NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Accounting Policies The Company sells general merchandise on a retail basis through stores (2,734 at January 31, 1997) located predominantly in small towns in the midwestern and southeastern United States. The Company has distribution centers in Scottsville, Kentucky; Homerville, Georgia; Ardmore, Oklahoma and South Boston, Virginia. Basis of presentation The following notes contain references to years 1997, 1996 and 1995 which represent fiscal years ended January 31, 1997, 1996 and 1995, respectively. The consolidated financial statements include all subsidiaries. Intercompany transactions have been eliminated.

Cash and cash equivalents:
Cash and cash equivalents include highly liquid investments with an original maturity of three months or less.

Inventories:
Inventories are stated at cost using the retail last-in, first-out (LIFO) method which is not in excess of market. The excess of current cost over LIFO cost was $18.4 million, $20.6 million and $22.2 million at January 31, 1997, 1996 and 1995, respectively. The LIFO reserves decreased by $2.2 million in 1997, $1.6 million in 1996 and $4.8 million in 1995.

Preopening costs:
Preopening costs for new stores are expensed as incurred.

Property and equipment:
Property and equipment are recorded at cost. The Company provides for depreciation of buildings and equipment on a straight-line basis over the following estimated useful lives: buildings, 25 to 39 years; furniture, fixtures and equipment, 5 to 10 years. Depreciation expense was $30.8 million, $25.1 million and $17.1 million in 1997, 1996 and 1995, respectively.

Insurance claims provisions:
In 1996, the Company established The Greater Cumberland Insurance Company, a Vermont-based, wholly-owned subsidiary captive insurance company. This insurance company charges Dollar General's subsidiary companies competitive premium rates to insure worker's compensation and non-property general liability claims risk. The insurance company is adequately funded and currently insures no unrelated risk.

The Company retains a portion of the risk for its workers' compensation, employee health insurance, general liability, property, and automobile coverages. Accordingly, provisions are made for the Company's actuarially determined estimates of future claim costs for such risks. To the extent that subsequent claim costs vary from those estimates, current earnings are charged or credited.

Net income per common and common equivalent share:
Net income per common and common equivalent share is based on the weighted average number of shares of common stock outstanding during each year, after giving effect to the assumed exercise of all dilutive stock options using the treasury stock method and the treatment of convertible preferred stock shares as common stock equivalents. Net income per common and common equivalent shares is also presented in the accompanying consolidated statements of income on an adjusted basis, which gives retroactive effect to a five-for-four stock split declared January 13, 1997, for shareholders of record on February 3, 1997, and paid on February 12, 1997.

Management estimates:
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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 those estimates.

2. Cash and Short-Term Borrowings The cash management system provides for daily investment of available balances and the funding of outstanding checks when presented for payment.

Outstanding but unpresented checks totaling $45.9 million and $45.2 million at January 31, 1997 and 1996, respectively, have been included in accounts payable. Upon presentation for payment, they will be funded through available cash balances or the Company's revolving credit/term loan agreement.

The Company had lines of credit with banks totaling $170.0 million at January 31, 1997, and $135.0 million at January 31, 1996. The lines are subject to periodic review by the lending institutions which may increase or decrease the amounts available. There were borrowings outstanding under these lines of $8.5 million at January 31, 1997, and $7.1 million at January 31, 1996.

The Company also has a $170.0 million revolving credit/term loan agreement which expires in June 1998. Borrowings under this facility were $30.0 million and $65.0 million at January 31, 1997 and 1996, respectively. Interest rates on amounts borrowed under this agreement can float with the prime commercial lending rate or can be fixed not to exceed the New York certificate of deposit rate plus 0.375%, the Adjusted Eurodollar rate plus 0.25%, or the Banker's Acceptance rate plus 0.45%, all for periods of up to six months. The weighted average interest rates were 5.6% and 6.2% at January 31, 1997 and 1996, respectively.

