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SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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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 31, 2002

|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

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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:

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. ý

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 April 4, 2002, was approximately $1,054,240,000.

There
were 38,229,857 shares of common stock outstanding as of April 4, 2002.

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 2002 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, prescription margins, margin improvement, cost reductions, distribution center
performance, changes in supply chain practices, the number of store openings and the level of capital expenditures, and are indicated by words or phrases such as "continuing," "expects," "estimates,"
"believes" 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, among other things, 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 ability of our automated fill center to meet expectations in filling prescriptions; 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; 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; and other factors discussed in this annual report or 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 |                                                                                       | 32
|         | 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                                        |   
|PART IV  |         |                              |                                                                                       |   
|         | Item 14 |                              | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                      |   

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PART I

Item 1.Business

Longs Drug Stores Corporation was founded in 1938 in Oakland, California. Longs is one of the largest drug store chains in North America, with 436 stores in
California, Colorado, Hawaii, Nevada, Washington and Oregon. Our goal is to provide our customers with a satisfying shopping experience, with quality service and merchandise. We believe that
establishing trust and building Longs brand loyalty are essential to earning repeat business.

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 footnotes to our financial statements.

Pharmacy
is the cornerstone of our retail drug store business, 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.

Our
PBM segment 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.

Recent developments

In November 1997, we formed a joint venture with American Drug Stores, Inc. (now Albertson's, Inc.) to provide PBM services under the name
RxAmerica. In September 2001, we exercised an option to purchase Albertson's interest in the joint venture.

In
February 2001, we formed a joint venture with AmerisourceBergen to establish a highly 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 35,000 prescriptions per week.

In
July 2001, we terminated our agreement with our third-party distribution center operator in California. During the third and fourth quarters we transitioned to
self-operation of our distribution centers.

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.

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

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 intend to transition to a more centralized purchasing approach for
most of our products, while allowing store managers to retain some degree of customization 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.

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 over 7,000 over-the-counter medications, health care products
and other non-pharmacy related items 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 rapid 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 31, 2002, 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 and distribution 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 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

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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.

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 1% 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 54% of our total merchandise, including 95% of our pharmaceutical inventories, from a single supplier, AmerisourceBergen, pursuant to a long-term
supply contract. Any significant disruptions in our relationship with AmerisourceBergen could have a material adverse effect on our business.

We
also depend on fuel and other energy sources for the distribution of inventories and the operation of our stores. As of January 31, 2002, we operated 361 stores in the state of
California, which has experienced energy shortages causing some power outages. To date we have not experienced significant disruption of our business resulting from energy shortages. However,
continued power outages and increases in energy costs could have a material adverse effect on us.

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.

Item 2.Properties

Stores

Fiscal2002

2001

2000Number of stores, beginning of year

430

416

381Stores opened

25

17

19Stores acquired





31Stores closed

(19
)
(3
)
(15
)Number of stores, end of year

436

430

416


As
of January 31, 2002, we operated 436 stores: 361 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 fiscal 2002 is 20,097 square feet. We lease 251 of
our stores from third parties.

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Of the remaining stores, 133 are company-owned buildings on company-owned land, and 52 are company-owned buildings on leased land.

We
plan to open between 25 and 30 new stores in fiscal 2003, and consistent with prior years, we may make decisions to close some stores in the normal course of business.

Distribution Centers

We operate the following distribution centers:

Location

Leased/Owned

Square FeetLathrop, California (front-end merchandise)

Owned

427,000Ontario, California (front-end merchandise)

Owned

353,000Ontario, California (pharmaceutical inventories)

Leased

36,000Honolulu, 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. We also lease a 33,000 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 2002.

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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 Mellon Investor Services
LLC, P.O. Box 3315, South Hackensack, NJ 07606-1915. There were approximately 18,996 stockholders of record as of April 4, 2002.

Quarterly
high and low stock prices, based on the New York Stock Exchange composite transactions, together with dividend information and other key select financial data are shown below:

|Quarter Ended  |  | Sales |           | Gross
Profit |   | Net
Income |  | Earnings
Per Diluted Share |        | Dividends
Per Share |   | Stock
Price Range
|-------------- |  | ----- | --------- | ------------ | - | ---------- |  | -------------------------- | ------ | ------------------- | - | -----------------
|
|04/26/01       |  | $     | 1,032,063 |              | $ | 262,678    |  | $                          | 11,600 |                     | $ | 0.31             
|07/26/01       |  |       | 1,041,926 |              |   | 270,064    |  |                            | 11,246 |                     |   | 0.30             
|10/25/01       |  |       | 1,017,381 |              |   | 256,366    |  |                            | 2,548  |                     |   | 0.07             
|01/31/02(1)(2) |  |       | 1,213,364 |              |   | 313,681    |  |                            | 21,774 |                     |   | 0.58             
|               |  |       |           |              |   |            |  |                            |        |                     |   |                  
|Fiscal 2002    |  | $     | 4,304,734 |              | $ | 1,102,789  |  | $                          | 47,168 |                     | $ | 1.25             
|               |  |       |           |              |   |            |  |                            |        |                     |   |                  
|04/27/00       |  | $     | 955,731   |              | $ | 246,394    |  | $                          | 11,966 |                     | $ | 0.31             
|07/27/00(3)    |  |       | 991,117   |              |   | 261,241    |  |                            | 17,219 |                     |   | 0.46             
|10/26/00(3)(4) |  |       | 973,763   |              |   | 249,088    |  |                            | 7,686  |                     |   | 0.21             
|01/25/01(5)    |  |       | 1,106,521 |              |   | 292,987    |  |                            | 8,013  |                     |   | 0.21             
|               |  |       |           |              |   |            |  |                            |        |                     |   |                  
|Fiscal 2001    |  | $     | 4,027,132 |              | $ | 1,049,710  |  | $                          | 44,884 |                     | $ | 1.19             
|               |  |       |           |              |   |            |  |                            |        |                     |   |                  

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Item 6.Selected Financial Data

Five Year Selected Financial Data

|                                                      |  | Fiscal |          
|----------------------------------------------------- |  | ------ | ---------
|
|Financial Statistics                                  |  |        |          
|(Thousands except per share data)                     |  |        |          
|Sales                                                 |  | $      | 4,304,734
|Net Income                                            |  |        | 47,168   
|Net Income per ShareBasic                            |  |        | 1.26     
|Net Income per ShareDiluted                          |  |        | 1.25     
|Dividends per Share                                   |  |        | .56      
|Total Assets                                          |  |        | 1,411,591
|Long-term Debt                                        |  |        | 198,774  
|Deferred Income Taxes and Other Long-term Liabilities |  |        | 43,490   
|Operating Statistics                                  |  |        |          
|Number of Stores at Year End                          |  |        | 436      
|Same Store Sales Growth (52-week basis)               |  |        | 4.0      
|Selling Square Footage at Year End (Millions)         |  |        | 7.2      
|Sales Per Selling Square Foot (52-week basis)         |  | $      | 594      
|Number of Employees at Year End                       |  |        | 22,200   

