UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

For the quarterly period ended February 27, 2010

Or

Commission File Number: 1-6807

FAMILY DOLLAR STORES, INC.

(Exact name of registrant as specified in its charter)

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ¨  No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

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

FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES

INDEX

2

PART I — FINANCIAL INFORMATION

Item 1.  Consolidated Condensed Financial Statements

FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

See notes to the consolidated condensed financial statements.

3

FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)

See notes to the consolidated condensed financial statements.

4

FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)

See notes to the consolidated condensed financial statements.

5

FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

See notes to the consolidated condensed financial statements.

6

FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

In the opinion of management, the accompanying unaudited consolidated condensed financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the Company’s financial position as of February 27, 2010; the results of operations for the second quarter and first half ended February 27, 2010 (“second quarter and first half of fiscal 2010”), and February 28, 2009 (“second quarter and first half of fiscal 2009”); and the cash flows for the first half of fiscal 2010 and first half of fiscal 2009. For further information, refer to the Consolidated Financial Statements and Footnotes included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 29, 2009 (“fiscal 2009”).

The results of operations for the second quarter and first half of fiscal 2010 are not necessarily indicative of the results to be expected for the full year.

Certain reclassifications of the amounts for the first half of fiscal 2009 have been made to conform to the presentation for the first half of fiscal 2010.

The preparation of the Company’s Consolidated Condensed Financial Statements, in conformity with generally accepted accounting principles in the United States of America (“GAAP”), 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.

Recent Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard which established the FASB Accounting Standards Codification (“ASC”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also considered sources of authoritative GAAP for SEC registrants. The ASC combines all non-SEC authoritative standards into a comprehensive database organized by topic. The ASC is effective for interim and annual periods ending after September 15, 2009. The Company adopted the ASC during the first quarter of fiscal 2010. The adoption of the ASC did not have an impact on the Company’s Consolidated Condensed Financial Statements.

In September 2006, the FASB issued fair value guidance (ASC 820) that defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. The Company adopted the guidance with respect to financial assets and liabilities during the first quarter of fiscal 2009. The guidance became effective for non-financial assets and liabilities for the first annual period beginning after November 15, 2008. The Company adopted the fair value guidance for non-financial assets and liabilities during the first quarter of fiscal 2010. The adoption did not have an impact on the Company’s Consolidated Condensed Financial Statements.

In January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-06 “Fair Value Measurements and Disclosures – Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”). ASU 2010-06 requires new disclosures for significant transfers in and out of Level 1 and 2 of the fair value hierarchy and the activity within Level 3 of the fair value hierarchy. The updated guidance also clarifies existing disclosures regarding the level of disaggregation of assets or liabilities and the valuation techniques and inputs used to measure fair value. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2009, with the exception of the new Level 3 activity disclosures, which are effective for interim and annual reporting periods beginning after December 15, 2010. The Company will adopt the applicable disclosure requirements beginning in the third quarter of fiscal 2010.

In February 2010, the FASB issued ASU No. 2010-09 “Subsequent Events – Amendments to Certain Recognition and Disclosure Requirements” (“ASU 2010-09”). ASU 2010-09 reiterates that an SEC filer is required to evaluate subsequent events through the date that the financial statements are issued and removes the requirement for an SEC filer to disclose the date through which subsequent events have been evaluated. The updated guidance was effective upon issuance. The Company adopted ASU 2010-09 during the second quarter of fiscal 2010. The adoption did not have an impact on the Company’s Consolidated Condensed Financial Statements.

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

The unobservable inputs in Level 3 can only be used to measure fair value to the extent that observable inputs in Level 1 and Level 2 are not available. The following table represents the Company’s fair value hierarchy as of February 27, 2010, and August 29, 2009, for items that are required to be measured at fair value on a recurring basis:

On a nonrecurring basis, the Company adjusts certain property and equipment to fair value through impairment charges. 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. The fair value of the property and equipment is determined based on a discounted cash flow analysis using Level 3 inputs. The Company estimates future cash flows based on its experience and expectations. Impairment charges were not material during the first half of fiscal 2010.

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Auction Rate Securities

The Company’s investment securities include student loan auction rate securities that were measured at fair value using either Level 2 or Level 3 inputs. The auction rate securities are tax-exempt bonds that are collateralized by federally guaranteed student loans. While the underlying securities generally have long-term nominal maturities that exceed one year, the interest rates reset periodically in scheduled auctions (generally every 7-35 days). The Company generally has the opportunity to sell its investments during such periodic auctions subject to the availability of buyers.

Beginning in the second quarter of fiscal 2008, issues in the global credit and capital markets led to failed auctions with respect to substantially all of the Company’s auction rate securities. A failed auction typically occurs when the number of securities submitted for sale in the auction exceeds the number of purchase bids. As of February 27, 2010, all of the Company’s $176.5 million par value investments were subject to failed auctions. As a result of the failed auctions, the interest rates on the investments reset to the established rates per the applicable investment offering statements. The Company will not be able to liquidate the investments until a successful auction occurs, a buyer is found outside the auction process, the securities are called or refinanced by the issuer, the securities are repurchased by the broker dealers, or the securities mature.