Additionally, the Company had a $260.0 million facility at January 31, 1997, and a $205.0 million facility at January 31, 1996, available for the issuance of letters of credit. At January 31, 1997 and 1996, the Company had outstanding letters of credit totaling $59.3 million and $125.0 million, respectively.

3.Accrued Expenses:
Accrued expenses consist of the following:

(in thousands)                               1997           1996
Compensation and benefits                    $24,976        $15,142
Taxes (other than taxes on income)             8,392          9,381
Insurance                                     25,785         26,399
Other                                         11,288         11,177
Total accrued expenses                       $70,441        $62,099

4.Income taxes The provision for taxes consists of the following:

(in thousands)                               1997      1996      1995
Currently payable:
     Federal                                 $54,015   $46,758   $40,349
     State                                     5,604     7,563     5,607
Total currently payable                       59,619    54,321    45,956
Deferred:
     Federal                                   8,710     (500)     1,103)
     State                                     1,588      (93)      (199)
Total deferred                                10,298     (593)    (1,302)
Total provision                              $69,917   $53,728   $44,654

Deferred tax expense (credit) is recognized for the future tax consequences of temporary differences between the amounts reported in the Company's financial statements and the tax basis of its assets and liabilities. Primary differences giving rise to the Company's deferred tax assets and liabilities are as follows:

                                   1997                          1996
(in thousands)                Assets    Liabilities         Assets    Liabilities
Inventories                   $  956                        $ 1,237
Property and equipment                  $5,432                        $2,993
Accrued insurance              2,008                         10,752
Other                            725       139
Total deferred taxes          $3,689    $5,571              $11,989   $2,993

Reconciliation of the federal statutory rate and the effective income tax rate follows:

                                             1997      1996      1995
Federal statutory rate                       35.0%     35.0%     35.0%
State income taxes, net of federal
income tax benefit                            2.8       3.4       3.0
Tax credits                                  (0.2)     (0.7)
Other                                        (0.2)      0.5
Effective income tax rate                    37.8%     38.0%     37.8%

5. Long-Term Debt:
Long-term debt consists of the following:

(in thousands)                                    1997      1996
Mortgage note payable to Kentucky Development
     Finance Authority through 1998,
     6.4% (LIBOR plus 0.5%) in 1997 and
     5.8% (LIBOR plus 0.5%) in 1996                2,333     3,111
Other                                              2,279     1,703
                                                   4,612     4,814
Less current portion                               2,030     1,536
Net long-term debt                                $2,582    $3,278

Certain loan agreements contain restrictive covenants which, among other things, require the Company to maintain minimum amounts of tangible net worth and working capital and restrict payment of dividends, repurchases of capital stock and additional borrowings. Approximate maturities on long-term obligations in the years ending January 31, 1998, through 2001 are (in millions): $2.0; $1.4; $1.0; $0.1 and $0.1.

6.Commitments:
At January 31, 1997, the Company and certain subsidiaries were committed for retail store space in the following fiscal years under noncancelable operating lease agreements requiring minimum annual rental payments of (in millions): 1998, $55.7; 1999, $41.5; 2000, $24.1; 2001, $8.7; 2002, $2.9 and $1.4 in later fiscal years. Most leases included renewal options for periods ranging from two to five years, and provisions for contingent rentals based upon a percentage of defined sales volume.

Rent expense under all operating store leases was as follows:

(in thousands)                          1997      1996      1995
Minimum rentals                         $57,054   $46,166   $35,318
Contingent rentals                      $10,232     9,891     8,391
Total rentals                           $67,286   $56,057   $43,709

7.Employee Benefits:
The Company has two noncontributory defined contribution retirement plans covering substantially all full-time employees. Expense for these plans was approximately $4.7 million, $3.0 million and $3.5 million in 1997, 1996 and 1995, respectively. The Company funds all benefit-plan costs as accrued.

8.Capital Stock:
The authorized capital stock of the Company consists of common stock and preferred stock.