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

RESULTS OF OPERATIONS

Sales

|                                                           |  | Fiscal |          
|---------------------------------------------------------- |  | ------ | ---------
|
|Sales (Thousands)                                          |  | $      | 4,304,734
|Sales Growth                                               |  |        | 6.9      
|Same Store Sales Growth                                    |  |        | 4.0      
|New Stores / Closed Stores Sales Growth                    |  |        | 0.8      
|Impact of 53rd Week on Sales Growth                        |  |        | 1.9      
|Impact of RxAmerica on Sales Growth                        |  |        | 0.2      
|Pharmacy Sales Growth                                      |  |        | 14.0     
|Same Store Pharmacy Sales Growth                           |  |        | 10.9     
|Pharmacy as a % of Total Drug Store Sales                  |  |        | 43.8     
|% of Pharmacy Sales Reimbursed by Third Party Health Plans |  |        | 89.5     
|Front-End Sales Growth                                     |  |        | 1.6      
|Same Store Front-End Sales Growth (Decline)                |  |        | (0.8     
|Front-End as a % of Total Drug Store Sales                 |  |        | 56.2     

Sales
increased 6.9% in fiscal 2002 over fiscal 2001, and 9.7% in fiscal 2001 over fiscal 2000. 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. Same-store sales, on a comparative 52-week to 52-week basis, increased 4.0% in fiscal 2002, and
new stores accounted for an increase of 0.8%. RxAmerica's net sales, measured from our acquisition of full ownership in the PBM in September 2001, contributed the remaining 0.2% of total sales
growth in fiscal 2002. The increase in sales in fiscal 2001 over fiscal 2000 was due largely to the contribution from new stores, including a full year of sales from the 31-store net
acquisition in California in October 1999. Incremental sales from this acquisition contributed 5.2% of total sales growth in fiscal 2001. Fiscal 2001 same-store sales increased
3.3%. The increased usage of newer and more costly prescription drugs and the aging U.S. population have fueled sales growth for each of the last two fiscal years.

Pharmacy
sales were 43.8% of total drug store sales in fiscal 2002, compared to 41.1% in fiscal 2001 and 39.1% in fiscal 2000. We expect this trend to continue due to the increased usage
of newer and more costly prescription drugs and the aging U.S. population. These factors contributed to same-store pharmacy sales increases of 10.9% in fiscal 2002 and 9.4% in fiscal 2001.

Pharmacy
sales reimbursed by third-party health plans represented 89.5% of total pharmacy sales, compared to 88.1% and 85.1% in the two previous fiscal years. We expect this trend to
continue due to the ongoing shift to managed care.

Same-store
front-end sales declined 0.8% in fiscal 2002 and 0.7% in fiscal 2001, due to increased competition from mass merchants, national drug store chains and
supermarket pharmacies; an economic slowdown, exacerbated by the terrorist attacks of September 11, 2001; a weak holiday shopping season and a mild cold and flu season that resulted in lower
over-the-counter drug sales. In addition, problems with the distribution of front-end merchandise related to our third-party distribution center operator in
California negatively impacted operations. We terminated our agreement with our third-party distribution center operator during the second quarter of fiscal 2002.

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Gross Profit

|                                                               |  | Fiscal |          
|-------------------------------------------------------------- |  | ------ | ---------
|
|Gross Profit (Thousands)                                       |  | $      | 1,102,789
|LIFO Provision (Thousands)                                     |  |        | 9,612    
|Inventory write-down pursuant to 2001 Closure Plan (Thousands) |  |        | 1,659    
|Gross Margin %                                                 |  |        | 25.6     

Gross
margin as a percent of sales was 25.6% in fiscal 2002, down from 26.1% and 26.5% in fiscal 2001 and 2000. The declining gross margin percentages reflect the
increase in pharmacy sales as a percentage of total sales. Pharmacy sales have lower margins than front-end sales. In addition, pharmacy margin percentages continue to decline throughout
the retail drug store industry due to the increasing percentage of pharmacy sales reimbursed by third-party health plans. Third-party health plans continue to reduce reimbursement levels, resulting in
lower gross margins for these sales than for non third-party sales. However, despite decreases in pharmacy gross margin percentages, pharmacy gross profit in dollars has continued to rise with the
growth in sales.

Gross
margin percentages on front-end sales have remained relatively constant for the past three fiscal years.

Our
gross profit includes LIFO provisions of $9.6 million, $4.7 million and $4.4 million in fiscal 2002, 2001 and 2000, included in cost of merchandise sold. The
LIFO provision fluctuates with inflation rates and inventory levels and mix. The increase in the LIFO provision in fiscal 2002 over fiscal 2001 was primarily due to increased inflation rates for
pharmaceutical inventories.

Operating and Administrative Expenses

|                                                            |  | Fiscal |          
|----------------------------------------------------------- |  | ------ | ---------
|
|Operating and Administrative Expenses (Thousands)           |  | $      | 1,014,330
|Operating and Administrative Expenses as a Percent of Sales |  |        | 23.6     

Operating
and administrative expenses were 23.6% of sales in fiscal 2002, compared to 23.2% in both fiscal 2001 and 2000. The increase in fiscal 2002 was primarily due to
newly opened stores, which have lower sales than our established stores. We opened 25 new stores in fiscal 2002, compared to 17 in fiscal 2001 and 19 in fiscal 2000. We also experienced increased
distribution expenses as we transitioned from our third-party distribution center operator to self-operation of our distribution centers.

Operating
and administrative expenses included $6.3 million, $6.4 million and $3.2 million of goodwill amortization in fiscal 2002, 2001 and 2000. With the adoption
of SFAS No. 142,Goodwill and Other Intangible Assets(discussed further below), we will discontinue the amortization of goodwill in fiscal 2003,
and we will review goodwill for impairment annually.

Provision for Store Closures and Asset Impairment

In January 2001, our board of directors approved a plan (the "2001 Closure Plan") to close 15 stores, and we recorded a related charge of
$25.6 million. We closed 14 stores pursuant to the 2001 Closure Plan during the first quarter of fiscal 2002, and we elected not to close the remaining store. As of January 31, 2002, we
had successfully terminated the leases and sublet or sold the properties for 13 of the 14 closed stores, and we are currently marketing the remaining property. Based on the results of the 2001 Closure
Plan to date and estimated future costs to complete the plan, we recorded a benefit of $1.5 million from the reduction of the related reserve in the fourth quarter of fiscal 2002.

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Additionally,
consistent with previous years, we make decisions to close stores in the normal course of business. We closed 5, 3 and 15 stores not included in the 2001 Closure Plan in
fiscal 2002, 2001 and 2000. During fiscal 2002, we recorded a benefit of $1.0 million from the reduction of the provision for store closures not included in the 2001 Closure Plan, offset by an
impairment charge of $0.8 million reflecting the write-down of certain long-lived tangible assets associated with three stores to their estimated net recoverable values.
In fiscal 2001 and 2000, we recorded expenses of $2.8 million and $4.9 million, related to the closure of stores not included in the 2001 Closure Plan.

Other Items

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 partial sale of joint venture assets in fiscal 2001.