The Company does not currently expect to liquidate any auction rate securities going forward through the normal auction process. However, the Company does expect to be able to liquidate substantially all of its remaining auction rate securities at par through issuer calls or refinancings, settlements with broker dealers, or upon maturity. During the first half of fiscal 2010, the Company liquidated $5.3 million of auction rate securities at par as a result of issuer calls. The Company’s auction rate securities were classified as long-term assets on the Consolidated Condensed Balance Sheet as of February 27, 2010, due to the continued failure of the auction process and the continued uncertainty regarding the timing of future liquidity, and were measured at fair value using Level 3 inputs, as discussed below.

Historically, the carrying value (par value) of the auction rate securities approximated fair market value due to the resetting rates, and the Company had no cumulative gross unrealized or realized gains or losses from these investments prior to fiscal 2008. However, due to the liquidity issues noted above, the Company had a temporary gross unrealized loss of $15.0 million ($9.5 million, net of taxes) with respect to these investments as of February 27, 2010. Changes in the unrealized loss are included in Accumulated Other Comprehensive Loss within Shareholders’ Equity on the Consolidated Condensed Balance Sheets. Because there is no active market for the Company’s auction rate securities, the fair value of each security was determined through the use of a discounted cash flow analysis using Level 3 inputs. The terms used in the analysis were based on management’s estimate of the timing of future liquidity, which assumes that the securities will be called or refinanced by the issuer or settled with broker dealers prior to maturity. The discount rates used in the analysis were based on market rates for similar liquid tax-exempt securities with comparable ratings and maturities. Due to the uncertainty surrounding the timing of future liquidity, the discount rates were adjusted further to reflect the illiquidity of the investments. The Company’s valuation is sensitive to market conditions and management’s judgment and can change significantly based on the assumptions used. A 100 basis point increase or decrease in the discount rate along with a 12-month increase or decrease in the term could result in a gross unrealized loss ranging from $6.0 million to $27.1 million.

The Company evaluated each of its auction rate securities for other-than-temporary impairment. The Company determined that there was no material other-than-temporary impairment as of February 27, 2010. The Company’s evaluation was based on an analysis of the credit rating and parity ratio of each security. The parity ratio is the ratio of trust assets available for distribution to creditors to the trust obligations to those creditors. The credit quality of the Company’s auction rate securities portfolio remains high (79% AAA-rated, 14% AA-rated, and 7% A-rated).

9

The following table summarizes the change in the fair value of the Company’s auction rate securities measured using Level 3 inputs during the second quarter and first half of fiscal 2010 and the second quarter and first half of fiscal 2009 (in thousands):

Additional Fair Value Disclosures

The estimated fair value of the Company’s $250.0 million par value long-term debt was $273.6 million as of February 27, 2010, and $266.2 million as of August 29, 2009. Because our debt is a private placement and there are no quoted prices in active markets, the fair value was determined through the use of a discounted cash flow analysis using Level 3 inputs. The discount rate used in the analysis was based on borrowing rates available to the Company for debt of the same remaining maturities. The fair value was greater than the carrying value of the debt by $23.6 million as of February 27, 2010, and $16.2 million as August 29, 2009.

On December 16, 2009, the Company entered into an unsecured revolving credit facility with a syndicate of lenders for short-term borrowings of up to $250 million. The credit facility has an initial term of 364 days and provides for two one-year extensions that require lender consent. Any borrowings under the credit facility accrue interest at a variable rate based on short-term market interest rates. The credit facility replaced the Company’s pre-existing $250 million 364-day credit facility.

The Company also maintains a $350 million unsecured revolving credit facility that matures on August 24, 2011. Any borrowings under this credit facility also accrue interest at a variable rate based on short-term market interest rates. Outstanding standby letters of credit ($152.3 million as of February 27, 2010) reduce the borrowing capacity of the $350 million credit facility.

There were no borrowings under the credit facilities during the first half of fiscal 2010. 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 February 27, 2010, the Company was in compliance with all such covenants.

10

During the first half of fiscal 2010, the Company purchased 3.8 million shares of its common stock in the open market at a cost of $116.0 million. In addition, on February 9, 2010, the Company entered into a structured repurchase agreement with a large financial institution. In connection with the agreement, the Company made a prepayment of $50.0 million to the financial institution. The financial institution will purchase shares of the Company’s common stock in the open market and deliver shares to the Company at specified intervals during the contract term. The number of shares to be delivered is based on the volume weighted average price (“VWAP”) of the Company’s common stock during the purchase period less an agreed upon discount. As of February 27, 2010, the Company had received 0.3 million shares at an average cost of $32.04. The Company recorded the $50.0 million prepayment as treasury stock on the Consolidated Condensed Balance Sheet. However, only the shares physically delivered to the Company as of February 27, 2010, were used to adjust the Company’s common shares outstanding and earnings per share calculations. The structured repurchase agreement is scheduled to end on any date between April 12, 2010, and May 13, 2010, at the option of the financial institution. The Company did not purchase any shares of its common stock during the first half of fiscal 2009.

