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SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

|(Mark One)                                                   |                                                                                         
|------------------------------------------------------------ | ----------------------------------------------------------------------------------------
|ý                                                            | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934    
|For the fiscal year ended January 30, 2003                  
|o                                                            | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period
from                            to

Commission file number 1-8978

LONGS DRUG STORES CORPORATION(Exact name of registrant as specified in its charter)

|Maryland(State or other jurisdiction of
incorporation or organization)                 |  | 68-0048627(I.R.S. Employer
Identification No.)
|-------------------------------------------------------------------------------------- |  | ----------------------------------------------
|141 North Civic Drive
Walnut Creek, California(Address of principal executive offices) |  | 94596(Zip Code)                               

Registrant's
telephone number, including area code:(925) 937-1170

Securities
registered pursuant to Section 12(b) of the Act:

|Title of Each Class |  | Name of Each Exchange on which Registered
|------------------- |  | -----------------------------------------
|Common stock        |  | New York Stock Exchange                  

Securities
registered pursuant to Section 12(g) of the Act:None

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Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes    ý        No    o

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.    o

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

The
aggregate market value of voting stock held by non-affiliates of the registrant as computed by the price of the registrant's shares on the New York Stock Exchange at the
close of business on August 1, 2002 was approximately $900,770,000.

There
were 37,309,425 shares of common stock outstanding as of April 8, 2003.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III of this Annual Report on Form 10-K, to the extent not set forth herein, is incorporated by
reference from specified portions of our definitive Proxy Statement for our 2003 Annual Meeting of Stockholders.

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This annual report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act. Such statements relate to, among other things, pharmacy and front-end sales trends, promotional activities, prescription margins, margin improvement, cost
reductions, changes in supply chain practices, inflation rates, workers compensation costs, the number of store openings and the level of capital expenditures, and are indicated by words or phrases
such as "continuing," "expects," "estimates," "believes," "plans," "anticipates," "approximately," "will" and other similar words or phrases. These statements are based on our current plans and
expectations and involve risks and uncertainties that could cause actual events and results to vary materially from those included in or contemplated by such statements. These risks and uncertainties
include, but are not limited to: changes in economic conditions generally or in the markets we serve; consumer preferences and spending patterns; continuing softness in the economy; competition from
other drugstore chains, supermarkets, on-line retailers, other retailers and mail order companies; changes in state or federal legislation or regulations; the efforts of third-party payers
to reduce prescription drug costs; the success of planned advertising and merchandising strategies; the availability and cost of real estate for, and construction of, new stores; accounting policies
and practices; our ability to hire and retain pharmacists and other store and management personnel; our relationships with our suppliers; our ability to improve our purchasing of front-end
products; our ability to successfully implement new computer systems and technology; our ability to obtain adequate insurance coverage; the impact of rising energy costs on our operations; changes in
internal business processes associated with supply chain and other initiatives; adverse determinations with respect to litigation or other claims; the effects of war and terrorism on economic
conditions and consumer spending patterns; and other factors discussed in this annual report under "Risk Factors" and elsewhere or in any of our other SEC filings. We assume no obligation to update
our forward-looking statements to reflect subsequent events or circumstances.

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Table of Contents

|PART I                                                                |         |    |                                                                                       | 
|--------------------------------------------------------------------- | ------- | -- | ------------------------------------------------------------------------------------- | 
|                                                                      | Item 1  |    | Business                                                                              | 
|                                                                      | Item 2  |    | Properties                                                                            | 
|                                                                      | Item 3  |    | Legal Proceedings                                                                     | 
|                                                                      | Item 4  |    | Submission of Matters to a Vote of Stockholders                                       | 
|PART II                                                               |         |    |                                                                                       | 
|                                                                      | Item 5  |    | Market for the Registrant's Common Equity and Related Stockholder Matters             | 
|                                                                      | Item 6  |    | Selected Financial Data                                                               | 
|                                                                      | Item 7  |    | Management's Discussion and Analysis of Financial Condition and Results of Operations | 
|                                                                      | Item 7a |    | Quantitative and Qualitative Disclosures of Market Risk                               | 
|                                                                      | Item 8  |    | Financial Statements and Supplementary Data                                           | 
|                                                                      |         |    | Independent Auditors' Report                                                          | 
|                                                                      | Item 9  |    | Changes in and Disagreements with Accountants on Accounting and Financial Disclosures | 
|PART III                                                              |         |    |                                                                                       | 
|                                                                      | Item 10 |    | Directors and Executive Officers of the Registrant                                    | 
|                                                                      | Item 11 |    | Executive Compensation.                                                               | 
|                                                                      | Item 12 |    | Security Ownership of Certain Beneficial Owners and Management                        | 
|                                                                      | Item 13 |    | Certain Relationships and Related Transactions                                        | 
|                                                                      | Item 14 |    | Controls and Procedures                                                               | 
|                                                                      | Item 15 |    | Principal Accountant Fees and Services                                                | 
|PART IV                                                               |         |    |                                                                                       | 
|                                                                      | Item 16 |    | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                      | 
|Signatures                                                            |         | 51
|Certifications of Chief Executive Officer and Chief Financial Officer |         | 53

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PART I

Item 1.Business

Longs Drug Stores Corporation was founded in 1938 in Oakland, California. We operate in two business segments, retail drug stores and, through our RxAmerica
subsidiary, pharmacy benefit management, or PBM. For financial information about these segments, see "Segment Information" in the accompanying notes to our consolidated financial statements.

Through
our retail drug store segment, we operate one of the largest drug store chains in North America, with 455 stores in California, Colorado, Hawaii, Nevada, Washington and Oregon as
of January 30, 2003. The majority of our stores and sales are concentrated in California. In addition to prescription drugs, our core merchandise categories include
over-the-counter medications, health care products, photo and photo processing, cosmetics, greeting cards, food and beverage items, housewares, toiletries, mail centers and
seasonal merchandise.

Our
PBM segment provides a range of services, including plan design and implementation, formulary management, claims processing and generic substitution, to third-party health plans and
other organizations.

Recent developments

In February 2001, we formed a joint venture with AmerisourceBergen to establish an automated central prescription fill center to increase productivity and
reduce prescription fill costs while addressing an industry-wide shortage of pharmacists. Certain of the prescriptions that we receive via phone, fax and the Internet are routed to the
central prescription fill center and then delivered to the stores in advance of the scheduled pickup. The fill center allows our in-store pharmacy personnel to spend more time serving
customers and filling prescriptions that are needed on an immediate basis. The center began filling prescriptions in June 2001, and is currently filling more than 50,000 prescriptions per week.

In
July 2001, we terminated our agreement with our third-party distribution center operator in California, and subsequently returned to self-operation of our
distribution centers.

In
September 2001, we exercised an option to purchase the interest of Albertson's, Inc. in our PBM joint venture, RxAmerica.

In
February 2002, the board of directors approved a program for upgrading our supply chain practices in an effort to increase efficiency and enhance profitability, along with
initiatives to increase front-end sales and pharmacy margins, enhance customer service and improve operational efficiencies.

In
October 2002, the board of directors selected Warren F. Bryant as our president and chief executive officer.

In
February 2003, we announced a series of steps designed to reduce operating and administrative expenses. These steps include a reduction of our administrative workforce by
approximately 170 people in our California offices, the closure of certain support facilities, store labor savings through workflow and staffing changes and a restructuring of our incentive
compensation arrangements.

In
March 2003, our board of directors authorized the repurchase of up to 2,000,000 shares of our common stock through January 2008, for a maximum total expenditure of
$50 million.

Merchandising

We strive to provide our customers with a broad range of name brand and private label merchandise. To enhance customer service and build customer loyalty, we
attempt to maintain a consistent in-stock position in all of our merchandise categories.

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Purchasing and Distribution

We have historically had a decentralized approach to purchasing, with store managers exerting significant control over their product mix based on their customers'
preferences and needs. As we upgrade our supply chain practices in order to achieve greater efficiencies and economies of scale, we have begun to transition to a more centralized purchasing approach
for many of our products, while allowing store managers to retain some degree of input into the merchandise selection of their store in order to suit their customers' preferences.

Advertising

We advertise primarily through promotional ads in major daily newspapers and on radio and television. Our approach is to regionalize our advertising and use the
most efficient media mix within a geographic area. We use rebates and allowances received from vendors to fund a significant portion of our total advertising spending.

Internet

In fiscal 2001, we introduced our Internet prescription refill business, Longs e-fills. Through our website, www.longs.com, our customers
can access our company information and extensive health and welfare information, refill prescriptions and purchase certain over-the-counter medications 24 hours a day,
7 days a week. Customers may have items mailed to them or may pick them up at their local store. We believe that this sales channel provides customers with added flexibility and further
improves their Longs shopping experience.

Technology

All of our stores have point-of-sale scanning systems and pharmacy systems that facilitate prescription fills, drug interaction analysis
and third-party adjudication. We also utilize computer-assisted ordering and replenishment systems for certain goods that track sales and merchandise on hand and plan orders as necessary.

Trademarks

We hold various trademarks, trade names (including Longs, Longs Drugs, Longs Drug Stores, Longs Pharmacy, Longs Express, Longs e-fills and RxAmerica)
and business licenses that are essential to the
operation of our business. These trademarks and licenses have varying statutory lives and are generally renewable indefinitely.

Employees

As of January 30, 2003, we had approximately 22,200 full-time and part-time employees. We hire additional temporary employees as
needed, especially during peak seasons. Virtually all of our employees are non-union, and we believe that our relationship with our employees is good.

Regulation

Our pharmacies and pharmacists must be licensed by the appropriate state boards of pharmacy. Our pharmacies, distribution centers and central fill centers are
also registered with the Federal Drug Enforcement Administration. Applicable licensing and registration requirements require our compliance with various state statutes, rules and regulations. If we
were to violate any applicable statute, rule or regulation, our licenses and registrations could be suspended or revoked.

In
recent years, an increasing number of legislative proposals have been introduced or proposed in Congress and in some state legislatures that would effect major changes in the
healthcare system, either

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nationally or at the state level. The legislative initiatives include prescription drug benefit proposals for Medicare participants. Also, in recent years, both federal and state authorities have
proposed or passed new legislation that imposes on healthcare providers, including pharmacies, significant additional obligations concerning the protection of confidential patient medical records and
information. Although we believe we are well positioned to respond to these developments, we cannot predict the outcome or effect of legislation resulting from these reform efforts.

Competition

The retail drug store industry is highly competitive. We compete with regional and national drug store chains, independent drug stores, Internet and mail order
prescription providers, supermarkets, variety stores and mass merchandise discount stores. We compete on the basis of price, merchandise quality, product mix, convenience and customer service.

Within
the pharmacy benefit management (PBM) industry, we compete with regional and national PBMs and mail order pharmacies, some of which are owned by our competitors in the
retail drug store
industry. We compete on the basis of our ability to reduce prescription drug benefit plan costs for our customers, and the quality and scope of services we offer.

Concentrations

All of our sales occur within the United States. We do not derive revenues from sales in foreign countries or export sales. No single customer accounts for 10% or
more of our total sales. The loss of any one customer or group of customers under common control would not have a material effect on our business.

We
obtain approximately half of our total merchandise, including over 90% of our pharmaceuticals, from a single supplier, AmerisourceBergen, with whom we have a long-term
supply contract. Any significant disruptions in our relationship with AmerisourceBergen could have a material adverse effect on us.

Our
stores, distribution centers and corporate offices are located in the western United States, with the majority of our stores and sales concentrated in California. Risks prevalent in
this region include, but are not limited to, major earthquakes, periodic energy shortages and rising energy costs, and shipping and other transportation-related disruptions. For example, the recent
work stoppage at West Coast ports caused us to purchase inventory for the holiday season before we otherwise would have done so. Because of our geographic concentration, these risks could result in
significant disruptions to our business or increased operating expenses.

Seasonality

Our business is seasonal, peaking in the fourth quarter when front-end sales benefit from the holiday season. Pharmacy sales and
over-the-counter medications also benefit from the winter cold and flu season.

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Item 2.Properties

Stores

|                                    |  | Fiscal |  
|----------------------------------- |  | ------ | -
|
|Number of stores, beginning of year |  | 436    |  
|Stores opened                       |  | 25     |  
|Stores closed                       |  | (6     | )
|                                    |  |        |  
|Number of stores, end of year       |  | 455    |  
|                                    |  |        |  

As
of January 30, 2003, we operated 455 stores: 380 in California, 32 in Hawaii, 17 in Washington, 15 in Nevada, 9 in Colorado and 2 in Oregon. Our stores vary in size, with the
majority ranging from 15,000 to 30,000 square feet, approximately 70% of which is devoted to selling space. The average size of the stores we opened in fiscal 2003 is 18,879 square feet. We lease 264
of our stores from third parties. Of the remaining stores, 138 are company-owned buildings on company-owned land, and 53 are company-owned buildings on leased land.

Distribution Centers

We operate the following distribution centers:

|Location                                         |  | Leased/Owned |  | Square Feet
|------------------------------------------------ |  | ------------ |  | -----------
|Lathrop, California (front-end merchandise)      |  | Owned        |  | 427,000    
|Ontario, California (front-end merchandise)      |  | Owned        |  | 353,000    
|Ontario, California (pharmaceutical inventories) |  | Leased       |  | 36,000     
|Honolulu, Hawaii (front-end merchandise)         |  | Owned        |  | 48,000     

Store
deliveries take place on a daily basis through a combination of company-owned trucks and common carriers.

Other Properties

We have two principal company-owned corporate office facilities in California, with a total of 142,000 square feet, and we lease an additional 80,000 square feet
of office space, also in California. We also lease a 20,000 square foot corporate office building for our PBM segment in Salt Lake City, Utah. Our remaining properties are not material, either
individually or in the aggregate.

Item 3.Legal Proceedings

We are subject to various lawsuits and claims arising in the normal course of our businesses. In the opinion of management, after consultation with counsel, the
disposition of these matters is not likely to have a material adverse effect, individually or in the aggregate, on our financial position or results of operations.

Item 4.Submission of Matters to a Vote of Stockholders

There were no matters submitted to a vote of stockholders during the fourth quarter of fiscal 2003.

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PART II

Item 5.Market for the Registrant's Common Equity and Related Stockholder Matters

The New York Stock Exchange is the principal market for our common stock, which is traded under the symbol "LDG." Our transfer agent is Wells Fargo Shareowner
Services, P.O. Box 64854, St. Paul, MN 55164-0854. There were approximately 19,209 stockholders of record as of April 8, 2003.

Quarterly
high and low stock prices, based on the New York Stock Exchange composite transactions, are shown below:

|            |  | First Quarter |       | Second Quarter |   | Third Quarter |  | Fourth Quarter |       | Fiscal Year
|----------- |  | ------------- | ----- | -------------- | - | ------------- |  | -------------- | ----- | -----------
|
|Fiscal 2003 |  | $             | 22.00 |                | $ | 31.57         |  | $              | 21.86 |            
|Fiscal 2002 |  | $             | 23.50 |                | $ | 31.81         |  | $              | 20.40 |            

Quarterly
dividends per share are summarized as follows:

|            |  | First Quarter |      | Second Quarter |   | Third Quarter |  | Fourth Quarter |      | Fiscal Year
|----------- |  | ------------- | ---- | -------------- | - | ------------- |  | -------------- | ---- | -----------
|Fiscal 2003 |  | $             | 0.14 |                | $ | 0.14          |  | $              | 0.14 |            
|Fiscal 2002 |  | $             | 0.14 |                | $ | 0.14          |  | $              | 0.14 |            

We
make our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to these
reports available free of charge on our website at www.longs.com as soon as reasonably practicable after we file them with the Securities Exchange Commission.

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Item 6.Selected Financial Data

Five Year Selected Financial Data

|                                                       |                                                      | Fiscal Year |          
|------------------------------------------------------ | ---------------------------------------------------- | ----------- | ---------
|
|Financial Statistics
(Thousands except per share data) |                                                      |             |          
|Sales                                                  |                                                      | $           | 4,426,273
|Income before cumulative effect of accounting change   |                                                      |             | 31,327   
|Net income                                             |                                                      |             | 6,702    
|Basic earnings per common share:                       |                                                      |             |          
|                                                       | Income before cumulative effect of accounting change |             |          
|                                                       | Net income                                           |             |          
|Diluted earnings per common share:                     |                                                      |             |          
|                                                       | Income before cumulative effect of accounting change |             |          
|                                                       | Net income                                           |             |          
|Dividends per common share                             |                                                      |             | .56      
|Total assets                                           |                                                      |             | 1,352,071
|Long-term debt                                         |                                                      |             | 181,429  
|Deferred income taxes and other long-term liabilities  |                                                      |             | 34,074   
|Operating Statistics                                   |                                                      |             |          
|Number of Stores at Year End                           |                                                      |             | 455      
|Same Store Sales Growth(5) (52-week basis)             |                                                      |             | 2.8      
|Selling Square Footage at Year End(Millions)           |                                                      |             | 7.5      
|Sales Per Selling Square Foot (52-week basis)          |                                                      | $           | 601      
|Number of Employees at Year End                        |                                                      |             | 22,200   

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7

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Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations

RESULTS OF OPERATIONS

Sales

|                                                            |  | Fiscal Year |          
|----------------------------------------------------------- |  | ----------- | ---------
|
|Sales(Thousands)                                            |  | $           | 4,426,273
|Sales Growth over Previous Year                             |  |             | 2.8      
|Same Store Sales Growth (52-week basis)                     |  |             | 2.8      
|Impact of New Stores/Closed Stores on Sales Growth          |  |             | 1.4      
|Impact of 53rd Week on Sales Growth                         |  |             | (1.8     
|Impact of RxAmerica on Sales Growth                         |  |             | 0.4      
|Pharmacy Sales Growth                                       |  |             | 4.6      
|Same Store Pharmacy Sales Growth (52-week basis)            |  |             | 5.8      
|Pharmacy as a % of Total Drug Store Sales                   |  |             | 44.4     
|% of Pharmacy Sales Paid by Third Party Health Plans        |  |             | 90.7     
|Front-End Sales Growth                                      |  |             | 0.8      
|Same Store Front-End Sales Growth (Decline) (52-week basis) |  |             | 0.5      
|Front-End as a % of Total Drug Store Sales                  |  |             | 55.6     

Fiscal 2003 versus Fiscal 2002

Sales increased 2.8% in fiscal 2003 over fiscal 2002. Fiscal 2003 included 52 weeks of operations compared to 53 weeks in fiscal 2002, resulting in a 1.8%
negative impact on sales growth in fiscal 2003 compared to 2002. Same-store sales, on a comparative 52-week basis, increased 2.8%, and new stores accounted for an increase of
1.4%. Additionally, our September 2001 acquisition of full ownership of RxAmerica, our pharmacy benefit management (PBM) subsidiary, contributed 0.4% of total sales growth in fiscal 2003. Prior
to the acquisition, RxAmerica was a joint venture between Longs and Albertson's, Inc., and we accounted for our interest in the joint venture using the equity method of accounting.

