1 million) in fiscal 2008 compared with fiscal 2007, and approximately 10.1% ($177.4 million) in fiscal 2007 compared with fiscal 2006. The increases in these expenses were attributable primarily to additional costs arising from the continued growth in the number of stores in operation. SG&A expenses, as a percentage of net sales, were 28.4% in fiscal 2008, 28.3% in fiscal 2007 and 27.5% in fiscal 2006. The increase in SG&A expenses, as a percentage of net sales, during fiscal 2008, was due primarily to an increase in occupancy costs (approximately 0.5% of net sales) and an increase in advertising costs (approximately 0.2% of net sales). In addition, most costs in fiscal 2008 were de-leveraged as a result of the low single-digit comparable store sales growth. These increases offset a decrease in insurance costs (approximately 0.5% of net sales) and a decrease in professional fees (approximately 0.4% of net sales). The increase in occupancy costs was primarily a result of changes in accrual estimates. In connection with the implementation of our new lease administration system and the increased visibility to the underlying lease information, we refined our accrual estimates related to store rental expenses. Advertising costs increased as we began to increase our marketing efforts during fiscal 2008. With respect to insurance costs, as we have worked to improve processes, inventory productivity, and store manager retention, we have experienced favorable trends in workers' compensation and general liability claims, resulting in a decrease in our actuarily determined insurance liabilities. Costs associated with the stockholder derivative actions during fiscal 2007 were not incurred during fiscal 2008, resulting in a year over year decrease in professional fees.

The increase in SG&A expenses, as a percentage of net sales, in fiscal 2007 compared with fiscal 2006, was due primarily to low-single digit comparable store sales growth, the effect of an increase in sales of prepaid services, increased professional fees, and increased occupancy costs. The increase was partially offset by a decrease in insurance costs.

Litigation Charge

During the second quarter of fiscal 2006, we recorded a $45.0 million (a net impact of approximately $0.18 per diluted share) litigation charge associated with an adverse litigation judgment. See Note 8 to the Consolidated Financial Statements included in this Report for more information. All other legal expenses during fiscal 2008, fiscal 2007 and fiscal 2006, including our defense costs related to the above-referenced case, were recorded in SG&A.

Interest Income

Interest income increased approximately 3.3% ($0.4 million) in fiscal 2008 compared with fiscal 2007 and approximately 54.2% ($3.8 million) in fiscal 2007 compared with fiscal 2006. The increase in 2008 was not material. The increase in fiscal 2007 was due to an increase in interest rates and an increase in investment securities.

Interest Expense

Interest expense decreased approximately 16.3% ($2.8 million) in fiscal 2008 compared with fiscal 2007 and increased approximately 33.1% ($4.3 million) in fiscal 2007 compared with fiscal 2006. The decrease in fiscal 2008 was due to an accounting policy change in the classification of tax-related interest and penalties in connection with our adoption of FIN 48. Tax-related interest and penalties were included in interest expense during fiscal 2007. The increase in interest expense during fiscal 2007 was due primarily to interest on taxes resulting from the Internal Revenue Service examination of our consolidated federal income tax returns for fiscal 2006, fiscal 2005 and fiscal 2004 and interest on state income taxes.

Income Taxes

The effective tax rate was 35.6% in fiscal 2008, 36.4% in fiscal 2007 and 37.3% in fiscal 2006. The decrease in the effective tax rate in fiscal 2008 compared with fiscal 2007 was due primarily to a decrease in the Company's tax liabilities as a result of the expiration of certain statute of limitations with respect to uncertain tax

Liquidity and Capital Resources

We have consistently maintained a strong liquidity position. Cash provided by operating activities during fiscal 2008 was $515.7 million as compared to $415.8 million in fiscal 2007 and $451.0 million in fiscal 2006. These amounts have enabled us to fund our regular operating needs, capital expenditure program, cash dividend payments, and interest payments, as well as a significant portion of our share repurchases.