All shares are purchased pursuant to share repurchase authorizations approved by the Board of Directors. On November 5, 2007, the Company announced that the Board of Directors authorized the Company to purchase up to $150 million of the Company’s outstanding common stock from time to time as market conditions warrant. This authorization was fully utilized during the second quarter of fiscal 2010. On November 18, 2009, the Company announced that the Board of Directors authorized the Company to purchase up to an additional $400 million of the Company’s outstanding common stock from time to time as market conditions warrant. As of February 27, 2010, the Company had $296.0 million remaining under this authorization. There are no expiration dates related to the above referenced authorization. Shares purchased under the share repurchase authorizations are generally held in treasury or have been canceled and returned to the status of authorized but unissued shares.

Basic net income per common share is computed by dividing net income by the weighted average number of shares outstanding during each period. Diluted net income per common share gives effect to all securities representing potential common shares that were dilutive and outstanding during the period. Certain stock options and performance share rights were excluded from the calculation of diluted net income per common share because their effects were antidilutive (0.7 million shares and 1.1 million shares for the quarter and first half ended February 27, 2010, respectively, and 3.3 million shares and 3.4 million shares for the quarter and first half ended February 28, 2009, respectively). In the calculation of diluted net income per common share, the denominator includes the number of additional common shares that would have been outstanding if the Company’s outstanding dilutive stock options and performance share rights had been exercised, as determined pursuant to the treasury stock method.

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

11

As previously disclosed in the Company’s Annual Report on Form 10-K for fiscal 2009, on October 5, 2009, the Supreme Court decided not to hear the Company’s appeal of the store manager classification litigation known as the Morgan case. During the first quarter of fiscal 2010, the Company paid the judgment of $35.6 million, plus interest, attorney’s fees and other related costs, thus concluding the Morgan litigation.

In addition to the Morgan case, since 2004, individuals who have held the position of Store Manager for subsidiaries of the Company have filed lawsuits alleging that the Company violated the Fair Labor Standards Act (“FLSA”), and/or similar state laws, by classifying the named plaintiffs and other similarly situated current and former Store Managers as “exempt” employees who are not entitled to overtime compensation. The majority of the Complaints in each action also request that the cases proceed as collective actions under the FLSA or as class actions under state law and request recovery of overtime pay, liquidated damages, and attorneys’ fees and court costs. The Company currently has 22 such cases pending against it.

The first two of these cases are Grace v. Family Dollar Stores, Inc. and Ward v. Family Dollar, Inc., both pending in the U.S. District Court for the Western District of North Carolina, Charlotte Division (the “N.C. Federal Court”). In those cases, the court has returned orders finding that the plaintiffs were not similarly situated and, therefore, that neither nationwide notice nor collective treatment under the FLSA is appropriate. Hence, the Grace and Ward cases are proceeding as approximately 43 individual plaintiff cases.

On July 9, 2009, the Court granted summary judgment against Irene Grace on the merits of her misclassification claim under the FLSA. Thus, the North Carolina Federal Court ruled that the Company was correct in treating Ms. Grace as an exempt employee under the Fair Labor Standards Act. Further, as of September 10, 2009, the Company has filed summary judgment motions related to each of the remaining 42 plaintiffs in the Grace and Ward cases. On September 9, 2009, the plaintiffs appealed certain rulings of the district court to the United States Court of Appeals for the Fourth Circuit including the court’s summary judgment order against Irene Grace. We estimate that briefing related to the appeal will be completed in the Spring of 2010.

We do not expect the district court to rule on any of the remaining summary judgment motions until the Fourth Circuit rules on Irene Grace’s claim. In the event that summary judgment is denied with respect to any of the individual Grace and Ward plaintiff’s claims, the court has stated it will conduct what it has referred to as “mini-trials” of a few plaintiffs at a time. We intend to vigorously defend the Company in these actions; however, no assurances can be given that the Company will be successful in the defense of these matters.

In addition to Grace and Ward, a total of 18 other similar class and/or collective misclassification cases are now pending before the N.C. Federal Court. All of these cases have been either transferred by U.S. District Courts in various states to the N.C. Federal Court or were the subject of an order entered by the United States Judicial Panel on MultiDistrict Litigation (“MDL”) transferring the cases that were originally filed in the United States District Courts in various states to the N.C. Federal Court for coordination of discovery with the other pending cases. The district court has stayed all discovery in these 18 cases pending the outcome of the Grace and Ward appeals. Presently, there are a total of 65 named plaintiffs and/or opt-ins in these cases.