On August 22, 1994, the Company exchanged 1,715,742 shares of Series A Convertible Junior Preferred Stock for the 8,578,710 shares of Dollar General common stock owned by C.T.S, Inc., a personal holding company controlled by members of the Turner family, the founders of Dollar General. The Series A Convertible Junior Preferred Stock was authorized by the Board of Directors out of the authorized but unissued preferred stock approved by the Company's shareholders in 1992. The exchange, negotiated and recommended by a special committee of the Company's Board of Directors, came in response to a request from C.T.S, Inc. to consider a transaction to meet estate planning needs of the Turner family. The Series A Convertible Junior Preferred Stock is (i) convertible into common stock pursuant to the terms and conditions set forth in the Restated Articles of Incorporation and (ii) is voted with the common stock on all matters presented to the holders of common stock. The Series A Convertible Junior Preferred Stock is convertible at the option of the holder. During the three years following August 22, 1996, the conversion ratio increases from 90% of the initial exchange ratio of five shares of common stock for each share of Series A Convertible Junior Preferred Stock converted (adjusted for all intervening stock splits or adjustments) to 100% of the initial exchange ratio (as adjusted). Additionally, the Series A Convertible Junior Preferred Stock is not transferable by the holders thereof.

9.Stock Incentive Plans:
The Company has established stock incentive plans under which options to purchase common stock may be granted to executive officers, directors, key employees and non-employee directors.

All options granted in 1997 and 1996, under the 1995 Employee Stock Incentive Plan, the 1995 Outside Directors Stock Option Plan, the 1993 Employee Stock Incentive Plan and the Dollar General Corporation 1989 Employee Stock Incentive Plan, were non-qualified stock options issued at a price equal to fair market value of the Company's common stock on the date of grant. The option term is ten years and options vest in nine and one-half years from the date of grant for employees and one year in the case of non-employee directors. However, if certain performance criteria established by the Corporate Governance and Compensation Committee are attained, the vesting of these options will be accelerated.

Although the plans permit various types of stock-based compensation to be awarded, in addition to stock options, the Company has issued only stock options under these plans.

The Company applies APB Opinion 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its plans. The exercise price of options awarded under these plans has been equal to the fair market value of the underlying common stock on the date of grant. Accordingly, no compensation expense has been recognized for its stock-based compensation plans. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant date for awards under these plans consistent with the methodology prescribed under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, net income and earnings per share would have been reduced to the pro forma amounts indicated in the table below.

(amounts are in thousands except per share data)       1997           1996
Net income - as reported                               $115,100       $87,818
Net income - pro forma                                 $111,618       $86,281
Earnings per share - as reported                       $   1.04       $  0.80
Earnings per share - pro forma                         $   1.01       $  0.79

Earnings per share have been adjusted for the February 12, 1997, five-for-four common stock split.

The pro forma effects on net income for 1997 and 1996 are not representative of the pro forma effect on net income in future years because they do not take into consideration pro forma compensation expense related to grants made prior to 1996. The fair value of options granted during 1997 and 1996 is $6.86 and $5.53 per share, respectively.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

                                             1997      1996
Expected divided yield                        0.7%      0.7%
Expected stock price volatility              40.0%     40.0%
Weighted average risk-free interest rate      6.0%      6.6%
Expected life of options (years)              3.0       3.0

The summary of the status of all of the Company's stock incentive plans as of January 31, 1997, 1996 and 1995 and changes during the years then ended is presented below:

                                                             Range of Option          Weighted Average

                                    Shares Under Plans       Prices Per Share         Exercise Price
Balance, January 31, 1994             9,581,507               $ 1.14  to $12.19        - -
Granted                               2,397,778                10.43  to  16.00        - -
Exercised                            (2,777,135)                1.53  to  11.02        - -
Canceled                               (527,988)                3.62  to  13.06        - -
Balance, January 31, 1995             8,674,162                 1.14  to  16.00        $10.26
Granted                               2,306,109                13.04  to  18.96         16.87
Exercised                            (1,934,728)                1.53  to  13.18          8.95
Canceled                               (361,324)                4.87  to  18.96         11.67
Balance, January 31, 1996             8,684,219                 1.14  to  18.96         12.99
Granted                               3,089,872                19.20  to  24.70         21.39
Exercised                            (1,771,397)                1.53  to  18.96         11.01
Canceled                               (831,308)                1.74  to  24.30         14.24
Balance, January 31, 1997             9,171,386               $ 1.14  to $24.70        $17.19

At January 31, 1997 and 1996, options for 1,646,345 and 1,707,285 shares were exercisable, respectively. The following table summarizes information about stock options outstanding at January 31, 1997:

                                 Options Outstanding                                 Options Exercisable
                    Number         Weighted Average                             Number              Weighted
Range of            Outstanding    Remaining                Weighted Average    Exercisable         Exercise
Exercise Prices     at 1/31/97     Contracted Life          Exercise Price      at 1/31/97          Price
$ 1.14 to $10.00    2,941,601      6.1 years                $ 9.15              1,199,838           $ 8.00
 10.01 to  17.00    3,014,105      7.8                       15.30                388,479            13.23
 17.01 to  24.70    3,215,680      9.4                       21.60                 58,028            17.81
$17.01 to $24.70    9,171,386      7.8 years                $17.18              1,646,345           $10.76

At January 31, 1997 and 1996, shares available for granting of stock options under the Company's stock option plans were 3,845,136 and 5,816,241 shares, respectively. All unexercised options expire not later than the year 2007.

10.Quarterly Financial Data (unaudited):
The following is selected unaudited quarterly financial data for the fiscal years ended January 31, 1997 and 1996. Amounts are in thousands except per share data.

Quarter                       First          Second         Third          Fourth         Year
1997:
Net Sales                     $455,856       $494,389       $508,977       $675,176       $2,134,398
Gross Profit                   123,374        133,728        148,634        199,059          604,795
Net Income                      15,024         21,885         26,642         51,549          115,100
Net Income Per Share (a)      $   0.17       $   0.25       $   0.30       $   0.59       $     1.30
Net Income Per Share (b)      $   0.14       $   0.20       $   0.24       $   0.47       $     1.04
1996: (c)
Net Sales                     $374,520       $403,719       $429,898       $556,051       $1,764,188
Gross Profit                   104,758        113,074        125,898        159,889          503,619
Net Income                      12,314         17,524         19,200         38,780           87,818
Net Income Per Share (a)      $   0.14       $   0.20       $   0.22       $   0.44       $     1.00
Net Income Per Share (b)      $   0.11       $   0.16       $   0.18       $   0.35       $      .80

(a)Based on common and common equivalent shares before adjustment for the February 12, 1997, five-for-four common stock split.
(b)Based on common and common equivalent shares as adjusted to give retroactive effect to the February 12, 1997, five-for-four common stock split.
(c)The quarterly financial data presented for the quarters ended May 5, August 4 and November 3, 1995 and January 31, 1996 has been restated to retroactively reflect the adoption of a retail 52/53 week reporting calendar effective February 1, 1996. For the quarterly periods ended April 30, July 31, and October 31, 1995 and January 31, 1996, the Company reported net income of $11,576,000, $17,691,000, $20,008,000 and $38,543,000, respectively, or $0.11, $0.16, $0.18 and $0.35, respectively, per common and common equivalent share, as restated for the February 13, 1997 stock split.

Cost of goods sold was determined in the first, second and third quarters utilizing estimates of inventory shrinkage, inflation and markdowns. Cost of goods sold for the fourth quarter includes an adjustment of these estimates based upon actual results. Such adjustments decreased fourth quarter cost of goods sold by $4.9 million in 1997 and by $1.4 million in 1996.

11.Subsequent Event:
On February 12, 1997, the Company effected a five-for-four common stock split payable to shareholders of record on February 3, 1997.