RxAmerica

We acquired full ownership of RxAmerica, our PBM segment, in the third quarter of fiscal 2002. Prior to the acquisition, RxAmerica was a joint venture between
Longs and Albertson's, and its results of operations, which were reported using the equity method of accounting, were not material to us. RxAmerica accounted for $4.3 million of net income
($0.11 per diluted share), including joint venture income recorded prior to the acquisition, in fiscal 2002.

Net Interest Expense

Net interest expense was $14.0 million in fiscal 2002, compared to $16.3 million in fiscal 2001 and $4.6 million in fiscal 2000. The decrease
in fiscal 2002 as compared to fiscal 2001 was due to lower average borrowings and interest rates. The increase in fiscal 2001 over fiscal 2000 was due to higher borrowings to finance stock repurchases
and the net acquisition of 31 stores in California.

Income Taxes

Our effective income tax rates were 37.3%, 39.6% and 39.4% in fiscal 2002, 2001 and 2000. We benefited in fiscal 2002 from a federal tax law change that allows us
to deduct dividends paid on allocated shares held in our employee stock ownership plan.

LIQUIDITY AND CAPITAL RESOURCES

Cash and equivalents were $123.2 million at January 31, 2002, compared to $44.7 million at January 25, 2001. The increase was due to
higher cash flows provided by operating activities and lower cash used in investing and financing activities as compared to fiscal 2001. RxAmerica accounted for $41.1 million of cash and
equivalents as of January 31, 2002.

Operating Cash Flows

Net cash provided by operating activities was $202.2 million in fiscal 2002, primarily due to $146.0 million of net income before
non-cash depreciation, amortization, asset impairment, deferred income tax and stock compensation charges. Reductions in inventory levels and increases in current liabilities also had a
significant positive impact on operating cash flows.

Net
cash provided by operating activities was $192.7 million in fiscal 2001, primarily due to $110.5 million of net income before non-cash depreciation,
amortization, deferred income tax and stock compensation charges. Operating cash flows also increased due to an increase of $76.7 million in

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current liabilities, including the $25.6 million reserve for the 2001 Closure Plan and increases in payables associated with the growth in the number of our stores.

Net
cash provided by operating activities was $103.5 million in fiscal 2000, primarily due to $141.2 million of net income before non-cash depreciation,
amortization, deferred income tax and stock compensation charges. This amount was partially offset by increases in receivables, inventories and other current assets associated with the growth in the
number of our stores.

Investing Cash Flows

Net cash used in investing activities was $94.6 million in fiscal 2002, compared to $128.8 million in fiscal 2001 and $240.0 million in
fiscal 2000. Capital expenditures in fiscal 2002 decreased from fiscal 2001 levels, which included expenditures of approximately $28.8 million for e-commerce and renovations of
stores acquired in fiscal 2000. Additionally, receipts from property disposals increased from $5.3 million in fiscal 2001 to $22.6 million in fiscal 2002 as a result of several
sale-leaseback transactions. Fiscal 2002 investing activities also included $5.8 million for the acquisition of the remaining 50% of RxAmerica, net of cash acquired. Fiscal 2000
capital expenditures included approximately $151 million for the 31-store net acquisition in California. Capital expenditures also included amounts related to the opening of 25, 17
and 19 new stores in fiscal 2002, 2001 and 2000.

We
plan to open between 25 and 30 stores in fiscal 2003. We expect net capital expenditures in fiscal 2003 to be approximately $120 million, including $40 million in net
new store investments, $20 million for improvements in existing stores, $15 million for technology, $25 million for supply chain improvements (including expenditures under the
supply chain program discussed further below) and $20 million for other items.

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. We expect to
spend approximately $60 million in capital expenditures for supply chain improvements under this program over the next four fiscal years.

Financing Cash Flows

Net cash used in financing activities was $29.2 million in fiscal 2002. We obtained an additional $50 million in privately placed debt financing in
the third quarter, offset by $58 million in repayments of long-term and short-term borrowings and dividends of $21.2 million. Net cash used in financing
activities was $35.6 million in fiscal 2001, reflecting net stock repurchases of $52.4 million and dividends of $21.3 million, offset by $38.1 million of
long-term and short-term borrowings. Net cash provided by financing activities was $137.9 million in fiscal 2000, including $115 million in proceeds from
privately placed debt financing and $42.9 million in other net borrowings, primarily for the 31-store net acquisition in California, offset by dividends of $22.0 million.

In
October 2001, we replaced our $130 million unsecured revolving line of credit with an Amended and Restated $150 million unsecured revolving line of credit, 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 31, 2002,
$40.0 million was outstanding under this line of credit with a weighted average interest rate of 3.08%.

Additionally,
as of January 31, 2002, we have $160.7 million in privately placed promissory notes, including $50 million completed 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%. We used the proceeds from the $50 million private placement borrowing in
fiscal 2002 to pay down the revolving line of credit and to provide cash funding for the acquisition of the remaining 50% of RxAmerica. Our note payable to RxAmerica was eliminated upon acquisition of
full ownership of the PBM subsidiary.

10

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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 $25.6 million charge associated with the 2001 Closure Plan in the computation of the fixed charge coverage
ratio. As of January 31, 2002, we were in compliance with the restrictions and limitations included in these provisions.

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 back to the Profit Sharing Plan in fiscal 2001 for $1.1 million, resulting in net stock repurchases of $52.4 million.

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 and capital
expenditure requirements for at least the next 12 months.

The
following table summarizes our contractual obligations as of January 31, 2002:

|                          |  | Payments due by Fiscal Year
|------------------------- |  | ---------------------------
|
|
|Long-term Debt            |  | $                          
|Capital Lease Obligations |  |                            
|Operating Leases          |  |                            
|                          |  |                            
|Totals                    |  | $                          
|                          |  |                            

We
utilize normal operating leases for many of our store locations, but we do not engage in lease financing of a special-purpose entity nature.

In
addition, we had the following commercial commitments as of January 31, 2002:

|                                 |  | Amount of Commitment Expiration by Fiscal Year
|-------------------------------- |  | ----------------------------------------------
|
|
|Lines of Credit (unused portion) |  | $                                             
|Letters of Credit                |  |                                               
|Surety Bonds                     |  |                                               
|                                 |  |                                               
|Totals                           |  | $                                             
|                                 |  |                                               

Our
surety bonds secure obligations related to workers' compensation claims and will continue to be renewed as long as the related payment obligations are in effect.

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 and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. We believe the following critical

11

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accounting policies require the most significant judgments and estimates used in the preparation of our consolidated financial statements:

Impairment of Long-Lived Assets

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

In
fiscal 2002, we identified three stores with a history of operating and cash flow losses combined with projections of continuing losses in the foreseeable future. Our projections
indicate that the carrying values of certain long-lived tangible assets associated with these stores will not be recovered through future cash flows. Accordingly, we recorded an impairment
charge of $0.8 million to write such assets down to their estimated fair values, based on discounted projected future cash flows.

Store Closure Reserves

We record the estimated costs associated with closing a store during the period in which the store is identified and approved by management under a plan of
termination, which includes the method of disposition and the expected date of completion. These costs include amounts that we are contractually obligated to pay during the remainder of the lease, net
of any expected sublease income, and the difference between the carrying values and estimated recoverable values of long-lived tangible and intangible assets. We record severance and other
employee-related costs in the period in which the closure and related severance packages are communicated to the affected employees. We record losses on the liquidation of inventories in cost of
merchandise sold when the inventories are sold or otherwise disposed of. We evaluate our store closure reserves and adjust them accordingly based on the estimated future costs to complete the store
closures.