The Company has received two additional class/collective action lawsuits that are not yet part of the MDL: Twila Walters et. al. v. Family Dollar Stores of Missouri, Inc. filed on January 26, 2010, in the Circuit Court of Jackson County Missouri; and Donna Barker et. al. v. Family Dollar, Inc. filed on February 17, 2010, in Circuit Court of Jefferson County Kentucky. Walters and Barker cases were filed as statewide class actions on behalf of all current and former Store Managers in the states of Missouri and Kentucky alleging that these Store Managers were improperly classified as exempt under state law. It should be noted that another state law class action, Marksberry v. Family Dollar Holdings, Inc., was filed in Indiana under Indiana’s wage and hour law. The plaintiff has filed a motion to voluntarily dismiss that action.

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

If at some point in the future the Company determines that a reclassification of some or all of its Store Managers as non-exempt employees under the FLSA is required, such action could have a material adverse effect on the Company’s financial position, liquidity or results of operation. At this time, the Company cannot quantify the impact of such a determination.

12

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

The Company is involved in numerous other legal proceedings and claims incidental to its business, including, as noted above, litigation related to alleged failures to comply with various state and federal employment laws, some of which are or may be pled as class or collective actions, and litigation related to alleged personal or property damage, as to which the Company carries insurance coverage and/or has established accrued liabilities as set forth in the Company’s financial statements. While the ultimate outcome cannot be determined, the Company currently believes that these proceedings and claims, both individually and in the aggregate, should not have a material adverse effect on the Company’s financial position, liquidity or results of operations, except as noted above. However, the outcome of any litigation is inherently uncertain and, if decided adversely to the Company, or if the Company determines that settlement of such actions is appropriate, the Company may be subject to liability that could have a material adverse effect on the Company’s financial position, liquidity or results of operations.

The following table provides a reconciliation of net income to comprehensive income. The unrealized gains and losses on investment securities are shown net of tax ($0.5 million and $0.0 million income tax expense for the quarter and first half ended February 27, 2010, respectively, and $1.4 million and $3.3 million income tax expense for the quarter and first half ended February 28, 2009, respectively).

The Company operates a chain of more than 6,600 general merchandise retail discount stores in 44 states, serving the basic needs of customers primarily in the low to middle income brackets. The stores are supported by nine distribution centers and one corporate headquarters. All of the stores operate under the Family Dollar name and are substantially the same in terms of size, merchandise, customers, distribution and operations. The Company has no franchised locations, foreign operations or other lines of business. The Company manages the business on the basis of one operating segment and therefore, has only one reportable segment. The following table presents net sales by classes of similar products.

13

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

14

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

The following discussion summarizes the significant factors affecting our consolidated results of operations and financial condition for the thirteen-week periods ended February 27, 2010, and February 28, 2009 (“second quarter of fiscal 2010” and “second quarter of fiscal 2009”, respectively), and the twenty-six-week periods ended February 27, 2010, and February 28, 2009 (“first half of fiscal 2010” and “first half of fiscal 2009”, respectively). This discussion should be read in conjunction with, and is qualified by, the financial statements included in this Report, the financial statements for the fiscal year ended August 29, 2009 (“fiscal 2009”), and Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) contained in our Annual Report on Form 10-K for fiscal 2009. This discussion also should be read in conjunction with the “Cautionary Statement Regarding Forward Looking Statements” set forth following this MD&A, and the “Risk Factors” set forth in Part I, Item 1A of our Annual Report on Form 10-K for fiscal 2009.

Executive Overview

We operate a chain of more than 6,600 general merchandise retail discount stores in 44 states, providing primarily low to middle income consumers with a selection of competitively priced merchandise in convenient neighborhood stores. Our merchandise assortment includes consumables, home products, apparel and accessories, and seasonal and electronics. We sell merchandise at prices that generally range from less than $1 to $10.

During the first half of fiscal 2010, as compared with the first half of fiscal 2009, our net sales increased 4.5% to $3.9 billion, our net income increased 25.4% to $179.8 million, and our diluted net income per common share increased 27.5% to $1.30. Comparable store sales (stores open more than 13 months) for the first half of fiscal 2010 increased 3.0% compared with the first half of fiscal 2009. Our strong results during the first half of fiscal 2010 were due primarily to our strong sales performance and improvements in cost of sales, as a percentage of net sales.

We are focused on providing our customers with more value, more convenience and a better shopping experience. Over the past several years, we made investments to improve processes, build merchandising capabilities and improve the productivity of our workforce. These investments are now delivering positive results.

While general economic conditions appear to be stabilizing, we believe pressures on low and lower-middle income customers continue to be significant, and we believe our strategy of providing both value and convenience positions us well to increase our market share. During the first half of fiscal 2010, we experienced an increase in customer traffic and the dollar value of the average transaction. While basic consumable needs continue to be the primary driver of recurring shopping trips, we are also seeing improvement in certain discretionary categories. For example, during this past holiday season we experienced strong sales in the Seasonal and Electronics and Home Products categories as a result of our focus on value, combined with appealing in-store presentations and customer communication. The various components affecting our results for the first half of fiscal 2010 are discussed in more detail below.