Pharmacy
sales increased 4.6% in fiscal 2003, with same-store pharmacy sales increasing 5.8%. Pharmacy sales were 44.4% of total drug store sales in fiscal 2003, compared to
43.5% in fiscal 2002. Our pharmacy sales have continued to increase as a result of favorable industry trends, including an aging U.S. population and the increased usage of newer and more expensive
prescription drugs. We expect these trends to continue.

Sluggish
economic growth and increased competition resulted in a 1.6% decrease in our same-store prescriptions in fiscal 2003. However, the average retail price per
prescription increased 7.4%. This increase was lower than in recent years primarily due to the recent introduction of several lower-priced high-volume generic drugs. Increased generic utilization
negatively impacted same-store pharmacy sales by approximately 1.8% in fiscal 2003. We expect generic utilization to continue to increase, although we also expect that average retail
prices for prescription drugs will continue to rise.

Third-party
health plans covered 90.7% of our pharmacy sales in fiscal 2003, compared to 89.5% in fiscal 2002. We expect third-party sales to remain at or slightly above 90% of our total
pharmacy sales due to significant consumer participation in managed care and other third-party plans.

Front-end
sales increased 0.8% in fiscal 2003, with same-store front-end sales increasing 0.5%. Front-end sales have been adversely
affected by sluggish economic growth in our primary markets,

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particularly in California, and increased competition from mass merchants, national drug store chains and supermarkets. We also experienced a weak holiday shopping season and a mild cold and flu
season that resulted in lower over-the-counter drug sales. The increase in same-store front-end sales in fiscal 2003 was primarily due to increased
promotional sales resulting from a refocused and event-driven advertising and marketing campaign. We will continue to make decisions about promotional activities based on competitive and economic
conditions, but we expect that our promotional sales will continue to be a significant portion of our total front-end sales in light of persistent softness in the economy and promotional
activities by our competitors.

Fiscal 2002 versus Fiscal 2001

Sales increased 6.9% in fiscal 2002 over fiscal 2001. Fiscal 2002 included 53 weeks of operations compared to 52 weeks in fiscal 2001. The 53rd week
accounted for 1.9% of the increase in sales in fiscal 2002. Same-store sales, on a comparative 52-week basis, increased 4.0%, and new stores accounted for an increase of 0.8%.
Our September 2001 acquisition of full ownership of RxAmerica contributed the remaining 0.2% of total sales growth in fiscal 2002.

Pharmacy
sales increased 14.0% in fiscal 2002, with same-store pharmacy sales increasing 10.9%. Pharmacy sales were 43.5% of total drug store sales in fiscal 2002, compared
to 41.1% in fiscal 2001. The growth in same-store pharmacy sales was due to a 9.1% increase in the average retail price per prescription and a 1.8% increase in same-store
prescriptions. Favorable industry trends, including an aging U.S. population and the increased usage of newer and more expensive prescription drugs, contributed to our increased pharmacy sales.

Third-party
sales represented 89.5% of total pharmacy sales during fiscal 2002, compared to 88.1% in fiscal 2001. The increase was a result of growing participation in managed care and
other third-party plans.

Front-end
sales increased 1.6% in fiscal 2002, with same-store front-end sales decreasing 0.8%. Front-end sales were adversely affected by
sluggish economic growth in our primary markets, exacerbated by the terrorist attacks of September 11, 2001, and increased competition from mass merchants, national drug store chains and
supermarkets. We also experienced a weak holiday shopping season and a mild cold and flu season that resulted in lower over-the-counter drug sales.

Gross Profit

|                          |  | Fiscal Year |          
|------------------------- |  | ----------- | ---------
|
|Gross Profit(Thousands)   |  | $           | 1,158,731
|Gross Profit %            |  |             | 26.2     
|LIFO Provision(Thousands) |  | $           | 6,150    

Fiscal 2003 versus Fiscal 2002

Gross profit was 26.2% of sales in fiscal 2003, compared to 25.6% in fiscal 2002. Almost half of the increase was attributable to the inclusion of RxAmerica's
gross profit in our consolidated total. We recognize in our consolidated sales RxAmerica's revenues from third-party health plans net of the related reimbursements due to participating pharmacies. We
do not record any of RxAmerica's expenses in cost of sales. Therefore, all of RxAmerica's net revenues ($23.3 million in fiscal 2003 and $7.9 million in fiscal 2002) are included in
gross profit. Prior to our acquisition of 100% ownership of RxAmerica in September 2001, it was a joint venture between Longs and Albertson's, Inc., and we recorded our share of its
profits in operating and administrative expenses using the equity method of accounting.

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In
fiscal 2003, the increased usage of generic drugs, which have higher gross profit percentages than name-brand drugs, offset a multi-year trend of declining
pharmacy gross profit percentages experienced throughout the retail drug store industry. We expect generic utilization to continue to increase. The multi-year decline in pharmacy gross
profit percentages reflects the increasing percentage of pharmacy sales reimbursed by third-party health plans, which have lower gross profit percentages than non third-party sales. Third-party health
plans continue to reduce the levels at which they reimburse us for the prescription drugs that we provide to their members, resulting in further pressure on pharmacy gross profits. Pharmacy sales also
have lower gross profit percentages than front-end sales, and as pharmacy sales continue to grow as a percent of total sales, overall gross profit percentages will be adversely impacted.
However, despite decreases in pharmacy gross profit percentages, pharmacy gross profit dollars continue to increase with the growth in sales.

In
fiscal 2003, we commenced initiatives to increase efficiency and enhance profitability. One of those initiatives is an upgrade of our supply chain practices. Improvements in our
supply chain, including more efficient distribution center operations and more favorable merchandise buying terms, combined with better category pricing, helped partially offset the negative
front-end gross profit impact of increased promotional sales. We expect that our promotional sales will continue to be a significant portion of our total front-end sales in
light of persistent softness in the economy and promotional activities by our competitors, resulting in further pressure on our front-end gross profits.

Gross
profit in fiscal 2003 included a LIFO provision of $6.2 million, compared to $9.6 million in fiscal 2002, included in cost of sales. The LIFO provision fluctuates
with inflation rates, inventory levels and merchandise mix. The decrease in the LIFO provision in fiscal 2003, which had a positive impact on gross profit as a percent of sales, was primarily due to
lower inflation rates in our front-end categories.

Fiscal 2002 versus Fiscal 2001

Gross profit was 25.6% of sales in fiscal 2002, compared to 26.1% in fiscal 2001. The decrease reflected higher pharmacy sales as a percentage of total sales and
a higher percentage of pharmacy sales reimbursed by third-party health plans.

Gross
profit in fiscal 2002 included a LIFO provision of $9.6 million, compared to $4.7 million fiscal 2001, included in cost of sales. The LIFO provision fluctuates with
inflation rates, inventory levels and merchandise mix. The increase in the LIFO provision in fiscal 2002, which had a negative impact on gross profit as a percent of sales, was primarily due to
increased inflation rates for pharmaceutical inventories.

Operating and Administrative Expenses

|                                                            |  | Fiscal Year |          
|----------------------------------------------------------- |  | ----------- | ---------
|
|Operating and Administrative Expenses(Thousands)            |  | $           | 1,012,093
|Operating and Administrative Expenses as a Percent of Sales |  |             | 22.9     

Fiscal 2003 versus Fiscal 2002

Operating and administrative expenses were 22.9% of sales in fiscal 2003, compared to 21.7% in fiscal 2002. Several factors contributed to the increase. We
included RxAmerica's operating and administrative expenses of approximately $12.8 million, or 0.3% of sales, in our consolidated totals for all of fiscal 2003. Prior to our acquisition of 100%
ownership of RxAmerica in September 2001, it was a joint venture between Longs and Albertson's, Inc., and we recorded our share of its profits in

10

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operating and administrative expenses using the equity method of accounting. These equity-method profits were not material to us.

We
incurred operating and administrative expenses of $11.8 million, or 0.3% of sales, in fiscal 2003 related to the supply chain initiative discussed above. We expect that we will
continue to incur operating and administrative expenses related to the supply chain initiative for the next several fiscal years, including approximately $16 million in fiscal 2004.

Workers
compensation expenses increased $9.8 million, or 0.2% of sales, in fiscal 2003. The increase was a result of a revaluation of our reserves for outstanding claims to
reflect regulatory changes in our principal markets and lower interest rates used to discount our liability. We expect that rising medical costs and changes in the regulatory environment will continue
to drive workers compensation claim costs higher in the near future. However, we expect that our workplace safety efforts will partially mitigate this increase in costs by reducing the number of
workers compensation claims.

As
previously noted, the increased usage of lower-priced generic drugs had a negative impact on our sales. This in turn resulted in higher operating and administrative expenses when
measured as a percent of sales, but increased gross margins. We estimate that the higher generic utilization resulted in an increase of approximately 0.2% in operating expenses as a percent of sales.

Other
elements of the increase in operating and administrative expenses include costs for certain consulting projects relating to strategic, operational and tax initiatives, employee
terminations and increased debit and credit card processing fees.

In
February 2003, we announced a series of steps designed to reduce our operating and administrative expenses as a percent of sales in the future. These steps include a reduction
of our administrative workforce by approximately 170 people in our California offices, the closure of certain support facilities, store labor savings through workflow and staffing changes and a
restructuring of our incentive compensation arrangements. We expect to record a provision of approximately $4 million for the related employee termination and facility closure costs in the
first quarter of fiscal 2004, and we expect to pay the majority of such costs in the first and second quarters of fiscal 2004.

Fiscal 2002 versus Fiscal 2001

Operating and administrative expenses were 21.7% of sales in fiscal 2002, compared to 21.5% in fiscal 2001. The increase was primarily due to newly opened stores,
which have lower sales than our established stores. We also experienced increased distribution expenses as we transitioned from our third-party distribution center operator to
self-operation of our distribution centers.

Depreciation and Amortization

Depreciation and amortization expenses were $77.7 million in fiscal 2003, compared to $78.2 million in fiscal 2002 and $69.3 million in
fiscal 2001. Effective with the first quarter of fiscal 2003, we no longer record amortization expense for goodwill and certain other intangible assets with indefinite useful lives, in accordance with
SFAS No. 142,Goodwill and Other Intangible Assets. Amortization for these assets was $6.8 million in both fiscal 2002 and fiscal 2001.
Excluding discontinued amortization, depreciation and amortization increased by $6.3 million in fiscal 2003 over fiscal 2002, and $8.9 million in fiscal 2002 over fiscal 2001, primarily
due to increased depreciation expense resulting from capital expenditures for new store investments, improvements to existing stores, supply chain improvements and technology.

In
fiscal 2004 we will be migrating about 180 of our stores away from a pharmacy information system to a more effective operating platform. As a result, we will depreciate the system's
remaining
$5.7 million of net book value equally over the first two quarters of fiscal 2004 while the system is still in operation.

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Provision for Store Closures and Asset Impairments

We recorded a provision of $10.8 million for store closures and asset impairments in fiscal 2003, compared to a benefit of $1.7 million in fiscal
2002 and a provision of $28.4 million in fiscal 2001. The components of these provisions (benefits) are summarized as follows:

|                                       |  | Fiscal Year
|-------------------------------------- |  | -----------
|
|
|Provision (benefit) for store closures |  | $          
|Asset impairments                      |  |            
|                                       |  |            
|Total                                  |  | $          
|                                       |  |            

Store Closures

Store
closure provisions primarily include expected future lease costs, net of sublease income, and severance and other employee-related costs.

In
January 2001, our board of directors approved a plan (the "2001 Closure Plan") to close 15 poorly performing stores, and we recorded expenses of $25.6 million associated
with this plan (including $12.3 million of store closure costs and $13.3 million of asset impairment charges). We also closed 3 stores not included in the 2001 Closure Plan during fiscal
2001 and recorded expenses of $2.8 million related to these store closures.

We
closed 14 stores pursuant to the 2001 Closure Plan in the first quarter of fiscal 2002, and we elected not to close the remaining store. We also closed 5 stores not included in the
2001 Closure Plan during fiscal 2002. Based on the results of store closure activities in fiscal 2002 and estimated future costs, we recorded a benefit of $2.5 million for the reduction of the
reserve for store closures in fiscal 2002.

We
closed 6 stores in fiscal 2003 and recorded expenses of $0.6 million related to these store closures and adjustments of previously recorded store closure reserves based on
estimated future costs.

Asset Impairment

The asset impairment charge associated with the 2001 Closure Plan totaled $13.3 million, comprised of $7.7 million of long-lived
tangible fixed assets and $5.6 million of goodwill associated with the closed stores. These charges represented the amounts necessary to write the assets down to their estimated realizable
values.

In
fiscal 2002 and 2003, we identified certain stores with assets whose carrying values exceeded their related undiscounted expected future cash flows. Accordingly, we recorded
impairment charges of $0.8 million in fiscal 2002 and $5.0 million in fiscal 2003 to write such assets down to their estimated fair values, based on projected discounted future cash
flows.

Also
in fiscal 2003, we abandoned a targeted marketing database that was originally developed as a component of our e-retail strategy. We recorded an impairment charge of
$5.2 million to write off the remaining net book value of this database.

We
have also identified 25 poorly performing stores for which we did not record asset impairment losses, either because their expected future cash flows were sufficient to recover their
carrying values or
because they have not been open sufficiently long to achieve fully mature operations and cash flows. We have developed action plans and timetables for improvement for these stores. However, if they

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continue to perform poorly, we may close them. This could result in significant additional store closure and asset impairment charges in the future.

Other Items

In fiscal 2003, we recorded a net charge of $0.5 million for the settlement of certain legal matters. These matters were settled in earlier fiscal years,
and as final payments were made during fiscal 2003, we incurred additional costs over those previously estimated. In fiscal 2002, we recorded a net charge of $0.9 million for the settlement of
a lease-related dispute with a landlord, partially offset by gains on the settlement of other disputes. In fiscal 2001 we recorded a net benefit of $6.8 million related to our share of a brand
name litigation settlement, partially offset by the settlement of a class action lawsuit regarding the employment classification of certain employees and the resolution of a contractual dispute with a
vendor. We also recorded a loss of $1.6 million reflecting our share of the loss on the sale of joint venture assets in fiscal 2001.

Net Interest Expense

Net interest expense was $13.0 million in fiscal 2003, compared to $14.0 million in fiscal 2002 and $16.3 million in fiscal 2001. The
decrease was due to lower average borrowings and interest rates.

Income Taxes

Our effective income tax rates were 29.8%, 37.3% and 39.6% in fiscal 2003, 2002 and 2001. The decrease in fiscal 2003 was primarily due to the benefits of wage
and other tax credits, which reduced our effective income tax rate by 5.85 percentage points. Also, a tax law change enacted in fiscal 2002 that allows us to deduct dividends paid on 100% vested
shares held in our employee stock ownership plan reduced our effective income tax rate by 0.9 percentage points in fiscal 2003 compared to fiscal 2002, and by 2.2 percentage points in fiscal 2002
compared to fiscal 2001. We expect our effective income tax rate to be between 37% and 38% in the fiscal year ending January 29, 2004.

LIQUIDITY AND CAPITAL RESOURCES

General

Our primary sources of liquidity are operating cash flows and long-term borrowings. We use cash primarily to provide working capital for our
operations, finance capital expenditures, repay debt and pay dividends. We also use cash for acquisitions and to repurchase shares of our common stock.

We
have a $150 million unsecured revolving line of credit with a syndication of banks, which expires in October 2004 and accrues interest at LIBOR-based rates. Borrowings
on the line of credit do not require repayment until the expiration date. As of January 30, 2003, $25.0 million was outstanding under this line of credit with a weighted average interest
rate of 2.6%.

Additionally,
as of January 30, 2003, we have $158.6 million in privately placed promissory notes, including $50 million placed in the third quarter of fiscal 2002.
These notes mature at various dates through 2014 and bear interest at fixed rates ranging from 5.85% to 7.85%. The notes include penalties for repayment prior to their scheduled maturities. We used
the proceeds from the $50 million private placement borrowing in fiscal 2002 to pay down our revolving line of credit and to provide cash funding for the acquisition of the remaining 50% of
RxAmerica.

Our
debt agreements contain limits on borrowings, dividend payments and repurchases of company stock, and various quarterly financial covenants that set maximum leverage ratios and
minimum fixed charge coverage ratios. The agreements allowed for the exclusion of the $41.0 million cumulative effect of adopting SFAS No. 142 and the $25.6 million charge
associated with the 2001 Closure Plan (see Notes 1 and 2 in the accompanying notes to our consolidated financial statements) in the computation

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of the fixed charge coverage ratio. As of January 30, 2003, we were in compliance with the restrictions and limitations included in these provisions.

We
believe that cash on hand, together with cash provided by operating activities and borrowings on our line of credit, will be sufficient to meet our working capital, capital
expenditure and debt service requirements for at least the next 12 months.

Operating Cash Flows

Net cash provided by operating activities was $43.2 million in fiscal 2003, compared to $202.2 million in fiscal 2002 and $192.7 million in
fiscal 2001. The decrease in operating cash flows in fiscal 2003 was primarily due to lower net income, higher receivables, inventories and other current assets and lower
current liabilities. In fiscal 2002, reductions in inventory levels and receivables, partially as a result of store closures, had a positive effect on operating cash flows.

The
increase in receivables during fiscal 2003 was primarily due to the growth in the number of stores, from 436 at the end of fiscal 2002 to 455 at the end of fiscal 2003, as well as
changes in payment terms for certain of our PBM customers.

The
increase in inventory levels during fiscal 2003 was partially due to the growth in the number of our stores, from 436 at the end of fiscal 2002 to 455 at the end of fiscal 2003.
Average LIFO inventories per store increased from $932,000 to $975,000, or 4.6% (3.4% excluding LIFO reserves). The increase was primarily the result of lower than anticipated sell-through
of inventory during the third and fourth quarters of the year.

The
increase in other current assets during fiscal 2003 was primarily due to the timing of certain prepayments relating to the first quarter of fiscal 2004. The corresponding payments
were not made until after the fourth quarter of fiscal 2002, resulting in an increase in the related prepaid expense balances.

The
decrease in current liabilities during fiscal 2003 was primarily due to a reduction in accounts payable of $28.0 million, from $270.5 million to $242.4 million.
During fiscal 2003, we resolved a payment dispute with a vendor, resulting in payment of amounts early in the fiscal year that were in outstanding payables as of the end of fiscal 2002. We also
accelerated the timing of our payments to certain vendors during fiscal 2003.

Working
capital, defined as current assets less current liabilities, was $242.6 million as of January 30, 2003 and $236.7 million as of January 31, 2002. We
plan to reduce our working capital by approximately $50 million on an equivalent-store basis by the end of fiscal 2004. We expect working capital reductions primarily in our
front-end inventories through reduced assortment and improved replenishment and restocking processes.

Closed
stores will continue to impact future operating cash flows negatively as we make payments associated with our noncancelable lease obligations associated with those stores.
However, those payments will be partially, and in some cases fully, offset by sublease rental income and the elimination of the operating cash flow losses that were incurred by the closed stores prior
to closure. The majority of the payments associated with closed stores will occur over their respective remaining lease terms of up to 23 years. As a result, we do not expect our existing
closed store obligations to affect our operating cash flows significantly in any single fiscal year unless we close a significant number of stores in a short period. Our store closure reserves were
$7.8 million as of January 30, 2003.

Investing Cash Flows

Net cash used in investing activities was $87.2 million in fiscal 2003, compared to $94.6 million in fiscal 2002 and $128.8 million in fiscal
2001. Investing activities primarily consist of capital expenditures

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for new stores, store improvements, technology and supply chain improvements, partially offset by cash receipts from property dispositions and sale-leaseback transactions. Fiscal 2002
investing cash outflows also included $5.8 million for the acquisition of the remaining 50% of RxAmerica, net of cash acquired.

Capital
expenditures were $93.9 million in fiscal 2003, compared to $111.4 million in fiscal 2002 and $134.1 million in fiscal 2001. The decrease over the past two
years was primarily due to lower expenditures for new stores, store improvements and technology. Fiscal 2001 capital expenditures included approximately $28.8 million for e-commerce
and renovations of stores acquired in fiscal 2000.

Cash
receipts from property dispositions were $6.8 million in fiscal 2003, $22.6 million in fiscal 2002 and $5.3 million in fiscal 2001. Fiscal 2002 receipts
included $15.2 million associated with five sale-leaseback transactions. We may enter into additional sale-leaseback transactions in the future to provide funding for a
portion of our capital expenditures. We also may sell additional properties, particularly if we close stores on our company-owned properties.

We
opened 25 new stores in fiscal 2003, 25 in fiscal 2002 and 17 in fiscal 2001. We plan to open approximately 20 new stores and to remodel approximately 20 existing stores in fiscal
2004. We expect net capital expenditures in fiscal 2004 to be between $100 million and $110 million, primarily for new store investments, remodels and improvements to existing stores,
technology and supply chain improvements, including expenditures under the supply chain program discussed further below. In addition, in the ordinary course of business we may acquire stores,
store-related assets including pharmacy customer lists, or other complimentary businesses.

In
February 2002, our board of directors approved a program for upgrading our supply chain practices in an effort to increase efficiency and enhance profitability. We expect to
spend approximately $30 million in capital expenditures for supply chain improvements under this program over the next two fiscal years, including $17 million in fiscal 2004. To date we
have spent approximately $14 million in capital expenditures under this program.

Financing Cash Flows

Net cash used in financing activities was $39.1 million in fiscal 2003, compared to $29.2 million in fiscal 2002 and $35.6 million in fiscal
2001. Our financing activities primarily consist of long-term borrowings and repayments, repurchases of common stock and dividend payments.

In
fiscal 2003, we repaid $17.6 million of long-term borrowings, including $15 million under our revolving line of credit and $2.1 million of regularly
scheduled principal payments on our private placement notes. In fiscal 2002, we obtained $50 million in additional privately placed debt financing, offset by $58 million in repayments of
long-term and short-term borrowings. In fiscal 2001, we had net long-term and short-term borrowings of $38.1 million.

Our
board of directors makes decisions about the declaration of quarterly dividends after reviewing our results of operations and financial position. We have paid quarterly dividends of
$0.14 per share ($0.56 per share annually) for each of the last three fiscal years. Total dividends were $21.4 million in fiscal 2003, $21.2 million in fiscal 2002 and
$21.3 million in fiscal 2001.

In
November 1999, our board of directors authorized the repurchase of up to 2,000,000 shares of our common stock through November 2004, for a maximum total expenditure of
$80 million. During fiscal 2001, we purchased 1,146,868 shares under this authorization at a total cost of $22.5 million. We also repurchased 1,614,157 shares of common stock from the
Estate of Vera M. Long at a total cost of $31.0 million pursuant to a separate authorization by the board of directors in February 2000. In addition, we sold 45,688 shares of common
stock to the Profit Sharing Plan in fiscal 2001 for $1.1 million, resulting in net stock repurchases of $52.4 million.

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In
the first quarter of fiscal 2004, we repurchased the remaining 853,100 shares under the November 1999 authorization at a total cost of $12.1 million. In
March 2003, our board of directors authorized the repurchase of up to 2,000,000 shares of our common stock through January 2008, for a maximum total expenditure of $50 million. We
repurchased 509,100 shares under the new authorization in March 2003 at a total cost of $8.0 million. Any future repurchase of our common stock will depend on existing market conditions
and our financial condition.

Contractual Obligations

The following table summarizes our contractual obligations as of January 30, 2003:

|                            |  | Payments due by period
|--------------------------- |  | ----------------------
|
|
|Long-term debt              |  | $                     
|Capital lease obligations   |  |                       
|Operating leases            |  |                       
|Purchase obligations        |  |                       
|Other long-term liabilities |  |                       
|                            |  |                       
|Totals                      |  | $                     
|                            |  |                       

See
"Debt," "Leases" and "Commitments and Contingencies" in the accompanying notes to our consolidated financial statements for further information about the above items. Our other
long-term liabilities consist of items that are not of a contractual nature, such as deferred income taxes and deferred rent, and obligations that are included elsewhere in the above
table, such as capital lease obligations.

OFF-BALANCE SHEET ARRANGEMENTS

We do not make use of any off-balance sheet arrangements that currently have or that we expect are reasonably likely to have a material future effect
on our financial condition, results of operations or cash flows. We utilize operating leases for many of our store locations, and from time to time we engage in sale-leaseback arrangements
for financing purposes. We do not use special-purpose entities in any of our leasing arrangements.

CRITICAL ACCOUNTING POLICIES

The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make
estimates and assumptions that affect the reported amounts of our assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the
reporting period. Uncertainties regarding such estimates and assumptions are inherent in the preparation of our financial statements, and actual results may differ from those estimates and
assumptions. We believe the following critical accounting policies require the most significant judgments and estimates used in the preparation of our consolidated financial statements:

Accounts Receivable and Reserves

Our receivables primarily include amounts due from third party providers (e.g., pharmacy benefit managers, insurance companies and governmental agencies), vendors
and our pharmacy benefit management customers. We maintain an allowance for the amount of these receivables that we estimate to be uncollectible. Our estimates of uncollectible amounts are based on
our historical

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collection experience and current economic and credit conditions. If the financial condition of our third party providers, vendors or PBM customers deteriorates, we may increase the allowance for
uncollectible accounts and our recovery of recorded receivables may be significantly affected.

Merchandise Inventories

Our inventories include prescription drugs, over-the-counter medications, health care products, photo products, cosmetics, greeting cards
and other general merchandise. We record our inventories at the lower of cost or market value. Accordingly, we maintain an allowance for certain merchandise to reduce it to our estimate of market
value. If we do not sell the merchandise at expected prices or if we make decisions to significantly reduce or eliminate merchandise items or categories, we may increase the allowance for markdowns
and our realization of recorded inventories may be significantly affected.

We
use the last-in, first-out (LIFO) method to determine inventory cost. The calculation of LIFO inventory costs depends on a number of factors, including
inflation rates, inventory levels and merchandise mix that require estimates during interim periods. These estimates are subject to substantial variability and may result in significant adjustments,
particularly during the fourth quarter, when final inflation rates and inventory levels are determined.

Impairment of Long-Lived Assets

We review long-lived tangible assets and intangible assets with finite useful lives for impairment whenever events or changes in circumstances
indicate that their carrying values may not be recoverable. Using our best estimates based on reasonable assumptions and projections, we record an impairment loss to write the assets down to their
estimated fair values if the carrying values of such assets exceed their related undiscounted expected future cash flows.

We
review goodwill and other intangible assets with indefinite useful lives for impairment annually, or more frequently if events or changes in circumstances warrant. If the carrying
values of such assets exceed their estimated fair values, we record an impairment loss to write the assets down to their estimated fair values.

We
generally evaluate long-lived tangible assets and intangible assets with finite useful lives at an individual store level, which is the lowest level at which independent
cash flows can be identified. We evaluate corporate assets or other long-lived assets that are not store-specific at a consolidated entity or segment level as appropriate. We evaluate
goodwill at a reporting unit level in accordance with SFAS No. 142,Goodwill and Other Intangible Assets. The regional operating districts within
our retail drug store segment make up our reporting units.

Since
there is typically no active market for our long-lived tangible and intangible assets, we estimate fair values based on the expected present value of future cash flows.
We estimate future cash flows based on store-level historical results, current trends and operating and cash flow projections. Our estimates are subject to substantial uncertainty and may be affected
by a number of factors outside of our control, including general economic conditions, the competitive environment and regulatory
changes. If actual results differ from our estimates, we may record significant additional impairment charges in the future.

Store Closure Reserves

Prior to January 1, 2003, we recorded the estimated costs associated with closing a store during the period in which the store was identified and approved
by management under a plan of termination, which included the method of disposition and the expected date of completion. These costs include direct costs to terminate a lease, lease rental payments
net of expected sublease income, and the difference between the carrying values and estimated recoverable values of long-lived tangible and

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intangible assets. We recorded severance and other employee-related costs in the period in which we communicated the closure and related severance packages to the affected employees.

Effective
with the adoption of SFAS No. 146,Accounting for Costs Associated with Exit or Disposal Activities, on January 1,
2003 (see "New Accounting Pronouncements"), we recognize a liability for costs associated with closing a store when the liability is incurred. We record the present value of expected future lease
costs and other closure costs when the store is closed. We record severance and other employee-related costs in the period in which we communicate the closure and related severance packages to the
affected employees.

Our
calculation of store closure costs includes significant estimates about the amounts and timing of potential lease termination costs and future sublease income. These estimates are
based on our historical experience, the condition and location of the property, the lease terms and current real estate leasing market conditions. If actual results differ from our estimates, we may
significantly adjust our store closure reserves in future periods.

In
addition, periodically we make judgments about which stores we should close and which stores we should continue to operate. We have 25 stores that we have presently decided to
continue to operate, but whose financial performance and cash flows are being monitored. If we decide to close a number of these stores, we will incur store closure costs significantly in excess of
the amounts recorded.

Insurance

We obtain insurance coverage for significant exposures as well as those risks required to be insured by law. It is generally our policy to retain a significant
portion of certain losses related to workers' compensation, general liability, property losses, pharmacist liability, business interruptions and employee health care. We record provisions for these
items based on claims experience, regulatory
changes, an estimate of claims incurred but not yet reported and other relevant factors. We discount reserves for workers' compensation and general liability claims to their expected present value
using a risk-free interest rate. The projections involved in this estimate are subject to substantial uncertainty because of several unpredictable factors, including actual claims
experience, regulatory changes, litigation trends and changes in inflation and interest rates.

Our
self-insurance exposure is concentrated in California, where the majority of our stores are located. California has experienced significant increases in workers'
compensation costs as a result of legislative changes and rising medical costs. These increases have adversely affected our results of operations and may continue to adversely affect us in the future.

If
claims are greater than we estimated, or if costs increase beyond what we anticipated, our recorded reserves may not be sufficient, and we may need to record significant additional
expense.

Revenue Recognition

We recognize revenue from the sale of merchandise and services, net of an allowance for estimated returns, at the time the merchandise is sold or services
performed. The allowance for sales returns is estimated based on our historical experience. Historically, our sales returns have not been significant, but changes in our experience could result in
significant additional reserves.

We
recognize revenue from our PBM segment when our RxAmerica subsidiary has completed its service obligations under its contracts, including the approval or denial of the authorization
request to the participating pharmacy. RxAmerica does not take title to the prescription drug inventories or assume substantial risks and rewards of ownership. Therefore, under our existing contracts
we recognize PBM revenues from third-party health plans net of the reimbursements due to participating pharmacies. We do not recognize or otherwise reflect in our financial statements
co-payments made to participating pharmacies by health plan members. We estimate certain rebate revenues in our PBM

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segment based on our historical experience, contractual terms and prescription drug utilization mix. These estimates are subject to uncertainty and actual results could differ significantly.

Vendor Rebates and Allowances

We record merchandise rebates and allowances as a reduction of cost of sales when we sell the related inventory. We recognize advertising rebates and allowances
as a reduction of advertising expense when we incur the related advertising expense or complete the required performance. We defer lump-sum payments received from vendors in connection
with a contractual arrangement and recognize them over
the contract term as a reduction of cost of sales or of advertising expense, depending on the nature of the contract. Some of our contractual arrangements require estimates of the rebate amounts
earned and collectible. If actual rebates and allowances received differ from our estimates, we may be required to record significant adjustments to our rebates and allowances.

Other Significant Accounting Policies

The above policies are not intended to be a comprehensive list of all of our accounting policies. In many cases, generally accepted accounting principles
specifically dictate the accounting treatment for a particular transaction. There are also certain areas in which management's judgment in selecting any available alternative would not produce a
materially different result. See the accompanying audited consolidated financial statements and notes thereto for a more complete discussion of our accounting policies and other disclosures required
by generally accepted accounting principles.

NEW ACCOUNTING PRONOUNCEMENTS

In fiscal 2002, we adopted Statement of Financial Accounting Standards ("SFAS") No. 133,Accounting for Derivative Instruments and
Hedging Activities, which established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and
for hedging activities. SFAS No. 133 requires that an entity recognize all derivative instruments as either assets or liabilities in the statement of financial position and measure those
instruments at fair value. We have no derivative instruments, and therefore adoption of SFAS No. 133 had no impact on our financial statements.

In
June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141,Business Combinations, and SFAS
No. 142,Goodwill and Other Intangible Assets. SFAS No. 141 requires that all business combinations after June 30, 2001 be
accounted for using the purchase method of accounting and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. The adoption of
SFAS No. 141 had no impact on our consolidated financial statements. Under SFAS No. 142, goodwill and certain other intangible assets deemed to have indefinite lives will no longer be
amortized, but must be tested for impairment annually, or more frequently if events and circumstances indicate there may be an impairment. We adopted SFAS No. 142 in the first quarter of fiscal
2003. Upon adoption of SFAS No. 142, we discontinued the amortization of goodwill with a carrying value of $123.3 million as of January 31, 2002 and of certain other intangible
assets with indefinite useful lives. See Note 4 in the accompanying notes to our consolidated financial statements for a reconciliation of reported earnings and earnings per share to the
amounts adjusted for the exclusion of amortization of goodwill and other intangible assets with indefinite lives, net of the related income tax effects.

As
required by SFAS No. 142, we performed a transitional goodwill impairment test as of February 1, 2002, the date of adoption of the standard. Based on an independent
valuation, we identified certain
reporting units in our retail drug store segment that have experienced declines in their fair values below their net carrying values. Accordingly, we recognized a goodwill impairment

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charge of $41.0 million ($24.6 million or $0.65 per diluted share after tax) for these reporting units in the first quarter of fiscal 2003 as the cumulative effect of a change in
accounting principle.

In
August 2001, the FASB issued SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets.
SFAS No. 144 establishes accounting and reporting standards for the impairment of long-lived assets and for long-lived assets to be disposed of. We adopted SFAS
No. 144 in the first quarter of fiscal 2003. The initial adoption of SFAS No. 144 did not have a significant impact on our reporting for impairments or disposals of
long-lived assets.

In
June 2002, the FASB issued SFAS No. 146,Accounting for Costs Associated with Exit or Disposal Activities, which
addresses accounting for restructuring and similar costs. SFAS No. 146 supersedes previous accounting guidance, principally EITF Issue No. 94-3. We have adopted the
provisions of SFAS No. 146 for restructuring activities initiated after December 31, 2002. SFAS No. 146 requires that the liability for costs associated with an exit or disposal
activity be recognized when the liability is incurred. Under Issue No. 94-3, we generally recognized a liability for an exit cost at the date of our commitment to an exit plan. SFAS
No. 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS No. 146 may affect the timing of recognizing future restructuring
costs as well as the amounts recognized.

In
December 2002, the FASB issued SFAS No. 148,Accounting for Stock-Based CompensationTransition and
Disclosure. SFAS No. 148 amends SFAS No. 123,Accounting for Stock-Based Compensation, to provide alternative
methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method
used on reported results. The transition guidance and annual disclosure provisions of SFAS No. 148 are effective for our fiscal year ended January 30, 2003. The interim disclosure
provisions are effective for the first quarter of the fiscal year ending January 29, 2004. We continue to account for stock-based compensation using the intrinsic value method in accordance
with the provisions of APB Opinion No. 25,Accounting for Stock Issued to Employees, as allowed by SFAS No. 123. As a result, the adoption
of SFAS No. 148 did not have any impact on our consolidated financial results.

In
November 2002, the FASB issued Interpretation ("FIN") No. 45,Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN No. 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about
obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The disclosure requirements of FIN No. 45 are effective for interim and annual periods ending after December 15, 2002, and the initial recognition and measurement
requirements are effective prospectively for guarantees issued or modified after
December 31, 2002. The initial adoption of FIN No. 45 did not have a material impact on our financial position or results of operations.

In
November 2002, the EITF reached a consensus regarding EITF Issue No. 02-16,Accounting by a Customer (including a Reseller) for
Certain Consideration Received from a Vendor. Issue No. 02-16 addresses the timing of recognition and classification of consideration received from vendors,
including rebates and allowances. Issue No. 02-16 is effective for certain of our vendor rebates and allowances commencing in November 2002 and others in January 2003.
The adoption of Issue No. 02-16 did not have a material impact on our consolidated financial statements.

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RISK FACTORS

You should carefully read the following risk factors.

The retail drug store and pharmacy benefit management industries are highly competitive, and further increases in competition could adversely affect
us.

We
face intense competition with local, regional and national companies, including other drug store chains, independent drug stores, mail order pharmacies, on-line retailers,
supermarket chains and mass merchandisers. In the PBM industry, our competitors include large national and regional PBMs, some of which are owned by our retail drug store competitors. Many of our
competitors have substantially greater resources, including name recognition and capital resources, than we do. As competition increases in the markets in which we operate, a significant increase in
general pricing pressures could occur, which could require us to reduce prices, purchase more effectively and increase customer service to remain competitive. We cannot assure you that we will be able
to continue to compete effectively in our markets or increase our sales volume or margins in response to further increased competition.

Our ability to successfully implement significant organizational changes, including supply chain improvements, is critical to the ongoing success of our
business.

We
are currently undertaking significant organizational changes, including store workflow and staffing changes, increased centralization, restructured incentive compensation arrangements
and other strategic initiatives. In addition, in February 2002 our board of directors approved a program to upgrade our supply chain practices in an effort to increase efficiency and enhance
profitability. We expect to spend approximately $30 million in capital expenditures for supply chain improvements under this program
over the next two fiscal years, including $17 million in fiscal 2004. To date we have spent approximately $14 million in capital expenditures under this program. Our ability to
successfully implement these organizational changes, which are significant to our operations and business practices, is critical to our future profitability. We cannot assure you that we will be able
to execute these initiatives successfully and without significant disruption to our business. If we are not successful, we will have spent significant capital and human effort and may not achieve any
of the expected benefits from these improvements and initiatives.

Changes in third-party reimbursement levels for prescription drugs continue to reduce our margins on pharmacy sales and could have a material adverse effect on
our overall performance.

We
are wholly or partially reimbursed by third-party health plans for approximately 90% of all the prescription drugs that we sell. Pharmacy sales reimbursed by third parties, including
Medicare and Medicaid plans, have lower gross margins than non third-party pharmacy sales. Third-party health plans continue to reduce the levels at which they reimburse us for the prescription drugs
that we provide to their members. Furthermore, Medicare reform initiatives may include prescription drug benefits. If third-party health plans continue to reduce their reimbursement levels, or if
Medicare covers prescription drugs at reimbursement levels lower than our current retail prices, our margins on these sales will continue to be reduced, and our profitability will be adversely
affected.

Continued economic softness could adversely affect consumer-buying practices and reduce our sales and profitability.

A
sluggish economy has adversely affected our sales and operating profitability for the past two fiscal years. The economy is very soft in many of the markets we serve, particularly
California, and consumer confidence is low. If the economy remains soft or slows further, or if unemployment increases, our pharmacy sales could be adversely affected as consumers may lose their
health insurance due to unemployment. Further, if economic conditions, war, terrorism or other global concerns continue to worry consumers, they may decrease their purchases, particularly of products
other than

21

---

pharmaceutical products. We make a higher profit on our sales of front-end products than we do on sales of pharmaceutical products. Therefore, any decrease in our sales of
front-end products could significantly decrease our profitability.

Our ability to attract and retain pharmacy personnel or develop alternate fill sources is important to the continued success of our
business.

Our
industry is experiencing an ongoing shortage of licensed pharmacists in the markets in which we operate. Our inability to attract and retain pharmacists and other key personnel could
adversely affect us. In order to mitigate this risk we entered into a joint venture agreement with AmerisourceBergen to
operate a central prescription fill center. The success of this fill center is important to our ability to address the shortage of pharmacists, but additional efforts may be necessary to address this
business issue. Other options may be costly or unavailable to us. Further, a significant disruption in our fill center's operations could worsen the effects of the pharmacist shortage and adversely
affect our business.

We are substantially dependent on a single supplier of pharmaceutical products to sell products to us on satisfactory terms. A disruption in our relationship with
this supplier could have a material adverse effect on our business.

We
obtain approximately half of our total merchandise, including over 90% of our pharmaceuticals, from a single supplier, AmerisourceBergen, with whom we have a long-term
supply contract. Any significant disruptions in our relationship with AmerisourceBergen, or deterioration in AmerisourceBergen's financial condition, could have a material adverse effect on us.

We are subject to governmental regulations, procedures and requirements. Our noncompliance with, or a significant change in, these regulations could have a
material adverse effect on us.

Our
pharmacy business is subject to numerous federal, state and local regulations, many of which are new and developing. These include local registrations of pharmacies in the states
where our pharmacies are located, applicable Medicare and Medicaid regulations, prohibitions against paid referrals of patients and protection of confidential patient medical records and information.
Failure to properly adhere to these and other applicable regulations could result in the imposition of civil and criminal penalties. Furthermore, any new federal or state regulation or reforms,
including healthcare reform initiatives or pharmacy benefit management regulation, could adversely affect us.

Certain risks are inherent in providing pharmacy services, and our insurance may not be adequate to cover any claims against us.

Pharmacies
are exposed to risks inherent in the packaging and distribution of pharmaceuticals and other healthcare products. Although we maintain professional liability and errors and
omissions liability insurance, we cannot assure you that the coverage limits under our insurance programs will be adequate to protect us against future claims, or that we will maintain this insurance
on acceptable terms in the future.

Continued volatility in insurance related expenses and the markets for insurance coverage could have a material adverse affect on us.

The
costs of employee health, workers' compensation, property and casualty, general liability, director and officer and other types of insurance have continued to rise, while the amount
and availability of coverage have decreased. Claims costs for workers' compensation and other self-insured exposures have also increased. These conditions have been exacerbated by rising
health care costs, legislative changes, economic conditions and the terrorist attacks of September 11, 2001. If our insurance related costs continue to increase significantly, or if we are
unable to obtain adequate levels of insurance, our financial position and results of operations could be adversely affected.

22

---

Our geographic concentration in the western United States presents certain risks that could adversely affect us.

Our
stores, distribution centers and corporate offices are located in the western United States. Risks prevalent in this region include, but are not limited to, major earthquakes,
periodic energy shortages and rising energy costs, and shipping and other transportation-related disruptions. For example, the recent work stoppage at California ports caused us to purchase inventory
for the holiday season before we otherwise would have done so. Because of our geographic concentration, these risks could result in significant disruptions to our business or increased operating
expenses.

Item 7a.Quantitative and Qualitative Disclosures of Market Risk

Our major market risk exposure is changing interest rates. We use debt financing in combination with operating cash flows to support capital expenditures,
acquisitions, working capital needs and general corporate purposes. A portion of our debt ($25 million at January 30, 2003) bears interest at LIBOR-based rates, and therefore an increase
in interest rates could increase our interest expense. We do not currently undertake any specific actions to cover our exposure to interest rate risk and we are not currently a party to any interest
rate risk management transactions. We have not purchased and do not currently hold any derivative financial instruments. Depending on the interest rate environment and subject to approval by our board
of directors, we may make use of derivative financial instruments or other interest rate management vehicles in the future.

A
10% change in interest rates (26 basis points on our floating-rate debt as of January 30, 2003) would have an immaterial effect on our earnings and cash flows and on
the fair value of our fixed rate debt.

23

---



Item 8.Financial Statements and Supplementary Data

STATEMENTS OF CONSOLIDATED INCOME

|                                                                       |                                                                       | For the Fiscal Years Ended |          
|---------------------------------------------------------------------- | --------------------------------------------------------------------- | -------------------------- | ---------
|
|
|                                                                       |                                                                       |                            |          
|Sales                                                                  |                                                                       | $                          | 4,426,273
|Cost of sales                                                          |                                                                       |                            | 3,267,542
|                                                                       |                                                                       |                            |          
|                                                                       | Gross profit                                                          |                            |          
|Operating and administrative expenses                                  |                                                                       |                            | 1,012,093
|Depreciation and amortization                                          |                                                                       |                            | 77,736   
|Provision (benefit) for store closures and asset impairments, net      |                                                                       |                            | 10,754   
|Legal settlements and other disputes                                   |                                                                       |                            | 469      
|Loss on sale of joint venture assets                                   |                                                                       |                            |         
|                                                                       |                                                                       |                            |          
|                                                                       | Operating income                                                      |                            |          
|Interest expense                                                       |                                                                       |                            | 14,018   
|Interest income                                                        |                                                                       |                            | (983     
|                                                                       |                                                                       |                            |          
|                                                                       | Income before income taxes and cumulative effect of accounting change |                            |          
|Income taxes                                                           |                                                                       |                            | 13,317   
|                                                                       |                                                                       |                            |          
|Income before cumulative effect of accounting change                   |                                                                       |                            | 31,327   
|Cumulative effect of accounting change (net of tax benefit of $16,410) |                                                                       |                            | (24,625  
|                                                                       |                                                                       |                            |          
|Net income                                                             |                                                                       | $                          | 6,702    
|                                                                       |                                                                       |                            |          
|Basic earnings per common share:                                       |                                                                       |                            |          
|                                                                       | Income before cumulative effect of accounting change                  |                            | $        
|                                                                       | Cumulative effect of accounting change (net of tax benefit of $0.43)  |                            |          
|                                                                       |                                                                       |                            |          
|                                                                       | Net income                                                            |                            | $        
|                                                                       |                                                                       |                            |          
|Diluted earnings per common share:                                     |                                                                       |                            |          
|                                                                       | Income before cumulative effect of accounting change                  |                            | $        
|                                                                       | Cumulative effect of accounting change (net of tax benefit of $0.43)  |                            |          
|                                                                       |                                                                       |                            |          
|                                                                       | Net income                                                            |                            | $        
|                                                                       |                                                                       |                            |          
|Dividends per common share                                             |                                                                       | $                          | 0.56     
|Weighted average number of shares outstanding:                         |                                                                       |                            |          
|                                                                       | Basic                                                                 |                            |          
|                                                                       | Diluted                                                               |                            |          

See notes to consolidated financial statements.

24

---



CONSOLIDATED BALANCE SHEETS

|                                                      |                                                                                                                      | January 30,
2003           |               | January 31,
2002 |          
|----------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------- | ---------------- | ---------
|
|Assets                                                |                                                                                                                     
|Current Assets:                                       |                                                                                                                      |                            |               |                  |          
|                                                      | Cash and cash equivalents                                                                                            |                            | $             | 40,195           |          
|                                                      | Pharmacy and other receivables, net                                                                                  |                            |               | 135,610          |          
|                                                      | Merchandise inventories, net                                                                                         |                            |               | 443,435          |          
|                                                      | Deferred income taxes                                                                                                |                            |               | 32,131           |          
|                                                      | Other                                                                                                                |                            |               | 11,290           |          
|                                                      |                                                                                                                      |                            |               |                  |          
|                                                      |                                                                                                                      | Total current assets       |               |                  | 662,661  
|                                                      |                                                                                                                      |                            |               |                  |          
|Property:                                             |                                                                                                                      |                            |               |                  |          
|                                                      | Land                                                                                                                 |                            |               | 107,175          |          
|                                                      | Buildings and leasehold improvements                                                                                 |                            |               | 524,768          |          
|                                                      | Equipment and fixtures                                                                                               |                            |               | 487,888          |          
|                                                      |                                                                                                                      |                            |               |                  |          
|                                                      |                                                                                                                      | Total property at cost     |               |                  | 1,119,831
|                                                      | Less accumulated depreciation                                                                                        |                            |               | 523,813          |          
|                                                      |                                                                                                                      |                            |               |                  |          
|                                                      |                                                                                                                      |                            | Property, net |                  |          
|                                                      |                                                                                                                      |                            |               |                  |          
|Goodwill                                              |                                                                                                                      |                            | 82,085        |                  |          
|Intangible assets, net                                |                                                                                                                      |                            | 5,430         |                  |          
|Other assets                                          |                                                                                                                      |                            | 5,877         |                  |          
|                                                      |                                                                                                                      |                            |               |                  |          
|                                                      |                                                                                                                      |                            | Total         |                  | $        
|                                                      |                                                                                                                      |                            |               |                  |          
|Liabilities and Stockholders' Equity                  |                                                                                                                     
|Current Liabilities:                                  |                                                                                                                      |                            |               |                  |          
|                                                      | Accounts payable                                                                                                     |                            | $             | 242,440          |          
|                                                      | Employee compensation and benefits                                                                                   |                            |               | 92,185           |          
|                                                      | Taxes payable                                                                                                        |                            |               | 54,579           |          
|                                                      | Current portion of long-term debt                                                                                    |                            |               | 2,348            |          
|                                                      | Other                                                                                                                |                            |               | 28,546           |          
|                                                      |                                                                                                                      |                            |               |                  |          
|                                                      |                                                                                                                      | Total current liabilities  |               |                  | 420,098  
|                                                      |                                                                                                                      |                            |               |                  |          
|Long-term debt                                        |                                                                                                                      |                            | 181,429       |                  |          
|Deferred income taxes and other long-term liabilities |                                                                                                                      |                            | 34,074        |                  |          
|Commitments and Contingencies                         |                                                                                                                      |                            |               |                  |          
|Stockholders' Equity:                                 |                                                                                                                      |                            |               |                  |          
|                                                      | Common stock: par value $0.50 per share, 120,000,000 shares authorized, 38,501,000 and 37,977,000 shares outstanding |                            |               | 19,250           |          
|                                                      | Additional capital                                                                                                   |                            |               | 169,853          |          
|                                                      | Common stock contribution to Profit Sharing Plan                                                                     |                            |               |                 |          
|                                                      | Unearned compensation                                                                                                |                            |               | (4,562           | )        
|                                                      | Retained earnings                                                                                                    |                            |               | 531,929          |          
|                                                      |                                                                                                                      |                            |               |                  |          
|                                                      |                                                                                                                      | Total stockholders' equity |               |                  | 716,470  
|                                                      |                                                                                                                      |                            |               |                  |          
|                                                      |                                                                                                                      |                            | Total         |                  | $        
|                                                      |                                                                                                                      |                            |               |                  |          

See notes to consolidated financial statements.

25

---



STATEMENTS OF CONSOLIDATED CASH FLOWS

|                                                  |                                                                                   | For the Fiscal Years Ended                        |                               
|------------------------------------------------- | --------------------------------------------------------------------------------- | ------------------------------------------------- | ------------------------------
|
|
|Operating Activities:                             |                                                                                   |                                                   |                               
|                                                  | Net income                                                                        |                                                   | $                             
|                                                  | Adjustments to reconcile net income to net cash provided by operating activities: |                                                   |                               
|                                                  |                                                                                   | Cumulative effect of accounting change            |                               
|                                                  |                                                                                   | Depreciation and amortization                     |                               
|                                                  |                                                                                   | Provision for store closures and asset impairment |                               
|                                                  |                                                                                   | Deferred income taxes and other                   |                               
|                                                  |                                                                                   | Stock awards, net                                 |                               
|                                                  |                                                                                   | Common stock contribution to benefit plans        |                               
|                                                  |                                                                                   | Changes in assets and liabilities:                |                               
|                                                  |                                                                                   |                                                   | Pharmacy and other receivables
|                                                  |                                                                                   |                                                   | Merchandise inventories       
|                                                  |                                                                                   |                                                   | Other current assets          
|                                                  |                                                                                   |                                                   | Current liabilities           
|                                                  |                                                                                   |                                                   |                               
|                                                  |                                                                                   | Net cash provided by operating activities         |                               
|                                                  |                                                                                   |                                                   |                               
|Investing Activities:                             |                                                                                   |                                                   |                               
|                                                  | Capital expenditures                                                              |                                                   |                               
|                                                  | Proceeds from property dispositions and sale-leasebacks                           |                                                   |                               
|                                                  | Acquisition of assets from RxAmerica, net of cash                                 |                                                   |                               
|                                                  |                                                                                   |                                                   |                               
|                                                  |                                                                                   | Net cash used in investing activities             |                               
|                                                  |                                                                                   |                                                   |                               
|Financing Activities:                             |                                                                                   |                                                   |                               
|                                                  | Proceeds from long-term borrowings                                                |                                                   |                               
|                                                  | Repayments of long-term borrowings                                                |                                                   |                               
|                                                  | Proceeds from (repayments of) short-term borrowings                               |                                                   |                               
|                                                  | Repurchases of common stock, net                                                  |                                                   |                               
|                                                  | Dividend payments                                                                 |                                                   |                               
|                                                  |                                                                                   |                                                   |                               
|                                                  |                                                                                   | Net cash used in financing activities             |                               
|                                                  |                                                                                   |                                                   |                               
|Increase (decrease) in cash and equivalents       |                                                                                   |                                                   | (82,992                       
|Cash and cash equivalents at beginning of year    |                                                                                   |                                                   | 123,187                       
|                                                  |                                                                                   |                                                   |                               
|Cash and cash equivalents at end of year          |                                                                                   | $                                                 | 40,195                        
|                                                  |                                                                                   |                                                   |                               
|Supplemental disclosure of cash flow information: |                                                                                   |                                                   |                               
|                                                  | Cash paid for interest                                                            |                                                   | $                             
|                                                  | Cash paid for income taxes                                                        |                                                   |                               
|Non-cash investing and financing activities:      |                                                                                   |                                                   |                               
|                                                  | Assets acquired through capital leases                                            |                                                   | $                             
|                                                  | Elimination of note payable in acquisition of RxAmerica                           |                                                   |                               

See notes to consolidated financial statements.

26

---



STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY

|                                          |                                                        |        |      |   |        |      |   | Common
Stock
Contributions
to Profit
Sharing Plan |        |   |        |         |   |        |  
|----------------------------------------- | ------------------------------------------------------ | ------ | ---- | - | ------ | ---- | - | ------------------------------------------------- | ------ | - | ------ | ------- | - | ------ | -
|
|
|
|
|Balance at January 27, 2000               |                                                        | 39,385 |      | $ | 19,692 |      | $ | 139,759                                           |        | $ | 10,181 |         | $ | (4,401 | )
|Net income                                |                                                        |        |      |   |        |      |   |                                                   |        |   |        |         |   |        |  
|Dividends ($.56 per share)                |                                                        |        |      |   |        |      |   |                                                   |        |   |        |         |   |        |  
|Profit Sharing Plan:                      |                                                        |        |      |   |        |      |   |                                                   |        |   |        |         |   |        |  
|                                          | Issuance of stock for FY00 contribution                |        | 550  |   |        | 275  |   |                                                   | 9,906  |   |        | (10,181 | ) |        |  
|                                          | Stock portion of FY01 contribution                     |        |      |   |        |      |   |                                                   |        |   |        | 7,695   |   |        |  
|                                          | Sale of stock to plan                                  |        | 46   |   |        | 23   |   |                                                   | 1,030  |   |        |         |   |        |  
|                                          | Purchase of stock from plan                            |        | (298 | ) |        | (149 | ) |                                                   | (5,810 | ) |        |         |   |        |  
|Stock awards, net of forfeitures          |                                                        | 147    |      |   | 73     |      |   | 2,459                                             |        |   |        |         |   | (2,642 | )
|Amortization of restricted stock awards   |                                                        |        |      |   |        |      |   |                                                   |        |   |        |         |   | 2,577  |  
|Tax expense related to stock awards       |                                                        |        |      |   |        |      |   | (182                                              | )      |   |        |         |   |        |  
|Repurchase of common stock                |                                                        | (2,463 | )    |   | (1,231 | )    |   | (5,962                                            | )      |   |        |         |   |        |  
|                                          |                                                        |        |      |   |        |      |   |                                                   |        |   |        |         |   |        |  
|Balance at January 25, 2001               |                                                        | 37,367 |      |   | 18,683 |      |   | 141,200                                           |        |   | 7,695  |         |   | (4,466 | )
|                                          |                                                        |        |      |   |        |      |   |                                                   |        |   |        |         |   |        |  
|Net income                                |                                                        |        |      |   |        |      |   |                                                   |        |   |        |         |   |        |  
|Dividends ($.56 per share)                |                                                        |        |      |   |        |      |   |                                                   |        |   |        |         |   |        |  
|Profit Sharing Plan:                      |                                                        |        |      |   |        |      |   |                                                   |        |   |        |         |   |        |  
|                                          | Issuance of stock for FY01 contribution                |        | 287  |   |        | 144  |   |                                                   | 7,551  |   |        | (7,695  | ) |        |  
|                                          | Stock portion of FY02 contribution                     |        |      |   |        |      |   |                                                   |        |   |        | 2,939   |   |        |  
|Contribution of stock to 401(k) plan      |                                                        | 285    |      |   | 143    |      |   | 6,776                                             |        |   |        |         |   |        |  
|Stock awards, net of forfeitures          |                                                        | 38     |      |   | 18     |      |   | 1,309                                             |        |   |        |         |   | (1,426 | )
|Amortization of restricted stock awards   |                                                        |        |      |   |        |      |   |                                                   |        |   |        |         |   | 1,885  |  
|Tax expense related to stock awards       |                                                        |        |      |   |        |      |   | 141                                               |        |   |        |         |   |        |  
|                                          |                                                        |        |      |   |        |      |   |                                                   |        |   |        |         |   |        |  
|Balance at January 31, 2002               |                                                        | 37,977 |      |   | 18,988 |      |   | 156,977                                           |        |   | 2,939  |         |   | (4,007 | )
|                                          |                                                        |        |      |   |        |      |   |                                                   |        |   |        |         |   |        |  
|Net income                                |                                                        |        |      |   |        |      |   |                                                   |        |   |        |         |   |        |  
|Dividends ($.56 per share)                |                                                        |        |      |   |        |      |   |                                                   |        |   |        |         |   |        |  
|Employee Savings and Profit Sharing Plan: |                                                        |        |      |   |        |      |   |                                                   |        |   |        |         |   |        |  
|                                          | Issuance of stock for FY02 profit sharing contribution |        | 120  |   |        | 60   |   |                                                   | 2,879  |   |        | (2,939  | ) |        |  
|                                          | Issuance of stock for 401(k) matching contributions    |        | 303  |   |        | 151  |   |                                                   | 7,410  |   |        |         |   |        |  
|Stock awards, net of forfeitures          |                                                        | 101    |      |   | 51     |      |   | 2,519                                             |        |   |        |         |   | (2,729 | )
|Amortization of restricted stock awards   |                                                        |        |      |   |        |      |   |                                                   |        |   |        |         |   | 2,174  |  
|Tax benefits related to stock awards      |                                                        |        |      |   |        |      |   | 68                                                |        |   |        |         |   |        |  
|                                          |                                                        |        |      |   |        |      |   |                                                   |        |   |        |         |   |        |  
|Balance at January 30, 2003               |                                                        | 38,501 |      | $ | 19,250 |      | $ | 169,853                                           |        | $ |       |         | $ | (4,562 | )
|                                          |                                                        |        |      |   |        |      |   |                                                   |        |   |        |         |   |        |  

See notes to consolidated financial statements.

27

---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    The Company and Significant Accounting Policies

The CompanyLongs Drug Stores Corporation ("Longs" or the "Company") operates
retail drug stores in California, Hawaii, Colorado, Nevada, Washington and Oregon through its wholly owned subsidiary, Longs Drug Stores California, Inc. The Company operates under the names
Longs, Longs Drugs, Longs Drug Stores, Longs Pharmacy and Longs Express. The majority of the Company's stores and sales are concentrated in California. In addition to prescription drugs the Company's
core merchandise categories include over-the-counter medications, health care products, photo and photo processing, cosmetics, greeting cards, food and beverage items,
housewares, toiletries, mail centers and seasonal merchandise.

Longs
Drug Stores California, Inc. also provides pharmacy benefit management (PBM) services through its wholly owned subsidiary, RxAmerica LLC. The PBM segment provides a range of
services, including plan design and implementation, formulary management, claims processing and generic substitution, to third-party health plans and other organizations.

Basis of PresentationThe consolidated financial statements include the Company and its wholly owned subsidiaries. All
significant inter-company accounts and transactions have been eliminated. Certain reclassifications have been made in the fiscal 2001 and 2002 financial statements to conform to the 2003 presentation.

Fiscal YearThe Company operates on a 52/53-week fiscal year ending on the last Thursday in January. The fiscal
years ended January 30, 2003 and January 25, 2001 each contained 52 weeks of operations. The fiscal year ended January 31, 2002 contained 53 weeks of operations.

Use of EstimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the
reported amounts of revenues and expenses during the reporting period. Uncertainties regarding such estimates and assumptions are inherent in the preparation of the Company's financial statements and
actual results may differ from those estimates and assumptions. The Company's significant accounting judgments and estimates include collectibility of receivables, valuation of inventories,
depreciable lives and impairment of long-lived assets, reserves for store closures, vendor rebates and receivables, accrued liabilities, self-insurance reserves and reserves for sales returns.

ConcentrationsThe Company obtains approximately half of its total merchandise, including over 90% of its pharmaceuticals,
from a single supplier, AmerisourceBergen, with whom the Company has a long-term supply contract.

Cash and cash equivalentsinclude investments with original maturities of three months or less when purchased.

Pharmacy and other receivablesprimarily include amounts due from third party providers (e.g., pharmacy benefit managers, insurance
companies and governmental agencies), vendors and pharmacy

28

---

benefit management customers. Receivables are stated net of allowances for uncollectible accounts, summarized as follows:

Fiscal Year2003

2002MillionsAllowances for uncollectible accounts, beginning of year

$
3.1

$
1.3Additions charged to expense


2.4


1.8Deductions for accounts written off


(0.5
)

Allowances for uncollectible accounts, end of year

$
5.0

$
3.1


Merchandise inventoriesare stated at the lower of cost or market value. Cost is determined using the last-in,
first-out (LIFO) method. The excess of specific cost over LIFO values was $171.4 million and $165.3 million as of January 30, 2003 and January 31, 2002,
respectively.

In
fiscal years 2002 and 2001 inventory quantities were reduced, resulting in a liquidation of certain LIFO inventory layers, the after-tax effect of which increased net
income by $0.4 million ($0.01 per diluted share) and $1.5 million ($0.04 per diluted share), respectively.

Propertyincludes the major categories of land, buildings and leasehold improvements, and equipment and fixtures. Property is initially
recorded at its cost, which is its estimated fair value if the property was acquired as part of an acquisition. The Company capitalizes costs that relate to the application and infrastructure
development stage of software and web site development, and includes such costs in equipment and fixtures. Costs for improvements that enhance the usefulness or extend the useful life of an asset are
capitalized. Repairs and maintenance costs are expensed as incurred.

Property
is depreciated using the straight-line method over its estimated useful life. Useful lives are estimated at twenty to thirty-three years for buildings, the shorter
of the estimated useful life or lease term for leasehold improvements and three to twenty years for equipment and fixtures.

Buildings
and leasehold improvements include assets under capital leases of $10.8 million and $4.4 million as of January 30, 2003 and January 31, 2002,
respectively. The corresponding capital lease obligation is included in other current and long-term liabilities, depending on scheduled payment dates. The amount capitalized for assets
under capital leases is the present value at the beginning of the lease term of the aggregate future minimum lease payments. The amortization of such assets is included in depreciation expense.
Accumulated amortization on assets under capital leases was $0.3 million as of January 30, 2003 and not significant as of January 31, 2002.

Goodwillrepresents the excess of acquisition cost over the fair value of the net assets of acquired entities. Effective with the first
quarter of fiscal 2003, goodwill is not amortized, but is subject to impairment testing annually, or more frequently if events and circumstances indicate there may be an impairment (see "New
Accounting Pronouncements").

Intangible assetsconsist primarily of purchased pharmacy customer lists, non-compete agreements and beverage licenses.
Effective with the first quarter of fiscal 2003, intangible assets with indefinite useful lives are not amortized, but are subject to impairment testing annually, or more frequently if events and
circumstances indicate there may be an impairment (see "New Accounting Pronouncements"). Intangible assets with finite useful lives are amortized over those useful lives.

Other assetsinclude joint venture investments accounted for under the equity method, deferred debt issue costs (net of amortization),
deposits and other items.

Impairment of Long-Lived AssetsThe Company reviews long-lived tangible assets and intangible assets
with finite useful lives for impairment whenever events or changes in circumstances indicate that their carrying values may not be recoverable. Using its best estimates based on reasonable assumptions

29

---

and projections, the Company records an impairment loss to write such assets down to their estimated fair values if the carrying values of the assets exceed their related undiscounted expected future
cash flows.

Goodwill
and other intangible assets with indefinite useful lives are reviewed for impairment annually, or more frequently if events or changes in circumstances warrant. If the carrying
values of such assets exceed their estimated fair values, the Company records an impairment loss to write the assets down to their estimated fair values.

Long-lived
tangible assets and intangible assets with finite useful lives are generally evaluated at an individual store level, which is the lowest level at which independent
cash flows can be identified. Corporate assets or other long-lived assets that are not store-specific are evaluated at a consolidated entity or segment level as appropriate. Goodwill is
evaluated at a reporting unit level in accordance with Statement of Financial Accounting Standards ("SFAS") No. 142,Goodwill and Other Intangible
Assets. The regional operating districts within the retail drug store segment make up the Company's reporting units.

Store Closure ReservesPrior to January 1, 2003, the Company recorded the estimated costs associated with closing a
store during the period in which the store was identified and approved by management under a plan of termination, which included the method of disposition and the expected date of completion. These
costs include direct costs to terminate a lease, lease rental payments net of expected sublease income, and the difference between the carrying values and estimated recoverable values of
long-lived tangible and intangible assets. Severance and other employee-related costs were recorded in the period in which the closure and related severance packages were communicated to
the affected employees.

Effective
with the adoption of SFAS No. 146,Accounting for Costs Associated with Exit or Disposal Activities, on January 1,
2003 (see "New Accounting Pronouncements"), the Company recognizes a liability for costs associated with closing a store when the liability is incurred. The present value of expected future lease
costs and other closure costs is recorded when the store is closed. Severance and other employee-related costs are recorded in the period in which the closure and related severance
packages are communicated to the affected employees. Accretion of the discounted present value of expected future costs is recorded in operations. Store closure reserves are reviewed and adjusted
periodically based on changes in estimates.

Fair Value of Financial InstrumentsThe carrying values of the Company's cash and equivalents, receivables and payables
approximate their estimated fair values due to their short-term nature. To estimate the fair value of long-term debt, the Company uses those interest rates that are currently
available to it for issuance of debt with similar terms and remaining maturities. As of January 30, 2003, the carrying value of the Company's long-term debt was
$183.8 million and its estimated fair value was $200.9 million. As of January 31, 2002, the carrying value of the Company's long-term debt approximated its estimated
fair value.

Revenue RecognitionThe Company recognizes revenue from the sale of merchandise and services, net of an allowance for
estimated returns, at the time the merchandise is sold or services performed. The allowance for sales returns is estimated based on the Company's historical experience.

Revenue
from the PBM segment is recognized when the Company's RxAmerica subsidiary has completed its service obligations under its contracts, including the approval or denial of the
authorization request to the participating pharmacy. RxAmerica does not take title to the prescription drug inventories or assume substantial risks and rewards of ownership. Therefore, revenues from
third-party health plans are recognized net of the reimbursements due to participating pharmacies. The Company does not recognize or otherwise reflect in its financial statements
co-payments made to participating pharmacies by health plan members.

30

---

Cost of salesincludes the cost of inventory sold and services performed during the period (net of merchandise rebates and allowances),
including in-bound freight, receiving, warehousing and certain purchasing and distribution costs.

Operating and administrative expensesinclude costs for store and administrative payroll and benefits, facilities and occupancy,
advertising (net of advertising rebates and allowances), and other miscellaneous expenses.

Vendor Rebates and AllowancesMerchandise rebates and allowances are recognized as a reduction of cost of sales when the
related inventory is sold. Advertising rebates and allowances are recognized as a reduction of advertising expense when the related advertising expense is incurred or the required performance is
completed. Lump-sum payments received from vendors in connection with a contractual arrangement are deferred and recognized over the contract term. Such payments are recognized as a
reduction of cost of sales or of advertising expense, depending on the nature of the contract.

AdvertisingNet advertising costs are expensed as incurred and were $24.5 million, $22.3 million and
$23.0 million in fiscal years 2003, 2002 and 2001, respectively.

InsuranceThe Company obtains insurance coverage for significant exposures as well as those risks required to be insured by
law. It is generally the Company's policy to retain a significant portion of certain losses related to workers' compensation, general liability, property losses, pharmacist liability, business
interruptions and employee health care. Provisions for these items are recorded based upon the Company's estimates for claims incurred. The provisions are estimated in part by third parties and are
based on claims experience, regulatory changes, an estimate of claims incurred but not yet reported and other relevant factors. Reserves for workers' compensation and general liability claims are
discounted to their expected present value using a risk-free interest rate.

New store opening costs, primarily labor, advertising and store supplies, are charged to expense as incurred.

RentMinimum rent expense, including fixed escalations, is recorded on a straight-line basis over the lease term.
When a lease provides for fixed escalations of the minimum rental payments, the difference between the straight-line rent charged to expense and the amount payable under the lease is
recognized as deferred rent. As of January 30, 2003 and January 31, 2002, deferred rent of $17.4 million and $14.3 million, respectively, was included in
long-term liabilities. Contingent rental payments, typically based on a percentage of sales, are recognized as an expense at the time the required sales levels are achieved.

Income taxesThe Company accounts for income taxes using the asset and liability method. Under this method, deferred income
taxes are recorded based upon the differences between the financial statement and tax basis of assets and liabilities.

Stock-based compensationThe Company has two stock-based employee compensation plans, as described in Note 12. The
Company accounts for stock-based employee compensation using the intrinsic value method in accordance with the provisions of APB Opinion No. 25,Accounting for Stock
Issued to Employees, as allowed by SFAS No. 123,Accounting for Stock-Based Compensation. Stock awards are valued at fair
market value at the date of grant, and are recorded as compensation expense over the vesting period. No compensation expense is recognized for employee stock options, because it is the Company's
practice to grant stock options with an exercise price equal to the market price of the underlying common stock on the date of grant. The following table illustrates the effect on net income

31

---

and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to all stock-based employee compensation:

|                                                                                                                                            |             | Fiscal Year |       
|------------------------------------------------------------------------------------------------------------------------------------------- | ----------- | ----------- | ------
|
|
|Net income, as reported                                                                                                                     |             | $           | 6,702 
|Add: Stock-based employee compensation expense included in reported net income, net of related tax effects                                  |             |             | 1,209 
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |             |             | (3,328
|                                                                                                                                            |             |             |       
|Pro forma net income                                                                                                                        |             | $           | 4,583 
|                                                                                                                                            |             |             |       
|Basic net income per share:                                                                                                                 |             |             |       
|                                                                                                                                            | As reported |             | $     
|                                                                                                                                            | Pro forma   |             |       
|Diluted net income per share:                                                                                                               |             |             |       
|                                                                                                                                            | As reported |             | $     
|                                                                                                                                            | Pro forma   |             |       

The
Company estimates the fair value of stock option grants using the Black-Scholes option pricing model, with the following weighted average assumptions:

|                        |  | Fiscal Year |  
|----------------------- |  | ----------- | -
|
|Dividend yield          |  | 2.43        | %
|Expected volatility     |  | 35.26       | %
|Risk-free interest rate |  | 3.64        | %
|Expected life (years)   |  | 5.0         |  

Earnings per shareBasic earnings per share are computed by dividing net income by the weighted average number of common
shares outstanding during the period. Diluted earnings per share are computed by dividing net income by the weighted average number of common shares and dilutive common equivalent shares (restricted
stock awards and stock options) outstanding during the period. The following is a reconciliation of the number of shares used in the Company's basic and diluted earnings per share computations:

|                                                      |                         | Fiscal Year
|----------------------------------------------------- | ----------------------- | -----------
|
|
|Basic weighted average number of shares outstanding   |                         | 37,937     
|Effect of dilution from:                              |                         |            
|                                                      | Restricted stock awards |            
|                                                      | Stock options           |            
|                                                      |                         |            
|Diluted weighted average number of shares outstanding |                         | 38,223     
|                                                      |                         |            

The
computations of diluted earnings per share in fiscal 2003 and 2002 exclude 916,575 and 49,900 stock options, respectively, because their effect would have been
anti-dilutive.

Comprehensive incomeequals net income for all periods presented.

32

---

New Accounting Pronouncements and Accounting ChangeIn fiscal 2002, the Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, which established accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133 requires that an entity recognize all derivative instruments as either assets or liabilities
in the statement of financial position and measure those instruments at fair value. The Company has no derivative instruments, and therefore adoption of SFAS No. 133 had no impact on the
Company's financial statements.

In
June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141,Business Combinations, and SFAS
No. 142,Goodwill and Other Intangible Assets. SFAS No. 141 requires that all business combinations after June 30, 2001 be
accounted for using the purchase method of accounting and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. The adoption of
SFAS No. 141 had no impact on the Company's consolidated financial statements. Under SFAS No. 142, goodwill and certain other intangible assets deemed to have indefinite lives will no
longer be amortized, but must be tested for impairment annually, or more frequently if events and circumstances indicate there may be an impairment. The Company adopted SFAS No. 142 in the
first quarter of fiscal 2003. Upon adoption of SFAS No. 142, the Company discontinued the amortization of goodwill with a carrying value of $123.3 million as of January 31, 2002,
and of certain other intangible assets with indefinite lives. See Note 4 for a reconciliation of reported earnings and earnings per share to the amounts adjusted for the exclusion of
amortization of goodwill and other intangible assets with indefinite lives, net of the related income tax effects.

As
required by SFAS No. 142, the Company performed a transitional goodwill impairment test as of February 1, 2002, the date of adoption of the standard. Based on an
independent valuation, the Company identified certain reporting units in its retail drug store segment that have experienced declines in their fair values below their net carrying values. Accordingly,
the Company recognized a goodwill impairment charge of $41.0 million ($24.6 million or $0.65 per diluted share after tax) for these reporting units in the first quarter of fiscal 2003 as
the cumulative effect of a change in accounting principle.

In
August 2001, the FASB issued SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets.
SFAS No. 144 establishes accounting and reporting standards for the impairment of long-lived assets and for long-lived assets to be disposed of. The Company adopted SFAS
No. 144 in the first quarter of fiscal 2003. The initial adoption of SFAS No. 144 did not have a significant impact on the Company's reporting for impairments or disposals of
long-lived assets.

In
June 2002, the FASB issued SFAS No. 146,Accounting for Costs Associated with Exit or Disposal Activities, which
addresses accounting for restructuring and similar costs. SFAS No. 146 supersedes previous accounting guidance, principally EITF Issue No. 94-3. The Company has adopted the
provisions of SFAS No. 146 for restructuring activities initiated after December 31, 2002. SFAS No. 146 requires that the liability for costs associated with an exit or disposal
activity be recognized when the liability is incurred. Under Issue No. 94-3, a liability for an exit cost was generally recognized at the date of the Company's commitment to an exit
plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS No. 146 may affect the timing of recognizing future
restructuring costs as well as the amounts recognized.

In
December 2002, the FASB issued SFAS No. 148,Accounting for Stock-Based CompensationTransition and
Disclosure. SFAS No. 148 amends SFAS No. 123,Accounting for Stock-Based Compensation, to provide alternative
methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee

33

---

compensation and the effect of the method used on reported results. The transition guidance and annual disclosure provisions of SFAS No. 148 are effective for the Company's fiscal year ended
January 30, 2003. The interim disclosure provisions are effective for the first quarter of the fiscal year ending January 29, 2004. The Company continues to account for stock-based
compensation using the intrinsic value method in accordance with the provisions of APB Opinion No. 25,Accounting for Stock Issued to Employees,
as allowed by SFAS No. 123. As a result, the adoption of SFAS No. 148 did not have any impact on the Company's consolidated financial results.

In
November 2002, the FASB issued Interpretation ("FIN") No. 45,Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN No. 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about
obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The disclosure requirements of FIN No. 45 are effective for interim and annual periods ending after December 15, 2002, and the initial recognition and measurement
requirements are effective prospectively for guarantees issued or modified after December 31, 2002. The initial adoption of FIN No. 45 did not have a material impact on the Company's
financial position or results of operations.

In
November 2002, the EITF reached a consensus regarding EITF Issue No. 02-16,Accounting by a Customer (including a Reseller) for
Certain Consideration Received from a Vendor. Issue No. 02-16 addresses the timing of recognition and classification of consideration received from vendors,
including rebates and allowances. Issue No. 02-16 is effective for certain of the Company's vendor rebates and allowances commencing in November 2002 and others in
January 2003. The adoption of Issue No. 02-16 did not have a material impact on the Company's consolidated financial statements.

2.    Provision for Store Closures and Asset Impairment

The Company periodically reviews store operations and makes decisions to close stores in the normal course of business. In addition, the Company periodically
reviews its long-lived tangible and intangible assets for impairment. Costs associated with store closures and asset impairment are recognized as a component of operating income. Following
is a summary of the provision (benefit) for store closures and asset impairments and related reserves, which are included in long-term liabilities, for the three fiscal years ended
January 30, 2003:

|Description                                       |  | Lease
Related
Costs |      | Employee
Termination
Costs |   | Asset
Impairment |   | Other |       | Total |  
|------------------------------------------------- |  | ------------------- | ---- | -------------------------- | - | ---------------- | - | ----- | ----- | ----- | -
|
|Reserve balance at January 27, 2000               |  | $                   | 7.7  |                            | $ |                 |   | $     |      |       | $
|Provision for store closures and asset impairment |  |                     | 14.0 |                            |   |                 |   |       | 13.3  |       |  
|Costs paid or settledcash                        |  |                     | (0.6 | )                          |   |                 |   |       |      |       |  
|                                                  |  |                     |      |                            |   |                  |   |       |       |       |  
|Reserve balance at January 25, 2001               |  |                     | 21.1 |                            |   |                 |   |       | 13.3  |       |  
|Provision for store closures and asset impairment |  |                     | (3.1 | )                          |   | 1.0              |   |       | 0.8   |       |  
|Costs paid or settledcash                        |  |                     | (5.5 | )                          |   | (1.0             | ) |       |      |       |  
|Costs paid or settlednon-cash                    |  |                     |     |                            |   |                 |   |       | (14.1 | )     |  
|                                                  |  |                     |      |                            |   |                  |   |       |       |       |  
|Reserve balance at January 31, 2002               |  |                     | 12.5 |                            |   |                 |   |       |      |       |  
|Provision for store closures and asset impairment |  |                     | 0.6  |                            |   |                 |   |       | 10.2  |       |  
|Costs paid or settledcash                        |  |                     | (5.3 | )                          |   |                 |   |       |      |       |  
|Costs paid or settlednon-cash                    |  |                     |     |                            |   |                 |   |       | (10.2 | )     |  
|                                                  |  |                     |      |                            |   |                  |   |       |       |       |  
|Reserve balance at January 30, 2003               |  | $                   | 7.8  |                            | $ |                 |   | $     |      |       | $
|                                                  |  |                     |      |                            |   |                  |   |       |       |       |  

34

---

Store Closures

In January 2001, the Board of Directors approved a plan (the "2001 Closure Plan") to close 15 poorly performing stores, and the Company recorded expenses
of $25.6 million associated with this plan (including $12.3 million of store closure costs and $13.3 million of asset impairment charges). The Company also closed 3 stores not
included in the 2001 Closure Plan during fiscal 2001 and recorded expenses of $2.8 million related to these store closures.

The
Company closed 14 stores pursuant to the 2001 Closure Plan in the first quarter of fiscal 2002, and elected not to close the remaining store. The Company also closed 5 stores not
included in the 2001 Closure Plan during fiscal 2002. Based on the results of store closure activities in fiscal 2002 and estimated future costs, the Company recorded a benefit of $2.5 million
for the reduction of the reserve for store closures in fiscal 2002.

The
Company closed 6 stores in fiscal 2003 and recorded expenses of $0.6 million related to these store closures and adjustments of previously recorded store closure reserves
based on estimated future costs.

Asset Impairment

The asset impairment charge associated with the 2001 Closure Plan totaled $13.3 million, comprised of $7.7 million of long-lived
tangible fixed assets and $5.6 million of goodwill associated with the closed stores. These charges represented the amounts necessary to write the assets down to their estimated recoverable
values.

In
fiscal 2002 and 2003, the Company identified certain stores with assets whose carrying values exceeded their related undiscounted expected future cash flows. Accordingly, impairment
charges of $0.8 million in fiscal 2002 and $5.0 million in fiscal 2003 were recorded to write such assets down to their estimated fair values, based on discounted projected future cash
flows.

Also
in fiscal 2003, the Company abandoned a targeted marketing database that was originally developed as a component of the Company's e-retail strategy. The Company recorded
an impairment charge of $5.2 million to write off the remaining net book value of this database.

3.    Acquisitions

On September 17, 2001, the Company exercised an option to acquire the interest of Albertson's Inc. in its PBM joint venture, RxAmerica. The
transaction was accounted for using the purchase method of accounting. The Company allocated the purchase price of $31.7 million to the acquired net assets (including cash of
$25.9 million) based on their estimated fair values at the date of acquisition. The Company's $11.7 million note payable to RxAmerica was eliminated upon acquisition of full ownership of
the PBM. The fair value of the net assets acquired exceeded the purchase price by an immaterial amount, resulting in a reduction of the carrying value of RxAmerica's tangible long-lived
assets.

This
acquisition was accounted for as a purchase, with the results of operations of the acquired business included in the accompanying consolidated financial statements from the date of
acquisition. On a pro forma basis, as if the business had been acquired at the beginning of fiscal 2001, sales, net income and net income per share would not differ materially from the amounts
reported in the accompanying consolidated financial statements.

4.    Goodwill and Intangible Assets

All of the Company's goodwill and other intangible assets are included in the retail drug store segment. As discussed in Note 1, goodwill and other
intangible assets with indefinite useful lives are

35

---

not amortized, but are subject to annual impairment testing. Intangible assets with finite useful lives are amortized over those useful lives.

The
changes in the net carrying value of goodwill for the fiscal years ended January 30, 2003 and January 31, 2002 were as follows:

Fiscal Year2003

2002ThousandsGoodwill, beginning of year

$
123,306

$
134,594Cumulative effect of adoption of SFAS No. 142 (see Note 1)


(41,035
)

Amortization expense prior to adoption of SFAS No. 142 (see Note 1)





(6,327
)Goodwill written off as a result of store closures (see Note 2)





(5,574
)Goodwill acquired





613Impairment losses


(151
)

Other adjustments


(35
)Goodwill, end of year

$
82,085

$
123,306


The
Company tests goodwill for impairment in the fourth quarter of each fiscal year, or whenever events and circumstances indicate there may be an impairment. The fair value of the
Company's reporting units is estimated based on the expected present value of future cash flows. Due to lower than previously expected operating profits and cash flows in one of the Company's
reporting units, the Company recorded a goodwill impairment loss of $151,000, included in the provision for store closures and asset impairments (see Note 2).

The
Company's intangible assets other than goodwill include the following:

|                        |                                                | Useful Lives                     |       | Gross Carrying
Value |   | Accumulated
Amortization |       | Net Carrying
Value
|----------------------- | ---------------------------------------------- | -------------------------------- | ----- | -------------------- | - | ------------------------ | ----- | ------------------
|
|As of January 30, 2003: |                                                |                                  |       |                      |   |                          |       |                   
|                        | Intangible assets subject to amortization:     |                                  |       |                      |   |                          |       |                   
|                        |                                                | Pharmacy customer lists          |       | 1-5 years            |   | $                        | 1,121 |                   
|                        |                                                | Non-compete agreements and other |       | 2-5 years            |   |                          | 91    |                   
|                        |                                                |                                  |       |                      |   |                          |       |                   
|                        |                                                |                                  | Total |                      |   |                          |       | 1,212             
|                        | Intangible assets not subject to amortization: |                                  |       |                      |   |                          |       |                   
|                        |                                                | Beverage licenses                |       | N/A                  |   |                          | 4,743 |                   
|                        |                                                |                                  |       |                      |   |                          |       |                   
|                        | Total                                          |                                  |       |                      | $ | 5,955                    |       | $                 
|                        |                                                |                                  |       |                      |   |                          |       |                   
|As of January 31, 2002: |                                                |                                  |       |                      |   |                          |       |                   
|                        | Intangible assets subject to amortization:     |                                  |       |                      |   |                          |       |                   
|                        |                                                | Pharmacy customer lists          |       | 1-5 years            |   | $                        | 3,658 |                   
|                        |                                                | Non-compete agreements and other |       | 2-5 years            |   |                          | 1,054 |                   
|                        |                                                |                                  |       |                      |   |                          |       |                   
|                        |                                                |                                  | Total |                      |   |                          |       | 4,712             
|                        | Intangible assets not subject to amortization: |                                  |       |                      |   |                          |       |                   
|                        |                                                | Beverage licenses                |       | N/A                  |   |                          | 4,695 |                   
|                        |                                                |                                  |       |                      |   |                          |       |                   
|                        | Total                                          |                                  |       |                      | $ | 9,407                    |       | $                 
|                        |                                                |                                  |       |                      |   |                          |       |                   

36

---

The
net decreases in the gross carrying values and accumulated amortization of pharmacy customer lists and non-compete agreements were primarily due to the removal of fully
amortized assets. The increase in the carrying value of beverage licenses was primarily due to the acquisition of additional licenses. Acquisitions of pharmacy customer lists and
non-compete agreements were not significant during the fiscal years ended January 30, 2003 and January 31, 2002.

Amortization
expense for intangible assets with finite useful lives was $287,000, $290,000 and $216,000 in fiscal 2003, 2002 and 2001, respectively. Estimated annual amortization expense
on these intangibles for each of the next five fiscal years is as follows (in thousands):

Fiscal Year 2004

$
289Fiscal Year 2005


221Fiscal Year 2006


150Fiscal Year 2007


27Fiscal Year 2008


Total

$
687


As
discussed in Note 1, upon adoption of SFAS No. 142 the Company discontinued the amortization of goodwill with a carrying value of $123.3 million as of
January 31, 2002, and of certain other intangible assets with indefinite lives. Following is a reconciliation of reported earnings and earnings per share to
the amounts adjusted for the exclusion of amortization of goodwill and other intangible assets with indefinite lives, net of the related income tax effects.

|                                                                    |                                                                     | Fiscal Year
|------------------------------------------------------------------- | ------------------------------------------------------------------- | -----------
|
|
|Reported income before cumulative effect of accounting change       |                                                                     | $          
|Amortization of goodwill, net of tax                                |                                                                     |            
|Amortization of other intangibles with indefinite lives, net of tax |                                                                     |            
|                                                                    |                                                                     |            
|Adjusted income before cumulative effect of accounting change       |                                                                     | $          
|                                                                    |                                                                     |            
|Basic earnings per share:                                           |                                                                     |            
|                                                                    | Reported income before cumulative effect of accounting change       |            
|                                                                    | Amortization of goodwill, net of tax                                |            
|                                                                    | Amortization of other intangibles with indefinite lives, net of tax |            
|                                                                    |                                                                     |            
|                                                                    | Adjusted income before cumulative effect of accounting change       |            
|                                                                    |                                                                     |            
|Diluted earnings per share:                                         |                                                                     |            
|                                                                    | Reported income before cumulative effect of accounting change       |            
|                                                                    | Amortization of goodwill, net of tax                                |            
|                                                                    | Amortization of other intangibles with indefinite lives, net of tax |            
|                                                                    |                                                                     |            
|                                                                    | Adjusted income before cumulative effect of accounting change       |            
|                                                                    |                                                                     |            

37

---

5.    Debt

Long-term debt at January 30, 2003 and January 31, 2002 consisted of the following:

2003

2002ThousandsUnsecured revolving line of credit, interest based on LIBOR (weighted average rate of 2.60% at January 30, 2003), expires October 2004

$
25,000

$
40,000Private placement notes, fixed interest rates ranging from 5.85% to 7.85%, mature at various dates through 2014


158,571


160,714Equipment notes and other


206


689Total long-term debt

$
183,777

$
201,403Less current portion


2,348


2,629Long-term portion

$
181,429

$
198,774


In
October 2001, the Company replaced its $130 million unsecured revolving line of credit with an Amended and Restated $150 million unsecured revolving line of
credit, which expires in October 2004. Borrowings on the line of credit do not require repayment until the agreement expires. Letters of credit totaling $9.3 million were outstanding
under the agreement as of January 30, 2003. The Company pays a quarterly commitment fee of 0.30% per annum on the unused portion of the line of credit ($115.7 million as of
January 30, 2003).

The
Company's debt agreements contain limits on borrowings, dividend payments and repurchases of Company stock, and various quarterly financial covenants that set maximum leverage ratios
and minimum fixed charge coverage ratios. The agreements allowed for the exclusion of the $41.0 million cumulative effect of adopting SFAS No. 142 (see Note 1) and the
$25.6 million charge associated with the 2001 Closure Plan (see Note 2) in the computation of the fixed charge coverage ratio. As of January 30, 2003, the Company was in
compliance with the restrictions and limitations included in these provisions.

Future
minimum principal payments on long-term debt are as follows (in thousands):

Fiscal Year 2004

$
2,348Fiscal Year 2005


66,870Fiscal Year 2006


8,870Fiscal Year 2007


45,870Fiscal Year 2008


6,727Thereafter


53,092Total

$
183,777


6.    Leases

The Company leases most of its store properties and certain of its distribution centers and corporate office facilities. Leases typically have original
non-cancelable terms of 15 to 25 years and contain renewal options covering up to 30 additional years in 5-year to 10-year increments. Leases normally
provide for minimum annual rent with provisions for additional rent based on a percentage of sales, and may
contain escalation clauses. The total amount of the minimum rent is expensed on a straight-line basis over the lease term (see Note 1).

38

---

Net
rental expense is summarized as follows:

|                            |  | Fiscal Year |       
|--------------------------- |  | ----------- | ------
|
|
|Minimum rentals             |  | $           | 64,288
|Contingent rentals          |  |             | 12,025
|                            |  |             |       
|                            |  |             | 76,313
|Less sublease rental income |  |             | (2,132
|                            |  |             |       
|                            |  | $           | 74,181
|                            |  |             |       

Minimum
rental commitments for non-cancelable leases as of January 30, 2003 are as follows:

Operating
Leases

Capital
LeasesThousandsFiscal Year 2004

$
69,294

$
1,016Fiscal Year 2005


70,143


1,016Fiscal Year 2006


67,403


1,016Fiscal Year 2007


64,572


1,044Fiscal Year 2008


61,657


1,052Thereafter


651,731


20,956Total minimum lease payments

$
984,800

$
26,100Less amounts representing interest





15,288Present value of capital lease obligations




$
10,812Less current portion





73Long-term portion




$
10,739


Total
minimum lease payments on operating leases have not been reduced by minimum future sublease rentals of $18.1 million under non-cancelable subleases.

During
the fourth quarter of fiscal 2002, Longs sold five Company-owned store properties for total net proceeds of $15.2 million and leased them back under new long-term operating
leases. The Company continues to operate the stores on these sale-leaseback properties. The Company deferred gains of $0.4 million on three of the properties and is amortizing them over the
lease terms. Losses of $0.8 million on the remaining two properties were recognized in operating income during fiscal 2002.

7.    Commitments and Contingencies

As of January 30, 2003, the Company had outstanding commitments to purchase $5 billion of merchandise inventory (including a significant portion
from AmerisourceBergen, a joint venture partner, see Note 8) at various dates through January 2006 for use in the normal course of business.

The
Company has entered into agreements with its executive officers and other key employees that provide termination benefits in the event of certain change in control events. Total
contingent termination benefits as of the end of fiscal 2003 were approximately $78.7 million. There have been no events that would trigger these benefits as of January 30, 2003.

The
Company is subject to various lawsuits and claims arising in the normal course of its businesses. In the opinion of management, after consultation with counsel, the disposition of
these matters is not likely to have a material adverse effect, individually or in the aggregate, on the Company's consolidated financial statements taken as a whole.

39

---

8.    Joint Ventures

In November 1997, Longs and American Drug Stores, Inc. (now Albertson's, Inc.) merged their PBM subsidiaries and pharmacy mail order
operations into a joint venture, RxAmerica. Longs contributed $5.0 million in cash, a note payable for $13.2 million and assets totaling $1.6 million in return for a 50% interest
in the joint venture. In fiscal 2001, RxAmerica sold the mail order business. The Company's share of the loss from the sale of these assets was $1.6 million. In September 2001, the
Company exercised an option to acquire the remaining 50% of RxAmerica's net assets from Albertson's (see Note 3). Prior to the acquisition, RxAmerica's results of operations, reported using the
equity method of accounting, were not material to the Company's consolidated financial statements.

In
February 2001, Longs and AmerisourceBergen entered into a joint venture agreement to establish a central prescription fill center in order to reduce prescription fill costs and
to address a shortage of pharmacists. Longs contributed approximately $3.3 million in cash in return for a 50% interest in the joint venture, which commenced operations in the second quarter of
fiscal 2002. The Company accounts for its investment in the fill center using the equity method of accounting. This joint venture's results of operations were not material to the Company's
consolidated financial statements in fiscal 2003 or 2002.

9.    Employee Compensation and Benefits

The Company had approximately 22,200 full-time and part-time employees as of January 30, 2003. Virtually all full-time
employees are covered by medical, dental and life insurance benefits paid primarily by the Company.

Employees
who meet certain eligibility requirements are entitled to profit sharing benefits under the Longs Drug Stores California, Inc. Employee Savings and Profit Sharing Plan.
Profit sharing benefits are funded entirely by the Company. The plan also has a 401(k) component under which employees may make voluntary contributions. The Company matches a portion of the employee
contributions. Company contributions to the plan, which may be made in cash or shares of Longs common stock, were $8.0 million, $9.4 million and $11.5 million for fiscal years
2003, 2002 and 2001, respectively. Matching contributions paid by the Company under the 401(k) component and included above were $8.0 million, $6.5 million and $3.1 million for
fiscal years 2003, 2002 and 2001, respectively.

The
Longs Drug Stores Corporation Deferred Compensation Plan of 1995 provides eligible employees with the opportunity to defer a specified percentage of their cash compensation.
Resulting obligations will be payable on dates selected by the participants in accordance with the terms of the plan. The plan provides for a total deferred compensation obligation under the plan of
up to $20.0 million. The Company's deferred compensation obligation was $8.3 million and $9.8 million as of January 30, 2003 and January 31, 2002, respectively.

40

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10.  Taxes on Income

Significant components of the Company's deferred tax assets and liabilities as of January 30, 2003 and January 31, 2002 are as follows:

January 30,
2003

January 31,
2002ThousandsDeferred Tax Assets:Employee compensation and benefits

$
32,909

$
31,494Intangible assets


13,511


601Store closure reserves


4,290


3,205Capitalized interest


2,856


2,952Tax credits


2,426


State income tax


973


1,875Other


2,761


34659,726


40,473Deferred Tax Liabilities:Depreciation


15,449


17,433Federal benefit of state income tax


3,904


1,388Property


1,536


2,404Inventories


1,169


5,293Other


3,692


3,91825,750


30,436Net deferred tax asset

$
33,976

$
10,037


Income
tax expense is summarized as follows:

|         |  | Fiscal Year |       
|-------- |  | ----------- | ------
|
|
|Current: |  |             |       
|Federal  |  | $           | 16,223
|State    |  |             | 4,623 
|         |  |             |       
|         |  |             | 20,846
|Deferred |  |             | (7,529
|         |  |             |       
|Total    |  | $           | 13,317
|         |  |             |       

The
reconciliation between the federal statutory tax rate and the Company's effective tax rates is as follows:

|                                          |  | Fiscal Year |  
|----------------------------------------- |  | ----------- | -
|
|Federal income taxes at statutory rate    |  | 35.00       | %
|State income tax, net of federal benefits |  | 4.20        |  
|Benefits of wage and other tax credits    |  | (6.62       | )
|Benefits of ESOP dividends                |  | (3.10       | )
|Other                                     |  | 0.35        |  
|                                          |  |             |  
|                                          |  | 29.83       | %
|                                          |  |             |  

41

---

The
Company has state tax credits of $2.4 million that may be carried forward for an indefinite period of time to offset future state taxable income.

11.  Stockholders' Equity

Authorized capital stock consists of 120 million shares of common stock, $.50 par value, and 30 million shares of preferred stock. Each outstanding
share of common stock includes a Preferred Stock Purchase Right (expiring in September 2006) which is exercisable only upon the occurrence of certain change in control events. There have been
no events that would allow these rights to be exercised.

In
November 1999, the Board of Directors authorized the repurchase of up to 2,000,000 shares of the Company's common stock through November 2004, for a maximum total
expenditure of $80 million. During fiscal 2001, the Company repurchased 1,146,868 shares under this authorization at a total cost of $22.5 million. The Company also repurchased 1,614,157
shares of common stock from the Estate of Vera M. Long at a total cost of $31.0 million pursuant to a separate authorization by the Board of Directors in February 2000. In addition, the
Company sold 45,688 shares of common stock to the Profit Sharing Plan in fiscal 2001 for $1.1 million, resulting in net stock repurchases of $52.4 million. The Company did not repurchase
any of its common stock in fiscal 2002 or 2003.

12.  Stock Incentive Plans

The Company has two separate plans under which it may grant options to purchase shares of the Company's common stock and other awards of common stock to key
employees. The 1995 Long Term Incentive Plan, as amended, authorized the issuance of 3,400,000 shares of common stock in the form of stock options, incentive stock options and stock awards. The
Non-Executive Long Term Incentive Plan, as amended, authorized the issuance of 3,000,000 shares of common stock of the Company and contains similar provisions to those of the 1995 Long
Term Incentive Plan, except that it does not allow for incentive stock options or grants to owners or directors of the Company. As of January 30, 2003, there were 2,131,403 shares of common
stock available for grant under the two plans.

Generally,
options are granted with an exercise price not less than 100% of the closing market price on the date of the grant. The Company's options generally vest over a period of
4 years and have a maximum term of 10 years. The Company's stock option award plans contain provisions for automatic vesting upon a change of control.

Stock
awards are valued at fair market value at the date of grant, and are recorded as compensation expense over the vesting period. Recipients have voting rights to the shares and
dividends are credited to the shares during the restriction period. However, transfer of ownership of the shares is dependent
on continued employment for periods of one to five years. Unearned compensation expense related to restricted stock awards was $4.6 million and $4.0 million as of January 30, 2003
and January 31, 2002, respectively, and has been reflected as a reduction of stockholders' equity. During fiscal years 2003, 2002 and 2001, the Company granted 123,300, 58,700 and 176,400
shares of restricted stock, respectively.

42

---

Stock Options

Following is a summary of stock option activity:

|                                            |  | Options Outstanding |   | Options Exercisable
|------------------------------------------- |  | ------------------- | - | -------------------
|
|Outstanding at January 27, 2000             |  |                    |   |                    
|Granted (weighted average fair value $6.81) |  | 573,850             |   | $                  
|Forfeited                                   |  | (4,600              | ) |                    
|                                            |  |                     |   |                    
|Outstanding at January 25, 2001             |  | 569,250             |   | $                  
|Granted (weighted average fair value $6.42) |  | 99,900              |   |                    
|Forfeited                                   |  | (28,600             | ) |                    
|                                            |  |                     |   |                    
|Outstanding at January 31, 2002             |  | 640,550             |   | $                  
|Granted (weighted average fair value $6.71) |  | 3,012,800           |   |                    
|Forfeited                                   |  | (68,400             | ) |                    
|                                            |  |                     |   |                    
|Outstanding at January 30, 2003             |  | 3,584,950           |   | $                  
|                                            |  |                     |   |                    

Following
is a summary of options outstanding and exercisable as of January 30, 2003:

|                 |  | Options Outstanding |  | Options Exercisable
|---------------- |  | ------------------- |  | -------------------
|
|$19.38 to $21.06 |  | 433,750             |  | 6.6                
|$21.69 to $23.25 |  | 2,941,300           |  | 9.4                
|$25.50 to $26.60 |  | 209,900             |  | 7.6                
|                 |  |                     |  |                    
|                 |  | 3,584,950           |  | 8.9                
|                 |  |                     |  |                    

13.  Segment Information

The Company operates in two business segments, retail drug stores and pharmacy benefit management ("PBM"). These segments were identified based on their separate
and distinct products and services, technology, marketing strategies and management reporting. Management evaluates the segments' operating performance separately and allocates resources based on
their respective financial condition, results of operations and cash flows. The accounting policies for the segments are the same as those described in Note 1. Inter-segment transactions and
balances are eliminated in consolidation.

Pharmacy
is the cornerstone of the retail drug store segment, complemented by such "front-end" categories as over-the-counter medications, health care
products, photo and photo processing, cosmetics, greeting cards, food and beverage items, housewares, toiletries, mail centers and seasonal merchandise. As of January 30, 2003, the retail drug
store segment operated 455 stores in six western states under the names Longs, Longs Drugs, Longs Drug Stores and Longs Pharmacy.

The
PBM segment, operated through the Company's RxAmerica subsidiary, contracts with drug manufacturers, third-party health plans and retail pharmacies to provide a range of services to
third-party health plan members, including pharmacy benefit plan design and implementation, formulary management, claims processing and generic substitution.

Prior
to the Company's September 2001 acquisition of 100% ownership in RxAmerica (see Note 3), the Company operated in one business segment, retail drug stores. RxAmerica
was a joint venture between the Company and Albertson's Inc., and the Company accounted for its interest in the joint venture using the equity method of accounting. Therefore, PBM segment
results for the fiscal year

43

---

ended January 31, 2002 reflect RxAmerica's operations since the Company's acquisition of 100% ownership in the PBM in September 2001.

The
following table summarizes significant financial information by segment as of and for the fiscal years ended January 30, 2003 and January 31, 2002:

|                                                  |  | Retail Drug
Stores |           | Pharmacy
Benefit
Management |   | Inter-Segment
Eliminations |  | Consolidated
Totals |       
|------------------------------------------------- |  | ------------------ | --------- | --------------------------- | - | -------------------------- |  | ------------------- | ------
|
|2003:                                             |  |                    |           |                             |   |                            |  |                     |       
|Sales                                             |  | $                  | 4,402,964 |                             | $ | 23,309                     |  | $                   |      
|Operating income                                  |  |                    | 47,788    |                             |   | 9,891                      |  |                     |      
|Depreciation and amortization                     |  |                    | 77,139    |                             |   | 597                        |  |                     |      
|Provision for store closures and asset impairment |  |                    | 10,754    |                             |   |                           |  |                     |      
|Legal settlements and other disputes              |  |                    | 469       |                             |   |                           |  |                     |      
|Total assets                                      |  |                    | 1,299,967 |                             |   | 53,710                     |  |                     | (1,606
|Capital expenditures                              |  |                    | 92,174    |                             |   | 1,770                      |  |                     |      
|2002(1):                                          |  |                    |           |                             |   |                            |  |                     |       
|Sales                                             |  | $                  | 4,296,821 |                             | $ | 7,913                      |  | $                   |      
|Operating income                                  |  |                    | 84,675    |                             |   | 4,606                      |  |                     |      
|Depreciation and amortization                     |  |                    | 78,050    |                             |   | 143                        |  |                     |      
|Provision for store closures and asset impairment |  |                    | (1,682    | )                           |   |                           |  |                     |      
|Legal settlements and other disputes              |  |                    | 860       |                             |   |                           |  |                     |      
|Total assets                                      |  |                    | 1,360,492 |                             |   | 52,176                     |  |                     | (1,077
|Capital expenditures                              |  |                    | 111,024   |                             |   | 338                        |  |                     |      

---

Consolidated
total sales include the following product and service types:

|                                     |                          | 52/53 weeks ended
|------------------------------------ | ------------------------ | -----------------
|
|
|Pharmacy sales                       |                          | $                
|Front-end sales                      |                          |                  
|Pharmacy benefit management revenues |                          |                  
|                                     |                          |                  
|                                     | Consolidated total sales |                  
|                                     |                          |                  

44

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14.  Selected Quarterly Information (Unaudited)

Summarized quarterly results of operations for the years ended January 30, 2003 and January 31, 2002 are as follows:

|                                                     |                                                      | First
Quarter |           | Second
Quarter |   | Third
Quarter |      | Fourth
Quarter |           | Fiscal
Year
|---------------------------------------------------- | ---------------------------------------------------- | ------------- | --------- | -------------- | - | ------------- | ---- | -------------- | --------- | -----------
|
|Year ended January 30, 2003                          |                                                      |               |           |                |   |               |      |                |           |            
|Sales                                                |                                                      | $             | 1,089,829 |                | $ | 1,101,630     |      | $              | 1,064,470 |            
|Gross profit                                         |                                                      |               | 281,765   |                |   | 289,709       |      |                | 281,996   |            
|Income before cumulative effect of accounting change |                                                      |               | 10,970    |                |   | 10,941        |      |                | 2,988     |            
|Net income (loss)                                    |                                                      |               | (13,655   | )              |   | 10,941        |      |                | 2,988     |            
|Diluted earnings per share:                          |                                                      |               |           |                |   |               |      |                |           |            
|                                                     | Income before cumulative effect of accounting change |               |           | 0.29           |   |               | 0.29 |                |           | 0.08       
|                                                     | Net income (loss)                                    |               |           | (0.36          | ) |               | 0.29 |                |           | 0.08       
|Year ended January 31, 2002                          |                                                      |               |           |                |   |               |      |                |           |            
|Sales                                                |                                                      | $             | 1,032,063 |                | $ | 1,041,926     |      | $              | 1,017,381 |            
|Gross profit                                         |                                                      |               | 262,678   |                |   | 270,064       |      |                | 256,366   |            
|Net income                                           |                                                      |               | 11,600    |                |   | 11,246        |      |                | 2,548     |            
|Diluted earnings per share                           |                                                      |               | 0.31      |                |   | 0.30          |      |                | 0.07      |            

The
fourth quarter of fiscal 2002 included 14 weeks of operations, compared to 13 weeks for all other quarters of fiscal 2002 and fiscal 2003.

Net
income for the fourth quarter of fiscal 2003 included provisions for store closures and asset impairments of $10.8 million ($6.4 million or $0.17 per diluted share
after tax), offset by income tax credits of $2.5 million ($0.07 per diluted share) resulting from the completion of certain tax projects.

Upon
adoption of SFAS No. 142,Goodwill and Other Intangible Assets, in the first quarter of fiscal 2003, the Company recognized a
transitional goodwill impairment charge of $41.0 million ($24.6 million or $0.65 per diluted share after tax) as the cumulative effect of a change in accounting principle. Also as
required by SFAS No. 142, effective with the first quarter of fiscal 2003 the Company discontinued the amortization of goodwill and certain other intangible assets deemed to have indefinite
lives. In fiscal 2002, amortization expense for these assets, net of the related income tax effects, was $4.1 million, or $0.11 per diluted share.

The
Company acquired full ownership of RxAmerica, its PBM segment, in the third quarter of fiscal 2002. Prior to the acquisition, RxAmerica was a joint venture between Longs and
Albertson's, Inc., and its results of operations, which were reported using the equity method of accounting, were not material. See Note 13 for a summary of RxAmerica's impact on the
Company's sales and operating income in fiscal 2003 and 2002.

15.  Subsequent Event

On February 26, 2003, the Company announced a series of steps designed to reduce operating and administrative expenses. These steps include a reduction of
the Company's administrative workforce by approximately 170 people in its California offices, the closure of certain support facilities, store labor savings through workflow and staffing changes and a
restructuring of incentive compensation arrangements. The Company expects to record a provision of approximately $4 million for the related employee termination and facility closure costs in
the first quarter of fiscal 2004.

45

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INDEPENDENT AUDITORS' REPORT

To
the Board of Directors and Stockholders of
Longs Drug Stores Corporation:

We
have audited the accompanying consolidated balance sheets of Longs Drug Stores Corporation and subsidiaries (the "Company") as of January 30, 2003 and January 31, 2002,
and the related statements of consolidated income, consolidated stockholders' equity and consolidated cash flows for each of the three fiscal years in the period ended January 30, 2003. These
financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Longs Drug Stores Corporation and subsidiaries at
January 30, 2003 and January 31, 2002, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 30, 2003, in
conformity with accounting principles generally accepted in the United States of America.

As
discussed in Note 1 to the consolidated financial statements, on February 1, 2002, the Company changed its method of accounting for goodwill and other intangible assets
to conform to Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."

LOGO

San
Francisco, California
February 26, 2003

46

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Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

PART III

Item 10.Directors and Executive Officers of the Registrant

Information concerning this item will be in our definitive proxy statement to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934
for our 2003 annual meeting of stockholders and is incorporated herein by reference.

Item 11.Executive Compensation

Information concerning this item will be in our definitive proxy statement to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934
for our 2003 annual meeting of stockholders and is incorporated herein by reference.

Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information concerning this item will be in our definitive proxy statement to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934
for our 2003 annual meeting of stockholders and is incorporated herein by reference.

Item 13.Certain Relationships and Related Transactions

Information concerning this item will be in our definitive proxy statement to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934
for our 2003 annual meeting of stockholders and is incorporated herein by reference.

Item 14.Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's Exchange Act
reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's
management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Within
90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the
Company's Chief Executive Officer and the Company's Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on the
foregoing, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective.

There
have been no significant changes in the Company's internal controls or in other factors that could significantly affect the internal controls subsequent to the date the Company
completed its evaluation.

47

---

Item 15.Principal Accountant Fees and Services

Information concerning this item will be in our definitive proxy statement to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934
for our 2003 annual meeting of stockholders and is incorporated herein by reference.

PART IV

Item 16.Exhibits, Financial Statement Schedules, and Reports on Form 8-K



|(a)(1) |  | The Financial Statements are filed with this Form 10-K at pages 24 to 46.                                       
|------ |  | ----------------------------------------------------------------------------------------------------------------
|(a)(2) |  | No schedules are required under the applicable instructions or are inapplicable and have therefore been omitted.
|(a)(3) |  | EXHIBITS                                                                                                        

|Exhibit No. |  |                                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                            
|----------- |  | ------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.          |  | Articles of Incorporation and By-Laws
|            |  | a.                                    |  | Restated Articles of Incorporation, amended June 3, 1997, as incorporated herein by reference, as previously filed with the Commission on September 12, 1997, as Exhibit 1 to Form 10-Q.                                                                                                                                                                                                                                                   
|            |  | b.                                    |  | Amended By-Laws of Longs Drug Stores Corporation, dated October 30, 2002, is incorporated herein by reference, as previously filed with the Commission on December 16, 2002, as Exhibit 3.1 to
Form 10-Q.                                                                                                                                                                                                                                  
|10.         |  | Material Contracts                   
|            |  | a.                                    |  | The Longs Drug Stores Corporation Deferred Compensation Plan of 1995 is incorporated herein by reference as previously filed with the Commission on June 6, 1995, on Form S-8, Registration
No. 033-60005.                                                                                                                                                                                                                                 
|            |  | b.                                    |  | Renewals of the Agreements for Termination Benefits dated August 22, 1996, are incorporated herein by reference as previously filed with the Commission on December 6, 1996, on Form 10-Q as Exhibit 1,
as executed by the Chairman, CEO and President; Exhibit 2, as executed by the Senior Vice Presidents, Vice Presidents, District Managers and the Treasurer; and Exhibit 3, as executed by Select Key Executives and Store Managers.
|            |  | c.                                    |  | Shareholder Rights Agreement of Longs Drug Stores Corporation dated August 20, 1996 is incorporated herein by reference as previously filed with the Commission on September 16, 1996, as Exhibit 1 to
Form 8-K.                                                                                                                                                                                                                           
|            |  | d.                                    |  | Employment agreement between the Company and Steven F. McCann, Senior Vice President, Chief Financial Officer, and Treasurer, dated April 17, 2000 is incorporated by reference as previously filed with the Commission
on September 11, 2000, as Exhibit 10.1 to Form 10-Q.                                                                                                                                                               
|            |  | e.                                    |  | Amendment to Shareholder Rights Agreement of Longs Drug Stores Corporation dated August 15, 2000, between the Company and Chase Mellon Shareholder Services, L.L.C. is incorporated herein by reference as previously
filed with the Commission on December 11, 2000, as Exhibit 4(a) to Form 10-Q.                                                                                                                                        

48

---

| |  | f. |  | Amendments to the Longs Drug Stores Corporation Deferred Compensation Plan of 1995 is incorporated herein by reference as previously filed with the Commission on April 13, 2001, as Exhibit 10(d) to
Form 10-K.                                                                              
| |  | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | g. |  | Employment agreement between the Company and Linda M. Watt, Senior Vice President, Head of Human Resources, dated June 7, 2001 is incorporated by reference as previously filed with the Commission on September 7,
2001, as Exhibit 10.1 to Form 10-Q.                                       
| |  | h. |  | Amended and Restated Credit Agreement Dated as of October 12, 2001, between Longs Drug Stores California, Inc. and the lenders thereunder, is incorporated herein by reference as previously filed with the Commission
on December 7, 2001, as Exhibit 10(a) to Form 10-Q.                    
| |  | i. |  | Employment agreement between the Company and Todd J. Vasos, Senior Vice PresidentMarketing, dated November 21, 2001, is incorporated herein by reference as previously filed with the Commission on
April 17, 2002, as Exhibit 10(l) to Form 10-K.                                           
| |  | j. |  | Retirement agreement between the Company and Dan R. Wilson, dated December 19, 2001, is incorporated herein by reference as previously filed with the Commission on April 17, 2002, as Exhibit 10(m) to
Form 10-K.                                                                            
| |  | k. |  | Separation agreement between the Company and Stephen D. Roath, President and Chief Executive Officer, dated February 26, 2002, is incorporated herein by reference as previously filed with the Commission on
June 14, 2002, as Exhibit 10.1 to Form 10-Q.                                    
| |  | l. |  | Amendment to employment agreement between the Company and Steven F. McCann, Senior Vice President, Chief Financial Officer and Treasurer, dated May 22, 2002, is incorporated herein by reference as previously
filed with the Commission on September 16, 2002, as Exhibit 10.1 to Form 10-Q.
| |  | m. |  | Amendment to separation agreement between the Company and Stephen D. Roath, President and Chief Executive Officer, dated July 24, 2002, is incorporated herein by reference as previously filed with the Commission
on September 16, 2002, as Exhibit 10.2 to Form 10-Q.                      
| |  | n. |  | The Longs Drug Stores Corporation 1995 Long-Term Incentive Plan, as amended, is incorporated herein by reference as previously filed with the Commission on August 29, 2002, on Form S-8, Registration
No. 333-98913.                                                                         
| |  | o. |  | Separation agreement between the Company and Ronald Lovelady, Senior Vice President and Regional Manager, dated October 23, 2002, is incorporated herein by reference as previously filed with the Commission on
December 16, 2002, as Exhibit 10.1 to Form 10-Q.                             
| |  | p. |  | Employment agreement between the Company and Warren F. Bryant, President and Chief Executive Officer, dated October 30, 2002, is incorporated herein by reference as previously filed with the Commission on
December 16, 2002, as Exhibit 10.2 to Form 10-Q.                                 
| |  | q. |  | Separation agreement between the Company and Brian Kilcourse, Senior Vice PresidentChief Information Officer, dated December 23, 2002.                                                                                                                                                       
| |  | r. |  | Separation agreement between the Company and James Famini, Senior Vice President and Regional Manager, dated January 2, 2003.                                                                                                                                                                 

49

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|    |  | s.                             |  | The Longs Drug Stores Corporation Non-Executive Long-Term Incentive Plan, as amended.                                                            
|--- |  | ------------------------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------
|    |  | t.                             |  | Employment agreement between the Company and Bruce E. Schwallie, Senior Vice PresidentPharmacy and Business Development, dated February 1, 2002.
|21. |  | Subsidiaries of the Registrant
|23. |  | Independent Auditors' Consent 



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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

|     |  |                |  | LONGS DRUG STORES CORPORATION(Registrant)                                                                             
|---- |  | -------------- |  | ----------------------------------------------------------------------------------------------------------------------
|Date |  | April 18, 2003 |  |                                                                                                                       
|     |  |                |  | /s/S. F. MCCANN(S. F. McCann) Senior Vice President, Chief Financial
Officer and Treasurer                            
|Date |  | April 18, 2003 |  |                                                                                                                       
|     |  |                |  | /s/R. L. CHELEMEDOS(R. L. Chelemedos) Vice PresidentController and
Assistant Secretary
(Principal Accounting Officer)

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been duly signed by the following persons on behalf of the registrant and in the capacities and on
the dates indicated.

|Signature                               |  | Title                                           |  | Date          
|--------------------------------------- |  | ----------------------------------------------- |  | --------------
|                                        |  |                                                 |  |               
|/s/R. M. LONG(R. M. Long)               |  | Chairman of the Board and Director              |  | April 18, 2003
|/s/W. F. BRYANT(W. F. Bryant)           |  | President, Chief Executive Officer and Director |  | April 18, 2003
|/s/L. T. BARNES, JR.(L. T. Barnes, Jr.) |  | Director                                        |  | April 18, 2003
|/s/W. L. CHENEVICH(W. L. Chenevich)     |  | Director                                        |  | April 18, 2003
|/s/M. H. DASHE(M. H. Dashe)             |  | Director                                        |  | April 18, 2003
|                                        |  |                                                 |  |               

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|/s/D. E. KNAPP(D. E. Knapp)           |  | Director                                   |  | April 18, 2003
|------------------------------------- |  | ------------------------------------------ |  | --------------
|/s/M. S. METZ, PHD.(M. S. Metz, PhD.) |  | Director                                   |  | April 18, 2003
|/s/R. A. PLOMGREN(R. A. Plomgren)     |  | Retired Senior Vice President and Director |  | April 18, 2003
|/s/G. H. SAITO(G. H. Saito)           |  | Director                                   |  | April 18, 2003
|/s/H. R. SOMERSET(H. R. Somerset)     |  | Director                                   |  | April 18, 2003
|(D. L. Sorby, PhD.)                   |  | Lead Director                              |  | April 18, 2003
|/s/T. R. SWEENEY(T. R. Sweeney)       |  | Director                                   |  | April 18, 2003
|/s/F. E. TROTTER(F. E. Trotter)       |  | Director                                   |  | April 18, 2003
|/s/A. G. WAGNER(A. G. Wagner)         |  | Director                                   |  | April 18, 2003

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Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I,
Warren F. Bryant, certify that:





|                     |  |                                                                          
|-------------------- |  | -------------------------------------------------------------------------
|Date: April 18, 2003 |  |                                                                          
|                     |  | /s/WARREN F. BRYANTWarren F. Bryant President and Chief Executive
Officer

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Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I,
Steven F. McCann, certify that:





|                     |  |                                                                                                 
|-------------------- |  | ------------------------------------------------------------------------------------------------
|Date: April 18, 2003 |  |                                                                                                 
|                     |  | /s/STEVEN F. MCCANNSteven F. McCann Senior Vice President, Chief
Financial Officer
and Treasurer

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Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Longs Drug Stores
Corporation (the "Company") hereby certifies, to such officer's knowledge, that:



|Date April 18, 2003 |  |                                                                           | 
|------------------- |  | ------------------------------------------------------------------------- | 
|                    |  | /s/WARREN F. BRYANTWarren F. Bryant
President and Chief Executive Officer

Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Longs Drug Stores
Corporation (the "Company") hereby certifies, to such officer's knowledge, that:



|Date April 18, 2003 |  |                                                                                                  | 
|------------------- |  | ------------------------------------------------------------------------------------------------ | 
|                    |  | /s/STEVEN F. MCCANNSteven F. McCann
Senior Vice President, Chief Financial Officer
and Treasurer

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