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 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. Under SFAS No. 142, goodwill and certain
other intangible assets deemed to have indefinite lives will no longer be amortized, but must be tested annually for impairment. We will adopt SFAS No. 141 and SFAS No. 142 in the first
quarter of fiscal 2003. We do not expect the adoption of SFAS No. 141 to have a material impact on our financial position or results of operations. Upon adoption of SFAS No. 142, we will
discontinue the amortization of goodwill with a carrying value of $123.3 million as of January 31, 2002 and annual amortization of approximately $6.3 million.

12

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As required by SFAS No. 142, we have performed a transitional goodwill impairment test as of February 1, 2002, the date of adoption of the standard. Based on an independent
valuation, we have identified certain regional reporting units that have experienced declines in their fair values below their net carrying values. Accordingly, we will recognize a goodwill impairment
charge of approximately $41 million (approximately $25 million after tax) for these reporting units in the first quarter of fiscal 2003 as the cumulative effect of a change in accounting
principle.

During
the year, the FASB also issued SFAS No. 143,Accounting for Asset Retirement Obligations, and SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. SFAS No. 143, which addresses the accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs, is effective for us beginning in fiscal 2004. SFAS No. 144
establishes accounting and reporting standards for the impairment of long-lived assets and for long-lived assets to be disposed of, and is effective for us beginning in fiscal
2003. We do not expect the adoption of SFAS No. 143 or SFAS No. 144 to have a material impact on our financial position or results of operations.

Risk Factors

You should carefully read the following risk factors.

The markets in which we operate 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, on-line
retailers, supermarket chains and mass merchandisers. 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 would require us to increase our sales volume and to sell higher-margin products
and services at reduced prices 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 supply chain improvements and other strategic initiatives is critical to the ongoing success of our business.

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, along with initiatives to increase front-end sales and pharmacy margins, enhance customer service and improve operational efficiencies. We expect to spend approximately
$60 million in capital expenditures for supply chain improvements under this program over the next four fiscal years. The success of these initiatives is important to our future profitability.
We cannot assure you that we will be able to execute these initiatives successfully.

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 reimbursed by third-party health plans for approximately 90% of all the prescription drugs that we sell, and this percentage has continued to increase.
Pharmacy sales to third parties 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, if Medicare is reformed to include prescription benefits, Medicare may cover some of the prescription drugs that we now sell at retail prices, and
we may be reimbursed at prices lower than our current retail prices. If third-party health plans continue to reduce their reimbursement levels, or if

13

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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.

The transition from third-party distribution to self-distribution could result in increased costs.

We terminated our agreement with our third-party distribution center operator in California during the second quarter of fiscal 2002. We incurred additional costs
during the third and fourth quarters as we continued to transition the operation of the distribution centers, and these costs could continue to adversely affect net income in the near future.

A continued economic slowdown could adversely affect consumer-buying practices and reduce our sales of front-end products, which are our higher margin products.

The economy began showing signs of slowing in fiscal 2002. The terrorist attacks on September 11, 2001 adversely affected sales for that week and have had
a continuing negative impact on tourism. We operate 32 stores in the state of Hawaii, which have been adversely impacted by the decline in tourism. If the economy continues to slow and unemployment
increases or inflationary conditions worry
consumers, they may decrease their purchases, particularly of products other than pharmaceutical products that they need for health reasons. 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 will decrease our profitability.

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

Our industry is experiencing a 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 response to the pharmacist shortage we recently 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.

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 54% of our total merchandise, including 95% of our pharmaceutical supplies, from a single supplier, AmerisourceBergen, pursuant to a
long-term supply contract. Any significant disruptions in our relationships with AmerisourceBergen could have a material adverse effect on us.

We are subject to governmental regulations, procedures and requirements; our noncompliance or their significant change could have a material adverse effect on us.

Our pharmacy business is subject to numerous federal, state and local regulations. 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, federal and state reform programs, such as healthcare reform
initiatives, could adversely affect our pharmacies, and any new federal or state programs could also adversely affect us.

14

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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.

The energy crisis in the state of California may result in increased operating and administrative expenses in fiscal 2003.

As of January 31, 2002, we operated 361 stores in the state of California, which has experienced energy shortages causing some power outages. California
utility companies announced significant increases in energy rates, which were reflected in utility bills received beginning in the third quarter of fiscal 2002. These shortages may expand to other
markets in which we operate. We have taken such steps as reducing store lighting, raising store temperatures and disconnecting unused electrical equipment to conserve energy, but the volatility of
energy rates has resulted in increased operating and administrative expenses and our energy-related expenses may continue to increase in fiscal 2003.

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 bears interest at LIBOR-based rates, and therefore an increase in interest rates could increase our interest
expense. We do not undertake any specific actions to cover our exposure to interest rate risk and we are not a party to any interest rate risk management transactions. We have not purchased and do not
hold any derivative financial instruments.

A
10% change in interest rates (31 basis points on our floating-rate debt as of January 31, 2002) would have an immaterial effect on our earnings and cash flows and on
the fair value of our fixed rate debt.

15

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Item 8.Financial Statements and Supplementary Data

STATEMENTS OF CONSOLIDATED INCOME

|                                               |                                                                  | For the Fiscal Years Ended |          
|---------------------------------------------- | ---------------------------------------------------------------- | -------------------------- | ---------
|
|
|Sales                                          |                                                                  | $                          | 4,304,734
|Cost and expenses:                             |                                                                  |                            |          
|                                               | Cost of merchandise sold                                         |                            |          
|                                               | Operating and administrative                                     |                            |          
|                                               | Provision (benefit) for store closures and asset impairment, net |                            |          
|                                               | Legal settlements and other disputes                             |                            |          
|                                               | Loss on partial sale of joint venture assets                     |                            |          
|                                               | Interest expense                                                 |                            |          
|                                               | Interest income                                                  |                            |          
|                                               |                                                                  |                            |          
|Income before income taxes                     |                                                                  |                            | 75,265   
|Income taxes                                   |                                                                  |                            | 28,097   
|                                               |                                                                  |                            |          
|Net income                                     |                                                                  | $                          | 47,168   
|                                               |                                                                  |                            |          
|Net income per common share:                   |                                                                  |                            |          
|                                               | Basic                                                            |                            | $        
|                                               | Diluted                                                          |                            | $        
|Dividends per common share                     |                                                                  | $                          | 0.56     
|Weighted average number of shares outstanding: |                                                                  |                            |          
|                                               | Basic                                                            |                            |          
|                                               | Diluted                                                          |                            |          

See
notes to consolidated financial statements.