During the first half of fiscal 2010, we focused on four key priorities: increase relevancy to the customer, drive increased profitability, manage risk and build great employee teams. The following are some of the highlights from these efforts:

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Results of Operations

Our results of operations for the second quarter and first half of fiscal 2010 and the second quarter and first half of fiscal 2009 are highlighted in the table below and discussed in the following paragraphs:

Second Quarter Results

Net Sales

Net sales increased 4.9% in the second quarter of fiscal 2010 compared with the second quarter of fiscal 2009. The increase in the second quarter of fiscal 2010 was due primarily to a 3.6% increase in comparable store sales, with the balance of the increase primarily relating to sales from new stores opened as part of our store growth program. The increase in comparable store sales resulted from an increase in customer traffic, as measured by the number of register transactions in comparable stores, and an increase in the dollar value of the average customer transaction. Sales during the second quarter of fiscal 2010 were strongest in the Seasonal and Electronics, Home Products, and Consumables categories.

Comparable store sales includes stores that have been open more than 13 months. Stores that have been renovated, relocated, or expanded are included in the comparable store sales calculation to the extent that they had sales during comparable weeks in each year. The method of calculating comparable store sales varies across the retail industry. As a result, our comparable store sales calculation may not be comparable to similarly titled measures reported by other companies.

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The average number of stores in operation during the second quarter of fiscal 2010 was 0.8% higher than the average number of stores in operation during the second quarter of fiscal 2009.

Cost of Sales

Cost of sales increased 2.2% in the second quarter of fiscal 2010 compared with the second quarter of fiscal 2009. This increase primarily reflected the additional sales volume between years. Cost of sales, as a percentage of net sales, was 64.6% in the second quarter of fiscal 2010 and 66.3% in the second quarter of fiscal 2009. The decrease in cost of sales, as a percentage of net sales, was due primarily to higher purchase mark-ups, lower markdown expense, lower freight expense, and lower inventory shrinkage. We continue to focus on improving our purchase mark-ups through our price management work, the continued development of our private label offering, and our global sourcing efforts. The decrease in markdown expense was due to the absence of any markdown expense during the second quarter of fiscal 2010 for products containing lead/phthalates, compared to approximately $8.0 million of lead/phthalate markdown expense during the second quarter of fiscal 2009 in connection with new product safety legislation. Freight expense benefited from a decrease in shipments, as a percentage of net sales, and increased transportation productivity and efficiency. We believe that inventory shrinkage benefited from higher store manager retention, lower levels of discretionary merchandise and improved analytics and monitoring processes.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses increased 4.1% in the second quarter of fiscal 2010 compared with the second quarter of fiscal 2009. The increases in these expenses were due in part to the additional sales volume between years and additional costs arising from the continued growth in the number of stores in operation. SG&A expenses, as a percentage of net sales, were 26.8% in the second quarter of fiscal 2010 and 27.0% in the second quarter of fiscal 2009. The decrease in SG&A expenses, as a percentage of net sales, was due primarily to decreases in utility expense (approximately 0.3% of net sales) and insurance expense (approximately 0.3% of net sales), offset partially by increases in store payroll (approximately 0.2% of net sales) and certain store maintenance and repair costs (approximately 0.2% of net sales). Our energy management efforts contributed to the decrease in utility expense, and insurance expense continues to benefit from favorable trends in workers’ compensation and general liability costs. Store payroll expense increased due to the expansion of our store operating hours, and the increase in store maintenance and repair costs was due primarily to an increase in snow removal costs.

Interest Income

Interest income decreased $1.3 million in the second quarter of fiscal 2010 compared with the second quarter of fiscal 2009. The decrease in interest income was due primarily to a decrease in interest rates.

Interest Expense

The change in interest expense in the second quarter of fiscal 2010 compared with the second quarter of fiscal 2009 was not material.

Income Taxes

The effective tax rate was 37.1% for the second quarter of fiscal 2010 compared with 36.4% for the second quarter of fiscal 2009. The increase in the effective tax rate was due primarily to changes in state income taxes and a decrease in federal jobs tax credits as a percentage of pre-tax income.

Year-to-date Results

Net Sales

Net sales increased 4.5% in the first half of fiscal 2010 compared with the first half of fiscal 2009. The increase in the first half of fiscal 2010 was due primarily to a 3.0% increase in comparable store sales, with the balance of the increase primarily relating to sales from new stores opened as part of our store growth program. The increase in comparable store sales resulted from an increase in customer traffic, as measured by the number of register transactions in comparable stores, and an increase in the dollar value of the average customer transaction. Sales during the first half of fiscal 2010 were strongest in the Consumables, Seasonal and Electronics, and Home Products categories. Sales of Apparel and Accessories continued to be weak.

Comparable store sales includes stores that have been open more than 13 months. Stores that have been renovated, relocated, or expanded are included in the comparable store sales calculation to the extent that they had sales during comparable weeks in each year. The method of calculating comparable store sales varies across the retail industry. As a result, our comparable store sales calculation may not be comparable to similarly titled measures reported by other companies.