On January 31, 2008, we entered into an additional unsecured revolving credit facility with a syndicate of lenders for short-term borrowings of up to $250 million. The credit facility has an initial term of 364 days and includes two one-year extensions that require lender consent. The credit facility also includes a one-year term-out option that does not require lender consent. Any borrowings under the credit facility accrue interest at a variable rate based on short-term market interest rates. The new credit facility noted above is in addition to our $350 million unsecured revolving credit facility expiring on August 24, 2011. Outstanding standby letters of credit ($185.9 million as of August 30, 2008) reduce the borrowing capacity of the $350 million facility. The $350 million facility also bears interest at a variable rate based on short-term market interest rates.

During fiscal 2008, we borrowed and repaid a total of $736.3 million under our credit facilities, compared with $26.0 million during fiscal 2007. The maximum outstanding borrowing amount during fiscal 2008 was $170.8 million. We had no borrowings against our credit facilities during fiscal 2006. The borrowings during fiscal 2008 were used to meet short-term liquidity needs resulting from seasonal inventory purchases and liquidity issues related to our investments in auction rate securities. See Note 2 to the Consolidated Financial Statements included in this Report for more information on our auction rate securities. The borrowings during fiscal 2007 were used to meet short-term liquidity needs resulting from the formation of our captive insurance subsidiary. During fiscal 2008, the credit facilities accrued interest at an average rate of 5.0%. As of August 30, 2008, the Company had no outstanding borrowings under the credit facilities. The credit facilities contain certain restrictive financial covenants, which include a consolidated debt to consolidated capitalization ratio, a fixed charge coverage ratio, and a priority debt to consolidated net worth ratio. As of August 30, 2008, the Company was in compliance with all such covenants.

Our inventories at the end of fiscal 2008 were 3.1% lower than at the end of fiscal 2007. Inventory per store at the end of fiscal 2008 was approximately 6% lower than inventory per store at the end of fiscal 2007, excluding merchandise in transit to the distribution centers. We continue to focus on inventory productivity and have worked aggressively to limit our inventory risk in more discretionary merchandise categories.

Merchandise inventories at the end of fiscal 2007 were 2.7% higher than at the end of fiscal 2006. The increase in merchandise inventories was due primarily to the additional inventory resulting from 257 net new stores. Inventory on a per store basis at the end of fiscal 2007 was approximately 1% lower than at the end of fiscal 2006, excluding merchandise in transit to the distribution centers. The decrease in inventory on a per store basis during fiscal 2007 resulted from our continued focus on inventory productivity.

Capital expenditures for fiscal 2008 were $167.9 million, compared with $131.6 million in fiscal 2007 and $192.2 million in fiscal 2006. The increase in capital expenditures during fiscal 2008 as compared to fiscal 2007 was due to an increase in existing store improvements and upgrades and an increase in technology investments. The decrease in capital expenditures during fiscal 2007 as compared to fiscal 2006 was due primarily to a decrease in the number of new stores opened during fiscal 2007 as compared to fiscal 2006 and lower distribution and transportation investments. Offsetting some of the decrease was an increase in expenditures related to technology investments. Capital expenditures for fiscal 2009 are expected to be between $140 million and $160 million and relate primarily to new store openings, existing store expansions, relocations and renovations, distribution center improvements, and expenditures related to store technology infrastructure.

During fiscal 2008, we purchased 3.7 million shares of our common stock at a cost of $97.7 million. During fiscal 2007, we purchased 8.2 million shares at a cost of $257.5 million, and during fiscal 2006, we purchased 15.4 million shares at a cost of $367.3 million. As of August 30, 2008, we had outstanding authorizations to purchase a total of $133.0 million of our common stock.

Our wholly-owned captive insurance subsidiary maintains certain balances in cash and cash equivalents and investment securities that are used in connection with our retained workers' compensation, general liability and automobile liability risks and are not designated for general corporate purposes. As of the end of fiscal 2008, these cash and cash equivalents and investment securities balances were $0.5 million and $93.4 million, respectively.