16

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CONSOLIDATED BALANCE SHEETS

|                                                      |                                                                                                                      | January 31,
2002           |               | January 25,
2001 |          
|----------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------- | ---------------- | ---------
|
|Assets                                                |                                                                                                                     
|Current Assets:                                       |                                                                                                                      |                            |               |                  |          
|                                                      | Cash and equivalents                                                                                                 |                            | $             | 123,187          |          
|                                                      | Pharmacy and other receivables, net                                                                                  |                            |               | 122,494          |          
|                                                      | Merchandise inventories                                                                                              |                            |               | 406,383          |          
|                                                      | Deferred income taxes                                                                                                |                            |               | 27,297           |          
|                                                      | Other                                                                                                                |                            |               | 5,053            |          
|                                                      |                                                                                                                      |                            |               |                  |          
|                                                      |                                                                                                                      | Total current assets       |               |                  | 684,414  
|                                                      |                                                                                                                      |                            |               |                  |          
|Property:                                             |                                                                                                                      |                            |               |                  |          
|                                                      | Land                                                                                                                 |                            |               | 104,928          |          
|                                                      | Buildings and leasehold improvements                                                                                 |                            |               | 488,492          |          
|                                                      | Equipment and fixtures                                                                                               |                            |               | 474,165          |          
|                                                      | Beverage licenses                                                                                                    |                            |               | 8,318            |          
|                                                      |                                                                                                                      |                            |               |                  |          
|                                                      |                                                                                                                      | Total property at cost     |               |                  | 1,075,903
|                                                      | Less accumulated depreciation                                                                                        |                            |               | 478,924          |          
|                                                      |                                                                                                                      |                            |               |                  |          
|                                                      |                                                                                                                      |                            | Property, net |                  |          
|                                                      |                                                                                                                      |                            |               |                  |          
|Goodwill, net                                         |                                                                                                                      |                            | 123,306       |                  |          
|Other assets                                          |                                                                                                                      |                            | 6,892         |                  |          
|                                                      |                                                                                                                      |                            |               |                  |          
|                                                      |                                                                                                                      |                            | Total         |                  | $        
|                                                      |                                                                                                                      |                            |               |                  |          
|Liabilities and Stockholders' Equity                  |                                                                                                                     
|Current Liabilities:                                  |                                                                                                                      |                            |               |                  |          
|                                                      | Accounts payable                                                                                                     |                            | $             | 270,473          |          
|                                                      | Short-term borrowings                                                                                                |                            |               |                 |          
|                                                      | Employee compensation and benefits                                                                                   |                            |               | 83,089           |          
|                                                      | Taxes payable                                                                                                        |                            |               | 61,394           |          
|                                                      | Current portion of long-term debt                                                                                    |                            |               | 2,629            |          
|                                                      | Other                                                                                                                |                            |               | 30,169           |          
|                                                      |                                                                                                                      |                            |               |                  |          
|                                                      |                                                                                                                      | Total current liabilities  |               |                  | 447,754  
|                                                      |                                                                                                                      |                            |               |                  |          
|Long-term Debt                                        |                                                                                                                      |                            | 198,774       |                  |          
|Deferred income taxes and other long-term liabilities |                                                                                                                      |                            | 43,490        |                  |          
|Commitments and Contingencies                         |                                                                                                                      |                            |               |                  |          
|Stockholders' Equity:                                 |                                                                                                                      |                            |               |                  |          
|                                                      | Common stock: par value $0.50 per share, 120,000,000 shares authorized, 37,977,000 and 37,367,000 shares outstanding |                            |               | 18,988           |          
|                                                      | Additional capital                                                                                                   |                            |               | 156,977          |          
|                                                      | Common stock contribution to Profit Sharing Plan                                                                     |                            |               | 2,939            |          
|                                                      | Unearned compensation                                                                                                |                            |               | (4,007           | )        
|                                                      | Retained earnings                                                                                                    |                            |               | 546,676          |          
|                                                      |                                                                                                                      |                            |               |                  |          
|                                                      |                                                                                                                      | Total stockholders' equity |               |                  | 721,573  
|                                                      |                                                                                                                      |                            |               |                  |          
|                                                      |                                                                                                                      |                            | Total         |                  | $        
|                                                      |                                                                                                                      |                            |               |                  |          

See
notes to consolidated financial statements.

17

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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: |                                                     |                               
|                                                  |                                                                                   | Depreciation                                        |                               
|                                                  |                                                                                   | Amortization                                        |                               
|                                                  |                                                                                   | Provision for asset impairment                      |                               
|                                                  |                                                                                   | Deferred income taxes and other                     |                               
|                                                  |                                                                                   | Amortization of restricted stock awards             |                               
|                                                  |                                                                                   | Common stock contribution to benefit plans          |                               
|                                                  |                                                                                   | Tax benefits credited to stockholders' equity       |                               
|                                                  |                                                                                   | Changes in assets and liabilities:                  |                               
|                                                  |                                                                                   |                                                     | Pharmacy and other receivables
|                                                  |                                                                                   |                                                     | Merchandise inventories       
|                                                  |                                                                                   |                                                     | Other current assets          
|                                                  |                                                                                   |                                                     | Current liabilities           
|                                                  |                                                                                   |                                                     |                               
|                                                  |                                                                                   | Net cash provided by operating activities           |                               
|                                                  |                                                                                   |                                                     |                               
|Investing Activities:                             |                                                                                   |                                                     |                               
|                                                  | Payments for property additions, store acquisitions and other assets              |                                                     |                               
|                                                  | Receipts 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                               |                                                     |                               
|                                                  | Sale (repurchase) of common stock to (from) Profit Sharing Plan                   |                                                     |                               
|                                                  | Repurchase of common stock                                                        |                                                     |                               
|                                                  | Dividend payments                                                                 |                                                     |                               
|                                                  |                                                                                   |                                                     |                               
|                                                  |                                                                                   | Net cash provided by (used in) financing activities |                               
|                                                  |                                                                                   |                                                     |                               
|Increase in cash and equivalents                  |                                                                                   |                                                     | 78,495                        
|Cash and equivalents at beginning of year         |                                                                                   |                                                     | 44,692                        
|                                                  |                                                                                   |                                                     |                               
|Cash and equivalents at end of year               |                                                                                   | $                                                   | 123,187                       
|                                                  |                                                                                   |                                                     |                               
|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.

18

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STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY

|                                             |                                          |        |      |   |        |      |   | Common
Stock
Contributions
to Profit
Sharing Plan |        |   |        |         |   |        |  
|-------------------------------------------- | ---------------------------------------- | ------ | ---- | - | ------ | ---- | - | ------------------------------------------------- | ------ | - | ------ | ------- | - | ------ | -
|
|
|
|
|Balance at January 28, 1999                  |                                          | 38,946 |      | $ | 19,473 |      | $ | 122,938                                           |        | $ | 9,834  |         | $ | (3,888 | )
|Net income                                   |                                          |        |      |   |        |      |   |                                                   |        |   |        |         |   |        |  
|Dividends ($.56 per share)                   |                                          |        |      |   |        |      |   |                                                   |        |   |        |         |   |        |  
|Profit Sharing Plan:                         |                                          |        |      |   |        |      |   |                                                   |        |   |        |         |   |        |  
|                                             | Issuance of stock for FY99 contributions |        | 269  |   |        | 134  |   |                                                   | 9,700  |   |        | (9,834  | ) |        |  
|                                             | Stock portion of FY00 contribution       |        |      |   |        |      |   |                                                   |        |   |        | 10,181  |   |        |  
|                                             | Sale of stock to plan                    |        | 70   |   |        | 35   |   |                                                   | 1,981  |   |        |         |   |        |  
|                                             | Reduction of plan debt                   |        |      |   |        |      |   |                                                   | 911    |   |        |         |   |        |  
|Stock awards, net of forfeitures             |                                          | 100    |      |   | 50     |      |   | 3,395                                             |        |   |        |         |   | (3,398 | )
|Amortization of restricted stock awards      |                                          |        |      |   |        |      |   |                                                   |        |   |        |         |   | 2,885  |  
|Tax benefits related to stock awards         |                                          |        |      |   |        |      |   | 834                                               |        |   |        |         |   |        |  
|Tax benefits related to employee stock plans |                                          |        |      |   |        |      |   |                                                   |        |   |        |         |   |        |  
|                                             |                                          |        |      |   |        |      |   |                                                   |        |   |        |         |   |        |  
|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 benefits related to stock awards         |                                          |        |      |   |        |      |   | 141                                               |        |   |        |         |   |        |  
|                                             |                                          |        |      |   |        |      |   |                                                   |        |   |        |         |   |        |  
|Balance at January 31, 2002                  |                                          | 37,977 |      | $ | 18,988 |      | $ | 156,977                                           |        | $ | 2,939  |         | $ | (4,007 | )
|                                             |                                          |        |      |   |        |      |   |                                                   |        |   |        |         |   |        |  

See notes to consolidated financial statements.

19

---



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. Prescription drugs and "front-end" merchandise,
including over-the-counter medications, health care products, photo and photo processing, cosmetics and greeting cards are the core merchandise categories. Additional
significant categories include 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 2000 and 2001 financial statements to conform to the 2002 presentation.

Fiscal YearThe Company operates on a 52/53-week fiscal year ending on the last Thursday in January. The fiscal
year ended January 31, 2002 contained 53 weeks of operations. The fiscal years ended January 25, 2001 and January 27, 2000 each contained 52 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 and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results may differ from those estimates.

ConcentrationsThe Company obtains approximately 54% of its total inventories, including 95% of its pharmaceutical
inventories, from a single supplier, AmerisourceBergen, pursuant to a long-term supply contract.

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

Accounts receivableprimarily include amounts due from third party providers (e.g., pharmacy benefit managers, insurance companies,
governmental agencies and vendors). Receivables are stated net of an allowance for uncollectible accounts, summarized as follows:

2002

2001MillionsAllowance for uncollectible accounts, beginning of year

$
0.4

$
1.1Additions charged to expense


0.8


0.4Deductions for accounts written off





(1.1
)Allowance for uncollectible accounts, end of year

$
1.2

$
0.4


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 $165.3 million and $155.6 million as of January 31, 2002 and January 25, 2001,
respectively.

20

---

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.

Propertyis depreciated using the straight-line method with estimated useful lives of twenty to thirty-three years for
buildings, the shorter of the life of the lease or estimated useful life for leasehold improvements and three to twenty years for equipment, fixtures and beverage licenses. The Company capitalizes
costs that relate to the application and infrastructure development stage of web site development. Such costs are included in equipment and fixtures and are amortized over seven years.

Buildings
and leasehold improvements include $4.4 million of assets under capital leases as of January 31, 2002. The corresponding capital lease obligation is included in
long-term liabilities. 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 not significant as of January 31, 2002.

Goodwillrepresents the excess of acquisition cost over the fair value of the net assets of acquired entities and is amortized using the
straight-line method over estimated useful lives of five to twenty-five years. Accumulated amortization was $19.0 million and $13.5 million as of
January 31, 2002 and January 25, 2001, respectively. In fiscal 2003, the Company will discontinue the amortization of goodwill (see "New Accounting Pronouncements").

Other assetsconsist primarily of joint venture investments accounted for under the equity method and purchased pharmacy customer files.
Amortization of pharmacy customer files is calculated using the straight-line method over estimated useful lives of one to five years.

Impairment of Long-Lived AssetsThe Company reviews long-lived tangible and intangible assets for
impairment whenever events or changes in circumstances indicate that their carrying values may not be recoverable. Using its best estimates based on reasonable and supportable assumptions and
projections, the Company records an impairment loss to write the assets down to their fair values if the carrying values of such assets exceed their related expected future cash flows.

In
fiscal 2002, the Company identified three stores with a history of operating and cash flow losses combined with projections of continuing losses in the foreseeable future. The
Company's projections indicate that the carrying values of certain long-lived tangible assets associated with these stores will not be recovered through future cash flows. Accordingly, an
impairment charge of $0.8 million was recorded
to write such assets down to their estimated fair values, based on discounted projected future cash flows.

Store Closure ReservesThe Company records the estimated costs associated with closing a store during the period in which the
store is identified and approved by management under a plan of termination, which includes the method of disposition and the expected date of completion. These costs include direct costs to terminate
a lease or sub-lease a property, 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 are recorded in the period in which the closure and related severance packages are communicated to the affected employees. Losses on the
liquidation of inventories are recorded in cost of merchandise sold when the inventories are sold or otherwise disposed of.

Fair Value of Financial InstrumentsThe carrying values of the Company's cash and equivalents, receivables, payables and
short-term borrowings 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

21

---

January 31, 2002 and January 25, 2001, 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, net of an allowance for estimated returns, at
the time the merchandise is sold. The allowance for sales returns is estimated based on the Company's historical experience.

Revenue
from the PBM segment is generated as pharmacies that participate in RxAmerica's retail network dispense prescription drugs to members of participating health plans. 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.

Vendor Rebates and AllowancesMerchandise rebates and allowances received from vendors are recognized as a reduction of cost
of goods sold when the related inventory is sold. Advertising rebates and allowances are recorded as a reduction of advertising expense when earned.

AdvertisingNet advertising costs are expensed as incurred and were $22.3 million, $23.0 million and
$24.3 million for fiscal years 2002, 2001 and 2000, respectively.

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

Deferred RentRent expense 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 31, 2002 and January 25, 2001, deferred rent of $14.3 million and $12.3 million, respectively, was included in long-term liabilities.

Legal settlements and other disputesIn fiscal 2002, the Company 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, the Company recorded income of $6.8 million related to the
Company's 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.

Income taxesThe Company accounts for its taxes in accordance with Statement of Financial Accounting Standards (SFAS)
No. 109, which requires the use of the asset and liability method of accounting for deferred income taxes. 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 accounts for employee 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, Accounting for Stock-Based
Compensation.

Net income per shareBasic net income per share is computed by dividing net income by the weighted average number of common
shares outstanding during the period. Diluted net income per share is 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

22

---

period. The following is a reconciliation of the number of shares used in the Company's basic and diluted net income per share computations:

|                                                      |                         | Fiscal
|----------------------------------------------------- | ----------------------- | ------
|
|
|Basic weighted average number of shares outstanding   |                         | 37,443
|Effect of dilution from:                              |                         |       
|                                                      | Restricted stock awards |       
|                                                      | Stock options           |       
|                                                      |                         |       
|Diluted weighted average number of shares outstanding |                         | 37,751
|                                                      |                         |       

The
Company excluded 49,900 stock options from the calculation of diluted earnings per share in fiscal 2002 because their effect would have been anti-dilutive.

Comprehensive incomeequals net income for all periods presented.

New Accounting Pronouncements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 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. Under SFAS No. 142, goodwill and certain
other intangible assets deemed to have indefinite lives will no longer be amortized, but must be tested annually for impairment. The Company
will adopt SFAS No. 141 and SFAS No. 142 in the first quarter of fiscal 2003. The adoption of SFAS No. 141 is not expected to have a material impact on the Company's financial
position or results of operations. Upon adoption of SFAS No. 142, the Company will discontinue the amortization of goodwill with a carrying value of $123.3 million as of
January 31, 2002 and annual amortization of $6.3 million.

As
required by SFAS No. 142, the Company has 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 has identified certain regional reporting units that have experienced declines in their fair values below their net carrying values. Accordingly, the Company will
recognize a goodwill impairment charge of approximately $41 million (approximately $25 million after tax) for these reporting units in the first quarter of fiscal 2003 as the cumulative
effect of a change in accounting principle.

During
the year the FASB also issued SFAS No. 143,Accounting for Asset Retirement Obligations, and SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. SFAS No. 143, which addresses the accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs, is effective for the Company beginning in fiscal 2004. SFAS
No. 144 establishes accounting and reporting standards for the impairment of long-lived assets and for long-lived assets to be disposed of, and is effective for the
Company beginning in fiscal 2003. The Company does not expect the adoption of SFAS No. 143 or SFAS No. 144 to have a material impact on its financial position or results of operations.

23

---

2.    Provision for Store Closures

In January 2001, the Board of Directors approved a plan (the "2001 Closure Plan") to close 15 stores, and the Company recorded expenses of
$25.6 million associated with this plan. 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. As of
January 31, 2002, the Company had successfully terminated the leases and sublet or sold the properties for 13 of the 14 closed stores, and is currently marketing the remaining property. Based
on the results of the 2001 Closure Plan to date and estimated future costs to complete the plan, the Company recorded a benefit of $1.5 million for the reduction of the related reserve in the
fourth quarter of fiscal 2002. The remaining reserve is included in long-term liabilities. Costs incurred to date and adjustments to the original estimated reserve are summarized as
follows:

|Description                         |  | Reserve
Balance at
January 25,
2001 |      | Costs
Incurred in
Fiscal 2002 |   | Increases
(Decreases)
to Reserve
Amount |   | Reserve
Balance at
January 31,
2002
|----------------------------------- |  | ----------------------------------- | ---- | ----------------------------- | - | --------------------------------------- | - | -----------------------------------
|
|Loss on disposition of fixed assets |  | $                                   | 7.7  |                               | $ | (6.3                                    | ) | $                                  
|Write-off of goodwill               |  |                                     | 5.6  |                               |   | (5.6                                    | ) |                                    
|Real estate related costs           |  |                                     | 11.2 |                               |   | (4.1                                    | ) |                                    
|Other closing costs                 |  |                                     | 1.1  |                               |   | (0.6                                    | ) |                                    
|Employment related costs            |  |                                     |     |                               |   | (1.0                                    | ) |                                    
|Gain on sale of other assets        |  |                                     |     |                               |   | 1.0                                     |   |                                    
|                                    |  |                                     |      |                               |   |                                         |   |                                    
|Total                               |  | $                                   | 25.6 |                               | $ | (16.6                                   | ) | $                                  
|                                    |  |                                     |      |                               |   |                                         |   |                                    

These
14 stores accounted for $59.0 million and $54.9 million of sales and $7.3 million and $5.0 million of pretax operating losses in fiscal 2001 and 2000,
respectively. In fiscal 2002, prior to their closure in the first quarter, these stores accounted for $12.0 million of sales and $2.9 million of pretax operating losses.

Additionally,
consistent with prior years, the Company makes decisions to close stores in the normal course of business. The Company closed 5, 3 and 15 stores not included in the 2001
Closure Plan in fiscal 2002, 2001 and 2000, respectively. During fiscal 2002, the Company recorded a benefit of $1.0 million from the reduction of the reserve for store closures not included in
the 2001 Closure Plan. In fiscal 2001 and 2000, the Company recorded expenses of $2.8 million and $4.9 million, respectively, related to the closure of stores not included in the 2001
Closure Plan. Reserves for store closures not included in the 2001 Closure Plan were $5.1 million and $9.9 million as of January 31, 2002 and January 25, 2001,
respectively, and consisted primarily of real estate related costs.

3.    Acquisitions

In October 1999, the Company completed the net acquisition of 31 stores (32 stores were acquired and one was closed) located in California from the Rite
Aid Corporation. Two additional stores were acquired in the first quarter of 2001 under the terms that governed the October 1999 acquisition. One of these two locations was immediately sold.
These stores contributed approximately $269 million and $66 million in sales to fiscal years 2001 and 2000, respectively. The total purchase price of the acquisition was approximately
$151 million. The Company recorded goodwill of $102 million associated with this transaction.

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 note payable to RxAmerica was eliminated upon acquisition of full

24

---

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.

These
acquisitions were accounted for as purchases, with the results of operations of the acquired businesses included in the accompanying consolidated financial statements from their
respective dates of acquisition. On a pro forma basis, as if the businesses had been acquired at the beginning of fiscal 2000, sales, net income and net income per share would not differ materially
from the amounts reported in the accompanying consolidated financial statements.

4.    Debt

At the end of fiscal 2001, the Company had a total of $20 million in short-term borrowings under two unsecured and uncommitted lines of credit,
each with a $10 million credit limit, that expired on March 1, 2001 and August 7, 2001. The Company repaid all borrowings under these lines of credit in fiscal 2002.

Long-term
debt at January 31, 2002 and January 25, 2001 consisted of the following:

2002

2001ThousandsUnsecured revolving line of credit, interest based on LIBOR (weighted average rate of 3.08% at January 31, 2002), expires October 2004

$
40,000

$
75,000Private placement notes, fixed interest rates ranging from 5.85% to 7.85%, mature at various dates through 2014


160,714


112,857Note payable to RxAmerica (eliminated upon acquisition)





12,041Equipment notes and other


689


1,263Total long-term debt

$
201,403

$
201,161Less current portion


2,629


3,101Long-term portion

$
198,774

$
198,060


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 $1.5 million were outstanding
under the agreement as of January 31, 2002. The Company pays a quarterly commitment fee of 0.30% per annum on the unused portion of the line of credit ($110 million as of
January 31, 2002).

The
Company obtained an additional $50 million in privately placed debt in the third quarter of fiscal 2002. These notes consist of $20 million of fully amortized notes
payable in annual installments from 2004 through 2008 and bearing interest at a rate of 6.46%, and $30 million of 6.71% interest-only notes payable in full in 2008. The Company used
the proceeds from the $50 million borrowing to pay down the revolving line of credit and to provide cash funding for the acquisition of Albertson's interest in RxAmerica.