17

The average number of stores in operation during the first half of fiscal 2010 was 0.9% higher than the average number of stores in operation during the first half of fiscal 2009. We had 6,689 stores in operation at the end of the first half of fiscal 2010 compared with 6,643 stores in operation at the end of the first half of fiscal 2009, representing an increase of 0.7%.

Cost of Sales

Cost of sales increased 2.2% in the first half of fiscal 2010 compared with the first half of fiscal 2009. This increase primarily reflected the additional sales volume between years. Cost of sales, as a percentage of net sales, was 64.2% in the first half of fiscal 2010 and 65.7% in the first half of fiscal 2009. The decrease in cost of sales, as a percentage of net sales, was due primarily to lower freight expense, higher purchase mark-ups, lower markdown expense, and lower inventory shrinkage. Freight expense benefited from a decrease in shipments, as a percentage of net sales, and increased transportation productivity and efficiency. We continue to focus on improving our purchase mark-ups through our price management work, the continued development of our private label offering, and our global sourcing efforts. The decrease in markdown expense was due to the absence of any markdown expense during the first half of fiscal 2010 for products containing lead/phthalates, compared to approximately $8.0 million of lead/phthalate markdown expense during the first half of fiscal 2009 in connection with new product safety legislation. Our continued focus on improving inventory productivity and managing inventory risk resulted in lower seasonal markdowns. We believe that inventory shrinkage benefited from higher store manager retention, lower levels of discretionary merchandise and improved analytics and monitoring processes.

Selling, General and Administrative Expenses

SG&A expenses increased 4.6% in the first half of fiscal 2010 compared with the first half of fiscal 2009. The increases in these expenses were due in part to the additional sales volume between years and additional costs arising from the continued growth in the number of stores in operation. SG&A expenses, as a percentage of net sales, were 28.3% in both the first half of fiscal 2010 and the first half of fiscal 2009. As a percentage of net sales, a decrease in insurance expense (approximately 0.3% of net sales) offset an increase in store payroll (approximately 0.2% of net sales), and a decrease in utility expense (approximately 0.3% of net sales) offset increases in other occupancy costs (approximately 0.3% of net sales). Insurance expense continues to benefit from favorable trends in workers’ compensation and general liability costs. Store payroll expense increased due to the expansion of our store operating hours. Our energy management efforts contributed to the decrease in utility expense, which offset increases in other occupancy costs such as maintenance and repair costs, depreciation, and store rental expenses.

Interest Income

Interest income decreased $4.5 million in the first half of fiscal 2010 compared with the first half of fiscal 2009. The decrease in interest income was due to a decrease in investment securities and interest rates.

Interest Expense

The change in interest expense in the first half of fiscal 2010 compared with the first half of fiscal 2009 was not material.

Income Taxes

The effective tax rate was 36.9% for the first half of fiscal 2010 compared with 36.3% for the first half of fiscal 2009. The increase in the effective tax rate was due primarily to changes in state income taxes and lower tax-exempt interest income, offset partially by changes in our liabilities for uncertain tax positions.

Liquidity and Capital Resources

General

We have consistently maintained a strong liquidity position. Cash provided by operating activities during the first half of fiscal 2010 was $316.6 million compared to $253.4 million in the first half of fiscal 2009. Our operating cash flows are generally sufficient to fund our regular operating needs, capital expenditure program, cash dividend payments, interest payments, and share repurchases. We believe operating cash flows and existing credit facilities will provide sufficient liquidity for our ongoing operations and growth initiatives.

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Credit Facilities

On December 16, 2009, we entered into an unsecured revolving credit facility with a syndicate of lenders for short-term borrowings of up to $250 million. The credit facility has an initial term of 364 days and provides for two one-year extensions that require lender consent. Any borrowings under the credit facility accrue interest at a variable rate based on short-term market interest rates. The credit facility replaced our pre-existing $250 million 364-day credit facility.

We also maintain a $350 million unsecured revolving credit facility that matures on August 24, 2011. Any borrowings under this credit facility also accrue interest at a variable rate based on short-term market interest rates. Outstanding standby letters of credit ($152.3 million as of February 27, 2010) reduce the borrowing capacity of the $350 million credit facility.

There were no borrowings under the credit facilities during the first half of fiscal 2010. 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 February 27, 2010, we were in compliance with all such covenants.

Long-Term Debt

On September 27, 2005, we obtained $250 million through a private placement of unsecured Senior Notes (the “Notes”) to a group of institutional accredited investors. The Notes were issued in two tranches at par and rank pari passu in right of payment with our other unsecured senior indebtedness. The first tranche has an aggregate principal amount of $169 million, is payable in a single installment on September 27, 2015, and bears interest at a rate of 5.41% per annum from the date of issuance. The second tranche has an aggregate principal amount of $81 million, matures on September 27, 2015, with amortization commencing on September 27, 2011, and bears interest at a rate of 5.24% per annum from the date of issuance. The second tranche has a required principal payment of $16.2 million on September 27, 2011, and on each September 27 thereafter to and including September 27, 2015. Interest on the Notes is payable semi-annually in arrears on the 27th day of March and September of each year. The sale of the Notes was effected in transactions not requiring registration under the Securities Act of 1933, as amended. The Notes 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 February 27, 2010, we were in compliance with all such covenants.

Other Considerations

Our merchandise inventories at the end of the first half of fiscal 2010 were 9.6% lower than at the end of the first half of fiscal 2009. Inventory per store at the end of the first half of fiscal 2010 was approximately 10.3% lower than inventory per store at the end of the first half of fiscal 2009. These decreases were due primarily to decreases in discretionary merchandise, particularly apparel. We continue to constrain our purchases of discretionary merchandise as our customers continue to focus on basic consumables. Our seasonal merchandise was also lower as a result of stronger sales during the holiday season. An increase in consumable merchandise at the end of the first half of fiscal 2009 in anticipation of the expansion of our consumable assortment also contributed to the year-over-year decrease in merchandise inventories.

Capital expenditures for the first half of fiscal 2010 were $82.9 million, compared with $61.8 million for the first half of fiscal 2009. The increase in capital expenditures during the first half of fiscal 2010 as compared with the first half of fiscal 2009 was due primarily to the investments we are making to drive revenues, including the roll-out of new register and point-of-sale technology in our stores and our space re-alignment efforts. We also purchased several of our existing stores from our landlords during the first half of fiscal 2010. Capital expenditures for fiscal 2010 are expected to be between $190 and $210 million and relate primarily to store technology infrastructure and other technology related projects; new store openings; expansions, relocations and renovations of existing stores; and distribution center improvements.

In the first half of fiscal 2010, we opened 86 stores, closed 52 stores and expanded, relocated, or renovated 21 stores. We occupy most of our stores under operating leases. Store opening, closing, expansion, relocation, and renovation plans, as well as overall capital expenditure plans, are continuously reviewed and may change.

During the first half of fiscal 2010, we purchased 3.8 million shares of our common stock in the open market at a cost of $116.0 million. In addition, on February 9, 2010, we entered into a structured repurchase agreement with a large financial institution. In connection with the agreement, we made a prepayment of $50.0 million to the financial institution. The financial institution will purchase shares of our common stock in the open market and deliver shares to us at specified intervals during the contract term. The number of shares to be delivered is based on the volume weighted average price (“VWAP”) of our common stock during the purchase period less an agreed upon discount. As of February 27, 2010, we had received 0.3 million shares at an average cost of $32.04. We recorded the $50.0 million prepayment as treasury stock on the Consolidated Condensed Balance Sheet. However, only the shares physically delivered to us as of February 27, 2010, were used to adjust our common shares outstanding and earnings per share calculations. The structured repurchase agreement is scheduled to end on any date between April 12, 2010, and May 13, 2010, at the option of the financial institution. We did not purchase any shares of our common stock during the first half of fiscal 2009.

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As of February 27, 2010, we had outstanding authorizations to purchase a total of $296.0 million of our common stock. The timing and amount of any shares repurchased have been and will continue to be determined by management based on its evaluation of market conditions and other factors. Our share repurchase program does not have a stated expiration date, and purchases may be made through open market purchases, private market transactions or other structured transactions.

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 February 27, 2010, these cash and cash equivalents and investment securities balances were $37.2 million and $91.7 million, respectively.

Cash Flows From Operating Activities

Cash provided by operating activities increased $63.2 million during the first half of fiscal 2010 as compared to the first half of fiscal 2009. The increase was due primarily to an increase in net income and a decrease in merchandise inventories, both in the ordinary course of business, offset partially by changes in our accounts payable and accrued liabilities. The change in our accounts payable and accrued liabilities was due primarily to payments related to legal liabilities and an increase in incentive compensation payments. During the first quarter of fiscal 2010, we paid out the litigation judgment and other costs that were accrued in connection with the Morgan litigation and made incentive compensation payments related to our fiscal 2009 performance. See Note 6 to the Consolidated Condensed Financial Statements included in this Report for more information on the Morgan litigation.

Cash Flows From Investing Activities

During the first half of fiscal 2010, we had a cash outflow of $113.9 million, compared to a cash outflow of $56.1 million in the first half of fiscal 2009. The increase was due to an increase in purchases of investment securities and an increase in capital expenditures.

Cash Flows From Financing Activities

During the first half of fiscal 2010, we had a cash outflow of $139.0 million, compared to a cash outflow of $56.5 million during the first half of fiscal 2009. The increase was due primarily to an increase in repurchases of common stock, offset partially by changes in cash overdrafts. As noted above, we purchased $166.0 million of our common stock during the first half of fiscal 2010 compared to no repurchases in the first half of fiscal 2009. Cash overdrafts increased $55.8 million during the first half of fiscal 2010 compared with a $27.3 million decrease during the first half of fiscal 2009.

Recent Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard which established the FASB Accounting Standards Codification (“ASC”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”). Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also considered sources of authoritative GAAP for SEC registrants. The ASC combines all non-SEC authoritative standards into a comprehensive database organized by topic. The ASC is effective for interim and annual periods ending after September 15, 2009. We adopted the ASC during the first quarter of fiscal 2010. The adoption of the ASC did not have an impact on our Consolidated Condensed Financial Statements.

In September 2006, the FASB issued fair value guidance (ASC 820) that defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. We adopted the guidance with respect to financial assets and liabilities during the first quarter of fiscal 2009. The guidance became effective for non-financial assets and liabilities for the first annual period beginning after November 15, 2008. We adopted the fair value guidance for non-financial assets and liabilities during the first quarter of fiscal 2010. The adoption did not have an impact on our Consolidated Condensed Financial Statements.

In January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-06 “Fair Value Measurements and Disclosures – Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”). ASU 2010-06 requires new disclosures for significant transfers in and out of Level 1 and 2 of the fair value hierarchy and the activity within Level 3 of the fair value hierarchy. The updated guidance also clarifies existing disclosures regarding the level of disaggregation of assets or liabilities and the valuation techniques and inputs used to measure fair value. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2009, with the exception of the new Level 3 activity disclosures, which are effective for interim and annual reporting periods beginning after December 15, 2010. We will adopt the applicable disclosure requirements beginning in the third quarter of fiscal 2010.

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In February 2010, the FASB issued ASU No. 2010-09 “Subsequent Events – Amendments to Certain Recognition and Disclosure Requirements” (“ASU 2010-09”). ASU 2010-09 reiterates that an SEC filer is required to evaluate subsequent events through the date that the financial statements are issued and removes the requirement for an SEC filer to disclose the date through which subsequent events have been evaluated. The updated guidance was effective upon issuance. We adopted ASU 2010-09 during the second quarter of fiscal 2010. The adoption did not have an impact on our Consolidated Condensed Financial Statements.

Critical Accounting Policies

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

There have been no material changes to the Critical Accounting Policies outlined in our Annual Report on Form 10-K for fiscal 2009.

Cautionary Statement Regarding Forward-Looking Statements

Certain statements contained in this Report, or in other public filings, press releases, or other written or oral communications made by Family Dollar or our representatives, which are not historical facts, are forward-looking statements that are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements address our plans, activities or events which we expect will or may occur in the future and may include express or implied projections of revenue or expenditures; statements of plans and objectives for future operations, growth or initiatives; statements of future economic performance; or statements regarding the outcome or impact of pending or threatened litigation. These forward-looking statements may be identified by the use of the words “believe,” “plan,” “estimate,” “expect,” “anticipate,” “probably,” “should,” “project,” “intend,” “continue,” and other similar terms and expressions. Various risks, uncertainties and other factors may cause our actual results to differ materially from those expressed or implied in any forward-looking statements. Factors, uncertainties and risks that may result in actual results differing from such forward-looking information include, but are not limited to, those listed in Part I, Item 1A of our Annual Report on Form 10-K for fiscal 2009, as well as other factors discussed throughout this Report, including, without limitation, the factors described under “Critical Accounting Policies” in Part I, Item 2 above, or in other filings or statements made by us. All of the forward-looking statements in this Report and other documents or statements are qualified by these and other factors, risks and uncertainties.

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

Item 3.   Quantitative and Qualitative Disclosures about Market Risk

We are subject to market risk from exposure to changes in interest rates based on our financing, investing and cash management activities. We maintain unsecured revolving credit facilities at variable rates of interest to meet the short-term needs of our expansion program and seasonal inventory increases. During the first half of fiscal 2010 and the first half of fiscal 2009, we did not incur any interest expense related to our credit facilities. Our $250.0 million of long-term debt bears interest at fixed rates ranging from 5.24% to 5.41%.

We are also subject to market risk from exposure to changes in the fair value of our investment securities. Our investment securities currently include auction rate securities that are subject to failed auctions and are not currently liquid. As of February 27, 2010, we had a $15.0 million unrealized loss ($9.5 million net of taxes) related to these investments. We believe that we will be able to liquidate our auction rate securities at par at some point in the future as a result of issuer calls or refinancings, settlements with broker dealers, or upon maturity. However, volatility in the credit markets could continue to negatively impact the timing of future liquidity related to these investments and lead to additional adjustments to their carrying value. See Note 2 to the Consolidated Condensed Financial Statements included in this Report for more information on our auction rate securities.

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Item 4.  Controls and Procedures

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

There has been no change in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1.   Legal Proceedings

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

Item 1A. Risk Factors

There have been no material changes in the Risk factors outlined in our Annual Report on Form 10-K for fiscal 2009.

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

The following table sets forth information with respect to purchases of shares of our common stock made during the quarter ended February 27, 2010, by us, on our behalf, or by any “affiliated purchaser” as defined by Rule 10b-18(a)(3) of the Securities Exchange Act of 1934.

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Item 5.   Other Information

At our Annual Meeting of Stockholders held January 21, 2010, stockholders voted to:

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Item 6.   Exhibits

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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.

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