Cash flows from operating activities

During fiscal 2008, cash provided by operating activities increased $100.0 million compared to fiscal 2007, primarily due to changes in merchandise inventories and other working capital items in the ordinary course of business. Merchandise inventories at the end of fiscal 2008 were 3.1% lower than at the end of fiscal 2007. Merchandise inventories at the end of fiscal 2007 were 2.7% higher than at the end of fiscal 2006. The change in the deferred income taxes, the income tax refund receivable, and income tax liabilities relate primarily to changes in the tax deductibility of insurance loss reserves in connection with the formation of our captive insurance subsidiary as well as reclassifications due to the implementation of FIN 48.

Cash flows from investing activities

Cash used for investing activities increased $7.7 million in fiscal 2008 as compared to fiscal 2007. The increase was due primarily to the increase in capital expenditures, as discussed above. The increase in capital expenditures was substantially offset by a decrease in the net purchase/sale of investment securities, which resulted from the liquidity issues in the auction rate securities market. See Note 2 to the Consolidated Financial Statements included in this Report for more information on our auction rate securities.

Cash flows from financing activities

Cash used in financing activities increased $28.4 million in fiscal 2008 as compared to fiscal 2007. The increase was primarily a result of a decrease in cash overdrafts as a result of the timing of payments at year end and a decrease in proceeds from the exercise of stock options. Lower expenditures related to stock repurchases offset some of the increase.

The following table shows our obligations and commitments to make future payments under contractual obligations at the end of fiscal 2008:

                                                            Payments Due During the Period Ending
(in thousands)                                     August      August      August      August      August
Contractual Obligations                Total        2009        2010        2011        2012        2013       Thereafter
Long-term debt                      $   250,000   $       -   $       -   $       -   $  16,200   $  16,200   $    217,600
Interest                                 91,916      13,387      13,387      13,387      12,609      11,760         27,386
Merchandise letters of credit           211,116     211,116           -           -           -           -              -
Operating leases                      1,379,809     312,355     277,408     231,158     184,676     135,261        238,951
Construction obligations                  5,805       5,805           -           -           -           -              -
Minimum royalties                        15,900       1,950       2,350       2,550       2,750       2,800          3,500

Total                               $ 1,954,546   $ 544,613   $ 293,145   $ 247,095   $ 216,235   $ 166,021   $    487,437

During the first quarter of fiscal 2008, we adopted FIN 48, which clarifies the accounting for income taxes recognized in an enterprise's financial statements. In accordance with FIN 48, we have recorded $39.2 million in liabilities related to our uncertain tax positions as of August 30, 2008. At this time, we cannot reasonably determine the timing of any payments related to these liabilities, except for $1.5 million which were classified as current liabilities and may become payable within the next 12 months. See Note 6 to the Consolidated Financial Statements included in this Report for more information on our adoption of FIN 48.

The following table shows our other commercial commitments at the end of fiscal 2008:

                                                          Total Amounts
           Other Commercial Commitments (in thousands)      Committed
           Standby letters of credit                     $       185,945
           Surety bonds                                           47,722

           Total                                         $       233,667

A substantial portion of the outstanding amount of standby letters of credit (which are primarily renewed on an annual basis) is used as surety for future premium and deductible payments to our workers' compensation and general liability insurance carrier. We accrue for these future payment liabilities as described in the "Critical Accounting Policies" section of this discussion. Included in the outstanding amount of surety bonds is a $44.5 million bond that we obtained in connection with an adverse litigation judgment, as discussed in Note 8 to the Consolidated Financial Statements included in this Report.

Recent Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"). FIN 48 provides guidance regarding the recognition and measurement of tax positions and the related reporting and disclosure requirements. We adopted FIN 48 during the first quarter of fiscal 2008. See Note 6 to the Consolidated Financial Statements included in this Report.

In September 2006, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted . . .