UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

For the quarterly period ended JuneSeptember 30, 2010

OR

For the transition period from ___________________ to ____________________

Commission file number 0-21318

O’REILLY AUTOMOTIVE, INC.

(Exact name of registrant as specified in its charter)

233 South Patterson

Springfield, Missouri 65802

(Address of principal executive offices, Zip code)

(417) 862-6708

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

Large Accelerated Filer  x        Accelerated Filer  ¨        Non-Accelerated Filer  ¨        Smaller Reporting Company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of12b-2of 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:

Common stock, $0.01 par value – 138,761,127139,636,795 shares outstanding as of August 2,November 1, 2010.

O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

FORM 10-Q

Quarter Ended JuneSeptember 30, 2010

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION

O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

See Notes to Condensed Consolidated Financial Statements.

Note: The balance sheet at December 31, 2009, has been derived from the audited Consolidated Financial Statements at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. Certain prior period amounts have been reclassified to conform to current period presentation.

See Notes to Condensed Consolidated Financial Statements.

O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share data)

See Notes to Condensed Consolidated Financial Statements.

O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

See Notes to Condensed Consolidated Financial Statements.

O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

JuneSeptember 30, 2010

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of O’Reilly Automotive, Inc. and its subsidiaries (the “Company” or “O’Reilly”) have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and sixnine months ended JuneSeptember 30, 2010, are not necessarily indicative of the results that may be expected for the year ended December 31, 2010. Certain prior period amounts have been reclassified to conform to current period presentation. These reclassifications had no effect on reported totals for assets, liabilities, shareholders’ equity, cash flows or net income. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

NOTE 2 – BUSINESS COMBINATION

On July 11, 2008, the Company completed the acquisition of CSK Auto Corporation (“CSK”), which was one of the largest specialty retailers of auto parts and accessories in the Western United States and one of the largest such retailers in the United States, based on store count at the date of acquisition. The acquisition was accounted for under the purchase method of accounting with O’Reilly Automotive, Inc. as the acquiring entity in accordance with the Statement of Financial Accounting Standard No. 141,Business Combinations. The consideration paid by the Company to complete the acquisition was allocated to the assets acquired and liabilities assumed based upon their estimated fair values as of the date of the acquisition. The allocation of the purchase price was finalized on June 30, 2009. The results of CSK’s operations have been included in the Company’s consolidated financial statements since the acquisition date.

NOTE 3 – GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill is reviewed annually on December 31 for impairment, or more frequently if events or changes in business conditions indicate that impairment may exist. During the three months ended JuneSeptember 30, 2010, the Company recorded an immaterial decreaseincrease in goodwill.goodwill of $0.1 million. During the sixnine months ended JuneSeptember 30, 2010, the Company recorded a decrease in goodwill of $0.5$0.4 million, primarily due to adjustments to the purchase price allocations related to small acquisitions.acquisitions and adjustments to the provision for income taxes relating to the exercise of stock options acquired in the CSK acquisition (see Note 2). The Company did not record any goodwill impairment during the three and sixor nine months ended JuneSeptember 30, 2010. For the three and sixnine months ended JuneSeptember 30, 2010, the Company recorded amortization expense of $2.1$1.7 million and $4.9$6.6 million, respectively, related to amortizable intangible assets, which are included in “Other assets, net” on the accompanying Condensed Consolidated Balance Sheets. For the three and sixnine months ended JuneSeptember 30, 2009, the Company recorded amortization expense of $3.8$3.1 million and $8.0$11.0 million, respectively, related to amortizable intangible assets, which are included in “Other assets, net” on the accompanying Condensed Consolidated Balance Sheets. The components of the Company’s amortizable and unamortizable intangible assets were as follows on Juneas of September 30, 2010, and December 31, 2009 (in thousands):

Included in the above table of amortizable intangible assets are favorable leases. These favorable lease assets were recorded in conjunction with the acquisition of CSK and represent the values of operating leases acquired with favorable terms. These favorable leases had an estimated weighted-average remaining useful life of approximately 10.3 years as of September 30, 2010. In addition, the Company recorded a liability for the values of operating leases with unfavorable terms acquired in the acquisition of CSK, totalingCSK. The cost of these unfavorable lease liabilities totaled approximately $49.6 million on Juneas of September 30, 2010, and December 31, 2009. These unfavorable leases havehad an estimated weighted-average remaining useful life of approximately 6.6 years.6.4 years as of September 30, 2010. During the three and sixnine months ended JuneSeptember 30, 2010, the Company recognized an amortized benefit of $1.9$1.8 million and $3.1$4.9 million, respectively, related to these unfavorable operating leases. During the three and sixnine months ended JuneSeptember 30, 2009, the Company recognized an amortized benefit of $2.1$2.3 million and $4.2$6.5 million, respectively, related to these unfavorable operating leases. The carrying amount, net of accumulated amortization, of the unfavorable lease liability is $33.4was $31.6 million and $36.5 million as of JuneSeptember 30, 2010, and December 31, 2009, respectively, and is shownincluded in the “Other liabilities” section ofon the accompanying Condensed Consolidated Balance Sheets.

NOTE 4 – LONG-TERM DEBT

Outstanding long-term debt was as follows on JuneSeptember 30, 2010, and December 31, 2009 (in thousands):

On July 11, 2008, in connection with the acquisition of CSK, the Company entered into a credit agreement for a five-year $1.2 billion asset-based revolving credit facility (the “Credit Facility”) arranged by Bank of America, N.A. (“BA”). The Credit Facility is comprised of a five-year $1.075 billion tranche A revolving credit facility and a five-year $125 million first-in-last-out revolving credit facility (FILO tranche), both of which mature on July 10, 2013. As of June 30, 2010, the amount of the borrowing base available under the Credit Facility was $1.197 billion, of which the Company had outstanding borrowings of $477.3 million. As of December 31, 2009, the amount of the borrowing base available under the credit facility was $1.196 billion, of which the Company had outstanding borrowings of $678.8 million. The available borrowings under the Credit Facility are also reduced by stand-by letters of credit issued by the Company primarily to satisfy the requirements of workers compensation, general liability and other insurance policies. As of June 30, 2010, the Company had stand-by letters of credit outstanding of $72.8 million and the aggregate availability for additional borrowings under the Credit Facility was $646.5 million. As of December 31, 2009, the Company had stand-by letters of credit outstanding in the amount of $72.3 million and the aggregate availability for additional borrowings under the credit facility was $445.2 million. As part of the Credit Facility, the Company has pledged substantially all of its assets as collateral and is subject to an ongoing consolidated leverage ratio covenant, with which the Company complied on June 30, 2010.6 ³/4% Exchangeable Senior Notes:

At June 30, 2010, borrowings under the tranche A revolver bore interest, at the Company’s option, at a rate equal to either a base rate plus 1.25% per annum or LIBOR plus 2.25% per annum, with each rate being subject to adjustment based upon certain excess availability thresholds. Borrowings under the FILO tranche bore interest, at the Company’s option, at a rate equal to either a base rate plus 2.50% per annum or LIBOR plus 3.50% per annum, with each rate being subject to adjustment based upon certain excess availability thresholds. The base rate is equal to the higher of the prime lending rate established by BA from time to time or the federal funds effective rate as in effect from time to time plus 0.50%, subject to adjustment based upon remaining available borrowings. Fees related to unused capacity under the Credit Facility are assessed at a rate of 0.50% of the remaining available borrowings under the facility, subject to adjustment based upon remaining unused capacity. In addition, the Company pays letter of credit fees and other administrative fees in respect to the Credit Facility. At June 30, 2010, the Company had borrowings of $27.3 million under its Credit Facility, which were not covered under an interest rate swap agreement, with interest rates ranging from 2.63% to 4.50%. At December 31, 2009, the Company had borrowings of $278.8 million under its Credit Facility, which were not covered under an interest rate swap agreement, with interest rates ranging from 2.50% to 4.50%.

On each of July 24, 2008, October 14, 2008, and January 21, 2010, the Company entered into interest rate swap transactions with Branch Banking and Trust Company (“BBT”), BA, SunTrust Bank (“SunTrust”) and/or Barclays Capital (“Barclays”). The Company entered into these interest rate swap transactions to mitigate the risk associated with its floating interest rate based on 30-day LIBOR on an aggregate of $450 million of its debt that is outstanding under the Credit Facility. The Company is required to make certain monthly fixed rate payments calculated on the notional amounts, while the applicable counterparty is obligated to make certain monthly floating rate payments to the Company referencing the same notional amount. The interest rate swap transactions effectively fix the annual interest rate payable on these notional amounts of the Company’s debt, which exists under the Credit Facility plus an applicable margin under the terms of the Credit Facility. The interest rate swap transactions have maturity dates ranging from August 1, 2010, through October 17, 2011. The counterparties, transaction dates, effective dates, applicable notional amounts, effective index rates and maturity dates of each of the interest rate swap transactions which existed as of June 30, 2010, are included in the table below:

On July 11, 2008, the Company executed the Third Supplemental Indenture (the “Third Supplemental Indenture”) to the 6 ³/4% Exchangeable Senior Notes due 2025 (the “Notes”), in which it agreed to become a guarantor, on a subordinated basis, of the $100 million principal amount of the Notes originally issued by CSK pursuant to an Indenture, dated as of December 19, 2005, as amended and supplemented by the First Supplemental Indenture dated as of December 30, 2005, and the Second Supplemental Indenture, dated as of July 27, 2006, by and between CSK Auto Corporation, CSK Auto, Inc. and The Bank of New York Mellon Trust Company, N.A., as trustee. On December 31, 2008, and effective as of July 11, 2008, the Company entered into the Fourth Supplemental Indenture in order to correct the definition of Exchange Rate in the Third Supplemental Indenture.

The Notes are exchangeable, under certain circumstances, into cash and shares of the Company’s common stock. The Notes bear interest at 6.75% per year until December 15, 2010, and 6.50% until maturity on December 15, 2025. Prior to their stated maturity, the Notes are exchangeable by the holders only under the following circumstances (as more fully described in the indentureindentures under which the Notes were issued):

As ofOn July 1, 2010, the Notes became exchangeable at the option of the holders and will remainremained exchangeable through September 30, 2010, the last trading day of the Company’s third quarter, as provided for in the Indentureindentures governing the Notes. The Notes became exchangeable as the Company’s common stock closed at or above 130% of the Exchange Price (as defined in the Indentureindentures governing the Notes) for 20 trading days within the 30 consecutive trading day period ending on June 30, 2010. As a result, during the exchange period commencing July 1, 2010, and continuing through and including September 30, 2010, for each $1,000 principal amount of the Notes held, holders of the Notes could, if they elected, surrender their Notes for exchange. If the Notes were exchanged, the Company would deliver cash equal to the lesser of the aggregate principal amount of Notes to be exchanged and the Company’s total exchange obligation and, in the event the Company’s total exchange obligation exceeded the aggregate principal amount of Notes to be exchanged, shares of the Company’s common stock in respect of that excess. The total exchange obligation reflects the exchange rate whereby each $1,000 in principal amount of the Notes is exchangeable into an equivalent value of approximately 25.97 shares of the Company’s common stock and approximately $60.61 in cash. On September 28, 2010, certain holders of the Notes delivered notice to the exchange agent to exercise their right to exchange $11 million of the principal amount of the Notes. The Cash Settlement Averaging Period (as defined in the indentures governing the Notes) ended on October 27, 2010, and on October 29, 2010 the Company delivered $11 million in cash, which represented the principal amount of the Notes exchanged and the value of partial shares, and 92,855 shares of the Company’s common stock to the exchange agent in settlement of the exchange obligation. Concurrently, the Company retired the $11 million principal amount of the exchanged Notes.

On October 1, 2010, the Notes again became exchangeable at the option of the holders and will remain exchangeable through December 31, 2010, the last trading day of the Company’s fourth quarter, as provided for in the indentures governing the Notes. The Notes became exchangeable as the Company’s common stock closed at or above 130% of the Exchange Price (as defined in the indentures governing the Notes) for 20 trading days within the 30 consecutive trading day period ending on September 30, 2010. As a result, during the exchange period commencing October 1, 2010, and continuing through and including December 31, 2010, for each $1,000 principal amount of the Notes held, holders of the Notes may, if they elect, surrender their Notes for exchange. If the Notes are exchanged, the Company will deliver cash equal to the lesser of the aggregate principal amount of Notes to be exchanged and the Company’s total exchange obligation and, in the event the Company’s total exchange obligation exceeds the aggregate principal amount of Notes to be exchanged, shares of the Company’s common stock in respect of that excess. The total exchange obligation reflects the exchange rate whereby each $1,000 in principal amount of the Notes is exchangeable into an equivalent value of approximately 25.97 shares of the Company’s common stock and approximately $60.61 in cash. The Notes currently have the entire $100 million principal amount outstanding.

The noteholdersholders of the Notes may require the Company to repurchase some or all of the Notes for cash at a repurchase price equal to 100% of the principal amount of the Notes being repurchased, plus any accrued and unpaid interest on December 15, 2010; December 15, 2015; or December 15, 2020, or on any date following a fundamental change as described in the indenture.indentures. The Company may redeem some or all of the Notes for cash at a redemption price of 100% of the principal amount plus any accrued and unpaid interest on or after December 15, 2010, upon at least 35-calendar days notice. The Company intends to redeem the Notes in December 2010, and plans to fund the redemption with available borrowings under its Credit Facility.asset-based revolving credit facility.

The Company distinguishes its financial instruments between permanent equity, temporary equity, and assets and liabilities. The share exchange feature and the embedded put and call options within the Notes are required to be accounted for as equity instruments. The difference between the fair value of the Notes at acquisition date and the fair value of the liability component on that date was $2.1 million, which was assigned to equity, and is fixed until the Notes are settled. The principal amount of the Notes as of JuneSeptember 30, 2010, and December 31, 2009, was $100 million and the net carrying amount of the Notes as of JuneSeptember 30, 2010, and December 31, 2009, was $100.3$100.2 million and $100.7 million, respectively. The unamortized premium on the Notes was $0.3$0.2 million as of JuneSeptember 30, 2010, which will be amortized through December 15, 2010. The unamortized premium on the Notes as of December 31, 2009, was $0.7 million. The if-converted value of the Notes as of JuneSeptember 30, 2010, calculated using the average stock price during the quarter and in accordance with the exchange obligation described above, was $128.2$131.4 million. The net interest expense related to the Notes for the three and sixnine months ended JuneSeptember 30, 2010, was $1.5 million and $3.0$4.5 million, respectively, resulting in an effective interest rate of 6.0%. The net interest expense related to the Notes for the three and sixnine months ended JuneSeptember 30, 2009, was $1.5 million and $3.0$4.5 million, respectively, resulting in an effective interest rate of 6.0%. As of September 30, 2010, the entire $100 million of the principal amount of the Notes was outstanding.

Asset-based revolving credit facility:

On July 11, 2008, in connection with the acquisition of CSK, the Company entered into a credit agreement for a five-year $1.2 billion asset-based revolving credit facility (the “Credit Facility”) arranged by Bank of America, N.A. (“BA”). The Credit Facility is comprised of a five-year $1.075 billion tranche A revolving credit facility (“tranche A revolver”) and a five-year $125 million first-in-last-out revolving credit facility (“FILO tranche”), both of which mature on July 10, 2013. The terms of the Credit Facility grant the Company the right to terminate the FILO tranche upon meeting certain requirements, including no events of default and aggregate projected availability under the Credit Facility. During the third quarter ended September 30, 2010, the Company, upon meeting all requirements to do so, elected to exercise its right to terminate the FILO tranche. As of September 30, 2010, the amount of the borrowing base available under the Credit Facility was $1.072 billion, of which the Company had outstanding borrowings of $325 million. As of December 31, 2009, the amount of the borrowing base available under the credit facility was $1.196 billion, of which the Company had outstanding borrowings of $678.8 million. The available borrowings under the Credit Facility are also reduced by stand-by letters of credit issued by the Company primarily to satisfy the requirements of workers compensation, general liability and other insurance policies. As of September 30, 2010, the Company had stand-by letters of credit outstanding of $72.9 million and the aggregate availability for additional borrowings under the Credit Facility was $673.7 million. As of December 31, 2009, the Company had stand-by letters of credit outstanding in the amount of $72.3 million and the aggregate availability for additional borrowings under the credit facility was $445.2 million. As part of the Credit Facility, the Company has pledged substantially all of its assets as collateral and is subject to an ongoing consolidated leverage ratio covenant, with which the Company complied as of September 30, 2010.

As of September 30, 2010, borrowings under the tranche A revolver bore interest, at the Company’s option, at a rate equal to either a base rate plus 1.25% per annum or LIBOR plus 2.25% per annum, with each rate being subject to adjustment based upon certain excess availability thresholds. The base rate is equal to the higher of the prime lending rate established by BA from time to time or the federal funds effective rate as in effect from time to time plus 0.50%, subject to adjustment based upon remaining available borrowings. Fees related to unused capacity under the Credit Facility are assessed at a rate of 0.50% of the remaining available borrowings under the facility, subject to adjustment based upon remaining unused capacity. In addition, the Company pays letter of credit fees and other administrative fees in respect to the Credit Facility. As of September 30, 2010, all of the Company’s borrowings under its Credit Facility were covered under interest rate swap agreements. As of December 31, 2009, the Company had borrowings of $278.8 million under its Credit Facility, which were not covered under an interest rate swap agreement, with interest rates ranging from 2.50% to 4.50%.

On each of July 24, 2008, October 14, 2008, and January 21, 2010, the Company entered into interest rate swap transactions with Branch Banking and Trust Company (“BBT”), BA, SunTrust Bank (“SunTrust”) and/or Barclays Capital (“Barclays”). The Company entered into these interest rate swap transactions to mitigate the risk associated with its floating interest rate based on 30-day LIBOR on an aggregate of $450 million of its debt that was outstanding under the Credit Facility. The interest rate swap transaction that the Company entered into with BBT on July 24, 2008, for $100 million matured on August 1, 2010, reducing the total notional amount of swapped debt to $350 million as of that date. The interest rate swap transaction that the Company entered into with BBT on October 14, 2008, for $25 million and was scheduled to mature on October 17, 2010, was terminated at the Company’s request on September 16, 2010, reducing the total notional amount of swapped debt to $325 million as of that date (see Note 6). The Company is required to make certain monthly fixed rate payments calculated on the notional amounts, while the applicable counterparty is obligated to make certain monthly floating rate payments to the Company referencing the same notional amount. The interest rate swap transactions effectively fix the annual interest rate payable on these notional amounts of the Company’s debt, which exists under the Credit Facility plus an applicable margin under the terms of the Credit Facility. The interest rate swap transactions have maturity dates ranging from October 17, 2010, through October 17, 2011. The counterparties, transaction dates, effective dates, applicable notional amounts, effective index rates and maturity dates of each of the interest rate swap transactions which existed as of September 30, 2010, are included in the table below:

The interest rate swap transactions that the Company entered into with BBT, BA and SunTrust on October 14, 2008, referenced in the table above, for a total of $75 million matured on October 17, 2010, reducing the total notional amount of swapped debt to $250 million as of that date.

NOTE 5 – EXIT ACTIVITIES

The Company maintains reserves for closed stores and other properties that are no longer utilized in current operations. operations as well as reserves for employee separation liabilities. Reserves for closed stores and other properties include stores and other properties acquired in the CSK acquisition (see Note 2). Employee separation liabilities represent costs for anticipated payments, including payments required under various pre-existing employment arrangements with acquired CSK employees which existed at the time of the acquisition, relating to the planned involuntary termination of employees performing overlapping or duplicative functions.

The Company accrues for closed property operating lease liabilities using a credit-adjusted discount rate to calculate the present value of the remaining noncancelable lease payments, contractual occupancy costs and lease termination fees after the closing date, net of estimated sublease income. The closed property lease liabilities are expected to be paid over the remaining lease terms, which currently extend through April 2023. The Company estimates sublease income and future cash flows based on the Company’s experience and knowledge of the market in which the closed property is located, the Company’s previous efforts to dispose of similar assets and existing economic conditions. Adjustments to closed property reserves are made to reflect changes in estimated sublease income or actual contracted exit costs, which vary from original estimates. Adjustments are made for material changes in estimates in the period in which the changes become known.

The following table is a summary of closure reserves for stores, administrative office and distribution facilities, and reserves for employee separation costs at Juneas of September 30, 2010, and December 31, 2009 (in thousands):

The revisions to estimates in closure reserves for stores and administrative office and distribution facilities included changes in the estimates of sublease agreements, changes in assumptions of various store and office closure activities, and changes in assumed leasing arrangements since the acquisition of CSK. The cumulative amount incurred in closure reserves for stores from the inception of the exit activity through JuneSeptember 30, 2010, was $22.7$23.1 million. The cumulative amount incurred in administrative office and distribution facilities from the inception of the exit activity through JuneSeptember 30, 2010, was $9.3$9.2 million. The balance of both these reserves is included within thein “Other current liabilities” and “Other liabilities” inon the accompanying Condensed Consolidated Balance Sheets.Sheets based upon the dates when the reserves are expected to be settled. The revisions to estimates in the reserves for employee separation liabilities include additional severance and incentive compensation accrued for employees of CSK. The cumulative amount incurred in employee separation liabilities from the inception of the exit activity through JuneSeptember 30, 2010, was $29.4 million, the balance of which is shown within theincluded in “Accrued payroll” inon the accompanying Condensed Consolidated Balance Sheets.

NOTE 6 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Interest Rate Risk Managementrate risk management:

As discussed in Note 4, on each of July 24, 2008, October 14, 2008, and January 21, 2010, the Company entered into interest rate swap transactions with BBT, BA, SunTrust and/or Barclays to mitigate cash flow risk associated with the floating interest rate, based on the one-month LIBOR rate on an aggregate of $450 million of the debt outstanding under its Credit Facility. The interest rate swap transaction that the Company entered into with BBT on July 24, 2008, for $100 million matured on August 1, 2010, reducing the total notional amount of swapped debt to $350 million as of that date. The interest rate swap transaction that the Company entered into with BBT on October 14, 2008, for $25 million and was scheduled to mature on October 17, 2010, was terminated at the Company’s request on September 16, 2010, reducing the total notional amount of swapped debt to $325 million as of that date. The swap transactions have been designated as cash flow hedges with interest payments designed to offset the interest payments for borrowings under the Credit Facility that correspond to notional amounts of the swaps. The fair values of the Company’s outstanding hedges are recorded as a liability inon the accompanying Condensed Consolidated Balance Sheets at JuneSeptember 30, 2010, and December 31, 2009. ChangesFor qualifying cash flow hedges, the effective portion of the change in the fair value areof the derivative instrument is recorded inas a component of “Accumulated other comprehensive loss”, and any changes resulting from ineffectiveness is recognized in earnings in the period of ineffectiveness. The change in the fair value of the $25 million interest rate swap contract, which was terminated by the Company on September 16, 2010, was deemed to be ineffective as of the termination date. The Company recognized $0.1 million in “Interest expense” for the three and nine months ended September 30, 2010, as a result of the hedge transactions would be recorded in current earnings. Theineffectiveness. As of September 30, 2010, the Company’s remaining hedging instruments have been deemed to be highly effective as of June 30, 2010.effective. The fair value oftables below represent the swap transactions at June 30, 2010, was a payable of $8.9 million ($5.5 million net of tax). The fair value of the swap transactions at December 31, 2009, was a payable of $13.1 million ($8.0 million net of tax). The net amount of each is included as a component of “Accumulated other comprehensive loss.”

The table below represents the amount recorded oneffect the Company’s Condensed Consolidated Balance Sheets as being a payable to counterparties at June 30, 2010, and December 31, 2009,derivative financial instruments had on its condensed consolidated financial statements (in thousands):

NOTE 7 – FAIR VALUE MEASUREMENTS

The Company uses the fair value hierarchy, which prioritizes the inputs used to measure the fair value of certain of its financial instruments. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The Company uses the income and market approaches to determine the fair value of its assets and liabilities. The three levels of the fair value hierarchy are set forth below:

6 ³/4% Exchangeable Senior Notes:

The carrying amount of the Company’s 6 ³/4% Exchangeable Senior Notes is included in “Current portion of long-term debt” on the accompanying Condensed Consolidated Balance Sheets. The estimated fair values of the Company’s 6 ³/4% Exchangeable Senior Notes, which are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value from the perspective of adetermined by reference to quoted market participant.

Assets and liabilities measured at fair valueprices (Level 1), are based on one or more of three valuation techniques. The three valuation techniques are identifiedincluded in the table below and are as follows:(in thousands):

Interest rate swap contracts:

The fair values of the Company’s outstanding interest rate swap contracts are included in “Other current liabilities” and “Other liabilities” on the accompanying Condensed Consolidated Balance Sheets. The fair value of the interest rate swap transactionscontracts are based on the discounted net present value of the swap using third party quotes (Level 2). Changes in fair market value are recorded in other comprehensive income (loss), and changes resulting from ineffectiveness are recorded in current earnings. Assets and liabilities measured atThe fair value on a recurring basis areof the Company’s interest rate contracts is included in the tabletables below (in thousands):

Asset-based revolving credit facility:

The estimated fair values of the Company’s financial instruments, which are determined by reference to quoted market prices, where available, or are based on comparisons to similar instruments of comparable maturities (Level 1), are included in the table below (in thousands):

The Company has determined that the estimated fair value of its asset-based revolving credit facility approximates the carrying amount of $477.3$325 million and $678.8 million at JuneSeptember 30, 2010, and December 31, 2009, respectively.respectively, which are included in “Long-term debt, less current portion” on the accompanying Condensed Consolidated Balance Sheets. These valuations were determined by consulting investment bankers, the Company’s observations of the value tendered by counterparties moving into and out of the facility and an analysis of the changes in credit spreads for comparable companies in the industry (Level 2).

NOTE 8 – ACCUMULATED OTHER COMPREHENSIVE LOSS

Unrealized losses from interest rate swapsswap contracts that qualify as cash flow hedges are included in “Accumulated other comprehensive loss.”loss” on the accompanying Condensed Consolidated Balance Sheets. The adjustment to “Accumulated other comprehensive loss” for the three months ended JuneSeptember 30, 2010, totaled $2.6$2.2 million with a corresponding tax liability of $1.0$0.8 million resulting in a net of tax effect of $1.6$1.4 million. The adjustment to “Accumulated other comprehensive loss” for the sixnine months ended JuneSeptember 30, 2010, totaled $4.1$6.4 million with a corresponding tax liability of $1.6$2.5 million resulting in a net of tax effect of $2.5$3.9 million.

During the three months ended September 30, 2010, $0.1 million was reclassified from “Accumulated other comprehensive loss” into earnings due to the ineffectiveness of an interest rate swap contract which was terminated on September 16, 2010 (see Note 6). Changes in “Accumulated other comprehensive loss” for the sixnine months ended JuneSeptember 30, 2010, consisted of the following (in thousands):

Comprehensive income for the three and sixnine months ended JuneSeptember 30, 2010, was $101.2$117.9 million and $199.6$317.5 million, respectively. Comprehensive income for the three and sixnine months ended JuneSeptember 30, 2009, was $87.3$89.4 million and $150.2$237.7 million, respectively.

NOTE 9 – SHARE-BASED EMPLOYEE COMPENSATION PLANS AND OTHER BENEFIT PLANS

The Company recognizes share-based compensation expense based on the fair value of the awards at the time of the grant. Share-based payments include stock option awards issued under the Company’s employee stock option plan, director stock option plan, stock issued through the Company’s employee stock purchase plan and stock awarded to employees through other benefit programs.

Stock Optionsoptions:

The Company’s employee stock-based incentive plan provides for the granting of stock options for the purchase of common stock of the Company to directors and certain key employees of the Company. Options are granted at an exercise price that is equal to the market value of the Company’s common stock on the date of the grant. Director options granted under the plan expire after seven years and are fully vested after six months. Employee options granted under the plan expire after ten years and typically vest 25% a year over four years. The Company records compensation expense for the grant date fair value of option awards evenly over the vesting period under the straight-line method. The following table summarizes the stock option activity during the first sixnine months of 2010:

The Company recognized stock option compensation costs of approximately $3.8 million and $7.5$11.3 million for the three and sixnine months ended JuneSeptember 30, 2010, respectively, and recognized a corresponding income tax benefit of approximately $1.5 million and $2.9$4.3 million for the three and sixnine months ended JuneSeptember 30, 2010, respectively. The Company recognized stock option compensation costs of approximately $3.6$3.3 million and $6.9$10.2 million for the three and sixnine months ended JuneSeptember 30, 2009, respectively, and recognized a corresponding income tax benefit of approximately $1.4$1.3 million and $2.7$4.0 million for the three and sixnine months ended JuneSeptember 30, 2009, respectively.

The fair value of each stock option grant is estimated on the date of the grant using the Black-Scholes option pricing model. The Black-Scholes model requires the use of assumptions, including expected volatility, expected life, the risk free rate and the expected dividend yield. Expected volatility is based upon the historical volatility of the Company’s stock. Expected life represents the period of time that options granted are expected to be outstanding. The Company uses historical data and experience to estimate the expected life of options granted. The risk free interest rate for periods within the contractual life of the options is based on the United States Treasury rates in effect at the time the options are granted for the options’ expected life.

The following weighted-average assumptions were used for grants issued in the sixnine months ended JuneSeptember 30, 2010 and 2009:

The weighted-average grant-date fair value of options granted during the first sixnine months of 2010 was $13.25$13.58 compared to a weighted-average grant-date fair value of $10.39$10.92 for the first sixnine months of 2009. The remaining unrecognized compensation cost related to unvested awards at JuneSeptember 30, 2010, was $36.7$36.9 million, and the weighted-average period of time over which this cost will be recognized is 2.6 years.

Other Employee Benefit Plansemployee benefit plans:

The Company sponsors other share-based employee benefit plans including a contributory profit sharing and savings plan that covers substantially all employees, an employee stock purchase plan which permits all eligible employees to purchase shares of the Company’s common stock at 85% of the fair market value and a performance incentive plan under which the Company’s senior management is awarded shares of restricted stock that vest equally over a three-year period. Compensation expense recognized under these plans is measured based on the market price of the Company’s common stock on the date of award and is recorded over the vesting period. During the three and sixnine months ended JuneSeptember 30, 2010, the Company recorded approximately $0.5 million and $1.0$1.5 million of compensation cost for benefits provided under these plans and a corresponding income tax benefit of approximately $0.2 million and $0.4$0.6 million, respectively. During the three and sixnine months ended JuneSeptember 30, 2009, the Company recorded approximately $2.7 million and $4.8$7.6 million of compensation cost for benefits provided under these plans and a corresponding income tax benefit of approximately $1.0$1.1 million and $1.9$3.0 million, respectively.

NOTE 10 – INCOME PER COMMON SHARE

The following table sets forth the computation of basic and diluted income per common share for the three and sixnine months ended JuneSeptember 30, (in thousands, except per share data):

The incremental

Incremental net shares for the exchange feature of the Notes, (see Note 4), were included in the diluted earnings per share calculation for the three and nine months ended September 30, 2010, and for the three months ended September 30, 2009; however, the incremental net shares for the exchange feature of the Notes were not included in the diluted earnings per share calculation for the sixnine months ended JuneSeptember 30, 2009, as the impact of the Notes would have been antidilutive.

For the three and sixnine months ended JuneSeptember 30, 2010, the Company did not include in the computation of diluted earnings per share approximately 1.11.0 million and 1.5 million shares, respectively. For the three and sixnine months ended JuneSeptember 30, 2009, the Company did not include in the computation of diluted earnings per share approximately 1.20.1 million and 4.21.6 million shares, respectively. These shares represent underlying stock options not included in the computation of diluted earnings per share because inclusion of such shares would have been antidilutive.

NOTE 11 – LEGAL MATTERS

O’Reilly LitigationLitigation:

O’Reilly is currently involved in litigation incidental to the ordinary conduct of the Company’s business. Although the Company cannot ascertain the amount of liability that it may incur from any of these matters, it does not currently believe that, in the aggregate, these matters, taking into account applicable insurance and reserves, will have a material adverse effect on its consolidated financial position, results of operations or cash flows in a particular quarter or annual period. In addition, O’Reilly is involved in resolving the governmental investigations that were being conducted against CSK and CSK’s former officers prior to its acquisition by O’Reilly Automotive, Inc. as described below.

CSK Pre-Acquisition Matters – Governmental Investigations and ActionsActions:

As previously reported, the pre-acquisition Securities and Exchange Commission (“SEC”) investigation of CSK, which commenced in 2006, was settled in May 2009 by administrative order without fines, disgorgement or other financial remedies. The Department of Justice (“DOJ”)’s criminal investigation into these same matters as previously disclosed remains ongoing.is near a conclusion and is described more fully below. In addition, the previously reported SEC complaint against three (3) former employees of CSK for alleged conduct related to CSK’s historical accounting practices remains ongoing. The action filed by the SEC on July 22, 2009, against Maynard L. Jenkins, the former chief executive officer of CSK seeking reimbursement from Mr. Jenkins of certain bonuses and stock sale profits pursuant to Section 304 of the Sarbanes-Oxley Act of 2002, as previously reported, also continues. The previously reported DOJ criminal complaint against Don Watson, the former Chief Financial Officer of CSK, remains ongoing.ongoing with trial set to commence on or about June 5, 2011.

With respect to the ongoing DOJ investigation into CSK’s pre-acquisition accounting practices as referenced above, as previously disclosed, attorneys from the DOJ have indicated that as a result of conduct alleged against the former employees, as set forth in the pleadings in United States vs. Fraser, et. al., U.S.Dist.Ct., Dist.U.S. District Court, District of Ariz.;Arizona; Case No: 2:09-cr-00372-SRB, the DOJ believes that criminal charges against CSK are appropriate. O’Reilly continueshas continued to cooperate with and engage in ongoing discussions with the DOJ, as previously disclosed, to attempt to resolve the pre-acquisition accounting issues related to CSK arising from the conduct of its former employees as referenced above. O’Reilly cannot predictand the ultimate outcomeDOJ have now agreed in principle, subject to final documentation, to resolve the DOJ investigation of these discussions at this time. O’Reilly believes that absent an agreed upon resolution, criminal charges against CSK are probable. If charged, O’Reilly intends to vigorously defend against any such charges.CSK’s legacy pre-acquisition accounting practices. Based upon the current status of discussions,agreement in principle for a final settlement, O’Reilly has recorded aan additional charge of $15$5.9 million in the secondthird quarter of 2010 to increase its accrual for the expected costs to resolve the investigationin anticipation of CSK, including potential settlement related payments to the DOJ, CSK and associated legal costs. However, there can be no assurance that the discussions with the DOJ will result inO’Reilly executing a resolutionNon-Prosecution Agreement and paying a one-time monetary penalty of these matters within the amount currently accrued by O’Reilly.$20.9 million dollars. The Company’s total reserve related to the DOJ investigation of CSK was $16.5$21.4 million as of JuneSeptember 30, 2010. O’Reilly paid approximately $0.8 million of legal costs related2010, which relates to the amount of the monetary penalty and associated legal costs.

Notwithstanding the agreement in principle with the DOJ, investigation of CSK in the second quarter of 2010.

Severalseveral of CSK’s former directors or officers and current or former employees have been or may be interviewed or deposed as part of or become the subject of criminal, administrative and civil investigations and lawsuits. As described above, certain former employees of CSK are the subject of civil and criminal litigation commenced by the government. Under Delaware law, the charter documents of the CSK entities and certain indemnification agreements, CSK has certain obligations to indemnify these persons and O’Reilly is currently incurring legal fees on the behalf of these persons in relation to pending matters. Some of these indemnification obligations and other related costs may not be covered by CSK’s insurance policies.

As a result of the CSK acquisition, O’Reilly expects to continue to incur ongoing legal fees related to the indemnity obligations related to the litigation that has commenced by the DOJ and SEC of CSK’s former employees. O’Reilly has a remaining reserve, with respect to such indemnification obligations, of $17.8$18.8 million as of JuneSeptember 30, 2010, which was primarily recorded as an assumed liability in the Company’s allocation of the purchase price of CSK. O’Reilly paid approximately $1.8 million of legal costs related to the indemnity obligations in the second quarter of 2010.

The foregoing governmental investigations and indemnification matters are subject to many uncertainties, and, given their complexity and scope, their final outcome cannot be predicted at this time. It is possible that in a particular quarter or annual period the Company’s results of operations and cash flowflows could be materially affected by an ultimate unfavorable resolution of such matters, depending, in part, upon the results of operations or cash flowflows for such period. However, at this time, management believes that the ultimate outcome of all of such regulatory proceedings and other matters that are pending, after consideration of applicable reserves and potentially available insurance coverage benefits not contemplated in recorded reserves, should not have a material adverse effect on the Company’s consolidated financial condition, results of operations and cash flows.

NOTE 12 – RECENT ACCOUNTING PRONOUNCEMENTS

With the exception of any pronouncements stated below, there have been no recent accounting pronouncements or changes in accounting pronouncements since those discussed in our Annual Report on Form 10-K for the year ended December 31, 2009, that are of material significance, or have potential material significance, to the Company.

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2010-06,Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements(“ASU 2010-06”). ASU 2010-06 amends Subtopic 820-10, requiring additional disclosures regarding fair value measurements such as transfers in and out of Levels 1 and 2, as well as separate disclosures about activity relating to Level 3 measurements. ASU 2010-06 clarifies existing disclosure requirements related to the level of disaggregation and input valuation techniques. The updated guidance is effective for interim and annual periods beginning after December 15, 2009, with the exception of the new Level 3 activity disclosures, which are effective for interim and annual periods beginning after December 15, 2010. The adoptionapplication of the newthis guidance affects disclosures only and therefore, did not have a materialan impact on the Company’s consolidated financial position, results of operations or cash flows. The adoption of the new Level 3 guidance is required in 2011 and is not expected to have a material impact on the Company’s consolidated financial position,condition, results of operations or cash flows.

In May 2009, the FASB issued FASB ASCAccounting Standards Codification 855, Subsequent Events (SFAS No. 165)(“ASC 855”), which provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. FASB ASC 855 is effective for interim or fiscal periods ending after June 15, 2009. The Company adopted the provisions of ASC 855 beginning with its condensed consolidated financial statements for the quarter ended June 30, 2009. On February 24, 2010, the FASB issued Accounting Standards Update (“ASU”) numberNo 2010-09 (“ASU 2010-09”), Amendments to Certain Recognition and Disclosure Requirements (“ASU 2010-09”), which was effective immediately. The ASU amended FASB ASC 855, to address certain implementation issues related to an entity’s requirement to perform and disclose subsequent events procedures. The amendments that are specifically relevant include the requirement that SEC filers evaluate subsequent events through the date the financial statements are issued, and the exemption of SEC filers from disclosing the date through which subsequent events have been evaluated. The Company adopted the provisions of ASU 2010-09 beginning with its condensed consolidated financial statements for the quarter ended March, 31, 2010. The adoption of ASC 855 and ASU 2010-09 did not have a material impact on the Company’s financial position, results of operations or cash flows.

Unless otherwise indicated, “we,” “us,” “our” and similar terms, as well as references to the “Company” or “O’Reilly” refer to O’Reilly Automotive, Inc. and its subsidiaries.

In Management’s Discussion and Analysis, we provide a historical and prospective narrative of our general financial condition, results of operations, liquidity and certain other factors that may affect our future results, which include the topics bulleted below:

The review of Management’s Discussion and Analysis should be made in conjunction with our consolidated financial statements, related notes and other financial information included elsewhere in this quarterly report.

FORWARD-LOOKING STATEMENTS

We claim the protection of the safe-harbor for forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. You can identify these statements by forward-looking words such as “expect,” “believe,” “anticipate,” “should,” “plan,” “intend,” “estimate,” “project,” “will” or similar words. In addition, statements contained within this quarterly report that are not historical facts are forward-looking statements, such as statements discussing among other things, expected growth, store development, CSK Auto Corporation (“CSK”) Department of Justice (“DOJ”) investigation resolution, integration and expansion strategy, business strategies, future revenues and future performance. These forward-looking statements are based on estimates, projections, beliefs and assumptions and are not guarantees of future events and results. Such statements are subject to risks, uncertainties and assumptions, including, but not limited to, competition, product demand, the market for auto parts, the economy in general, inflation, consumer debt levels, governmental approvals, our ability to hire and retain qualified employees, risks associated with the integration of acquired businesses including the acquisition and integration of CSK, weather, terrorist activities, war and the threat of war. Actual results may materially differ from anticipated results described or implied in these forward-looking statements. Please refer to the “Risk Factors” section of our annual report on Form 10-K for the year ended December 31, 2009, for additional factors that could materially affect our financial performance.

OVERVIEW

We are one of the largest specialty retailers of automotive aftermarket parts, tools, supplies, equipment and accessories in the United States, selling our products to both do-it-yourself (“DIY”) customers and professional installers. At JuneSeptember 30, 2010, we operated 3,4923,536 stores in 38 states. The table below depicts our store activity from December 31, 2009, through JuneSeptember 30, 2010:

Our stores carry an extensive product line, including the products bulleted below:

Many of our stores offer enhanced services and programs to our customers, including those bulleted below:

Our strategy continues to be the opening of new stores to achieve greater penetration in existing markets and expansion into new, contiguous markets. We plan to open approximately 150 new stores in 2010.2010, and approximately 170 new stores in 2011. We typically open new stores either by (i) constructing a new store at a site we purchase or lease and stocking the new store with fixtures and inventory, (ii) acquiring an independently owned auto parts store, typically by the purchase of substantially all of the inventory and other assets (other than realty) of such store, or (iii) purchasing multi-store chains. We believe that our dual market strategy of targeting both the do-it-yourself retail customer and commercial installer positions the companyCompany extremely well to take advantage of growth in the automotive aftermarket business. We believe our investment in store growth will be funded with the cash flows generated by our existing operations.

We believe that the number of U.S. miles driven, new light vehicle sales, number of U.S. registered vehicles, average vehicle age, new light vehicle sales, unperformed maintenance and product quality differentiation are key drivers of current and future demand of products sold within the automotive aftermarket.

Number of miles driven:

Total miles driven in the U.S., along with changes in the average age of vehicles on the road, heavily influence the demand for the repair and maintenance products we sell. Historically, the long-term trend in the total miles driven in the U.S. has steadily increased. According to the Department of Transportation, between 1999 and 2007, the total number of miles driven in the U.S. increased at an average annual rate of approximately 1.6%. In 2008, however, difficult macroeconomic conditions and record high gas prices during the first half of the year leadled to a decrease in the number of miles driven and in 2009, miles driven remained relatively flat. During the first fiveeight months of 2010, miles driven declined slightly, which wein the United States increased by 0.4%. We believe wasthis slight increase is a result of increasing gas prices and difficult winter weather conditions at the startstabilization of the year. Aseconomy, unemployment and gas prices. Miles driven in the U.S. has increased each month since March and, as the U.S. economy recovers, we believe that annual miles driven will return to historical growth rates and continue to increase the demand for our products.

New light vehicle sales:

Along withAs a result of the flat to slight decreasedifficult macroeconomic environment in the number of miles driven sinceU.S., beginning in 2008 the number of light vehicle purchases has also declined.declined sharply. The Automotive Aftermarket Industry Association (“AAIA”) estimates that new car sales in the U.S. decreased 4.7% between 1999 and 2007 for the light vehicle market; however, sales for the same market decreased by 18.5% in 2008 and 21.2% in 2009, due to the difficult macroeconomic conditions during these periods.2009. We believe that consumers will continue to defer the purchase of new vehicles and choose to keep their vehicles longer and drive them at higher miles, continuing the trend of an aging vehicle population.

Average vehicle age of registered vehicles:

As reported by the AAIA, the average age of the U.S. vehicle population has increased over the past decade from 9.1 years for passenger cars and 8.5 years for light trucks in 1999 to 10.6 and 9.6 years in 2009, respectively. We believe this increase in average age can be attributed to better engineered and built vehicles, which can be reliably driven at higher miles due to better quality power trains, and interiors and exteriors, the decrease in new car sales over the past two years and the consumers’ willingness to invest in maintaining their higher-mileage, better built vehicles. As the average age of the vehicle on the road increases, a larger percentage of miles are being driven by vehicles which are outside of manufacturemanufacturer warranty. These out-of-warranty, older vehicles generate strong demand for our products as they go through more routine maintenance cycles, have more frequent mechanical failures which require replacement parts such as brakes, belts, hoses, batteries and filters and generally require more maintenance thenthan newer vehicles would require.

Unperformed maintenance:

According to estimates compiled by the Automotive Aftermarket Suppliers Association, the annual amount of unperformed or underperformed maintenance in the U.S. totaled $50 billion for 2008. This metric represents the degree to which routine vehicle maintenance recommended by the manufacturer is not being performed. Consumer decisions to avoid or defer maintenance affect demand for our products and the total amount of unperformed maintenance represents potential future demand. We believe that challenging macroeconomic conditions in 2008, continuing into 2009 and 2010, contributed to the amount of unperformed maintenance; however, with the reduced number of new car sales, we believe the amount of underperformed maintenance is decreasing as people place a higher focus on maintaining their current vehicle, with the expectation of keeping the vehicle longer than they would have in a better macroeconomic environment.

Product quality differentiation:

We provide our customers with an assortment of products that are differentiated by quality and price for most of the product lines we offer. For many of our product offerings, this quality differentiation reflects “good”, “better”, and “best” alternatives. Our sales and total gross margin dollars are highest for the “best” quality category of products. Consumers’ willingness to select products at a higher point on the value spectrum is a driver of sales and profitability in our industry. We believe that the average consumer’s tendency has been to “trade-down” to lower quality products during the recent challenging macroeconomic conditions. We have ongoing initiatives targeted to marketing higher quality products to our customers and expect our customers to be more willing to return to purchasing up on the value spectrum in the future as the U.S. economy recovers.