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 $25.6 million charge associated with the 2001 Closure Plan in the computation of the fixed charge
coverage ratio. As of January 31, 2002, the Company was in compliance with the restrictions and limitations included in these provisions.

25

---

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

Fiscal Year 2003

$
2,629Fiscal Year 2004


2,352Fiscal Year 2005


81,870Fiscal Year 2006


8,870Fiscal Year 2007


45,870Thereafter


59,812Total

$
201,403


5.    Commitments and Contingencies

Leases

The Company leases a significant portion of its store properties and certain of its distribution centers. Original non-cancelable lease terms range
from 2 to 26 years and generally contain renewal options covering up to 20 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). Lease rentals for fiscal years 2002, 2001 and 2000 were $68.1 million, $64.3 million and $53.7 million, respectively, of which
$53.9 million, $51.2 million and $41.6 million, respectively, represented minimum payments.

Minimum
rental commitments for non-cancelable leases as of January 31, 2002 were as follows:

Operating Leases

Capital LeasesThousandsFiscal Year 2003

$
60,233

$
398Fiscal Year 2004


58,541


418Fiscal Year 2005


55,890


418Fiscal Year 2006


52,487


418Fiscal Year 2007


49,781


423Thereafter


486,460


8,015Total minimum lease payments

$
763,392

$
10,090Less amounts representing interest





5,709Present value of capital lease obligations




$
4,381Less current portion





7Long-term portion




$
4,374


Total
minimum lease payments on operating leases have not been reduced by minimum future sublease rentals of $12.8 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.

26

---

Legal Matters

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.

6.    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. 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 2002.

7.    Employee Compensation and Benefits

The Company had approximately 22,200 full-time and part-time employees as of January 31, 2002. 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 $9.4 million, $11.5 million and $12.6 million for fiscal years
2002, 2001 and 2000, respectively. Matching contributions paid by the Company under the 401(k) component and included above were $6.5 million, $3.1 million and $1.8 million for
fiscal years 2002, 2001 and 2000, 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
$10.0 million. Deferred compensation was $9.8 million and $8.1 million as of January 31, 2002 and January 25, 2001, respectively.

27

---

8.    Taxes on Income

Significant components of the Company's deferred tax assets and liabilities as of January 31, 2002 and January 25, 2001 are as follows:

January 31,
2002

January 25,
2001ThousandsDeferred Tax Assets:Reserve for vacation pay

$
13,292

$
11,901Reserve for workers' compensation


8,524


8,260Reserve for deferred compensation


3,494


2,998Reserve for store closures


3,205


10,948Capitalized interest


2,952


2,264Reserve for health benefits


2,114


1,789ESOP deduction


2,041


State income tax


1,875


2,593Other


15,814


15,43753,311


56,190Deferred Tax Liabilities:Depreciation


21,351


20,744Inventories


5,293


4,437Basis of property


2,404


3,540Other


14,226


11,43343,274


40,154Net deferred tax asset

$
10,037

$
16,036


Income
tax expense is summarized as follows:

Fiscal Year2002

2001

2000ThousandsCurrent:Federal

$
17,740

$
38,755

$
36,811State


4,358


6,097


7,79422,098


44,852


44,605Deferred


5,999


(15,452
)

295Total

$
28,097

$
29,400

$
44,900


28

---

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

Fiscal Year2002

2001

2000Federal income taxes at statutory rate

35.00
%
35.00
%
35.00
%State income tax, net of federal benefits

5.14

5.16

4.82Benefits of wage credits

(0.77
)
(0.83
)
(0.38
)Benefits of ESOP dividends

(2.22
)


(0.29
)Other

0.18

0.25

0.2837.33
%
39.58
%
39.43
%


9.    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 purchased 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 back to the Profit Sharing Plan in fiscal 2001 for $1.1 million, resulting in net stock repurchases of $52.4 million.

10.  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 authorized the issuance of 1,400,000 shares of common stock in the form of stock options, incentive stock options and stock awards. The
Non-Executive Long Term Incentive Plan authorized the issuance of 1,000,000 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 31, 2002, there were 1,174,385 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 become exercisable in
installments of 30% after the third year, 60% after the fourth year and 100% after the fifth anniversary of the grant date 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 $4.0 million and $4.5 million as of January 31, 2002 and January 25, 2001, respectively, and has been reflected
as a reduction of

29

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stockholders' equity. During fiscal years 2002, 2001 and 2000, the Company granted 58,700, 176,400 and 101,720 shares of restricted stock, respectively.

Stock Options

Following is a summary of stock option activity:

Shares

Weighted Average
Exercise PriceOutstanding at January 27, 2000




Granted (weighted average fair value of $6.81)

573,850

$
20.10Forfeited

(4,600
)

19.41Outstanding at January 25, 2001

569,250


20.10Granted (weighted average fair value of $6.42)

99,900


23.74Forfeited

(28,600
)

19.44Outstanding at January 31, 2002

640,550


20.70


Following
is a summary of options outstanding and exercisable as of January 31, 2002:

|                 |  | Options Outstanding |  | Options Exercisable
|---------------- |  | ------------------- |  | -------------------
|
|$17.85 to $20.40 |  | 459,450             |  | 8.5                
|$20.41 to $22.95 |  | 51,200              |  | 9.8                
|$22.96 to $25.50 |  | 129,900             |  | 8.8                
|                 |  |                     |  |                    
|                 |  | 640,550             |  | 8.7                
|                 |  |                     |  |                    

No
options were exercisable as of January 25, 2001.

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

Fiscal2002

2001Dividend yield

2.34
%
0.56
%Expected volatility

30.18
%
29.21
%Risk-free interest rate

4.29
%
6.20
%Expected life (years)

5.0

4.1


The
Company has adopted the disclosure-only provisions of SFAS No. 123,Accounting for Stock-Based Compensation. Had
compensation cost been determined based on the fair value at the grant date

30

---

consistent with the provisions of this statement, the Company's pro forma net income and net income per common share would have been as follows:

Fiscal2002

2001Net income (Thousands):As reported

$
47,168

$
44,884Pro forma


46,932


44,768Basic net income per share:As reported

$
1.26

$
1.19Pro forma


1.25


1.19Diluted net income per share:As reported

$
1.25

$
1.19Pro forma


1.24


1.18


11.  Segment Information

Prior to the September 2001 acquisition of Albertson's interest in the RxAmerica joint venture, the Company operated in one business segment, retail drug
stores. Subsequently, the Company identified a second business segment, pharmacy benefit management ("PBM"). These segments were identified based on their separate and distinct products and services,
technology, marketing strategies and management reporting. The accounting policies of the segments are the same as those for the Company as described in note 1. Management evaluates the
segments' operating performance separately and
allocates resources based on their respective financial condition, results of operations and cash flows, exclusive of inter-segment transactions and balances, which are eliminated in consolidation.

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

|                                                 |                                                   | Retail
Drug Stores |           | Pharmacy Benefit
Management(1) |   | Consolidated
Totals |     
|------------------------------------------------ | ------------------------------------------------- | ------------------ | --------- | ------------------------------ | - | ------------------- | ----
|
|Sales                                            |                                                   | $                  | 4,296,821 |                                | $ | 7,913               |     
|Income before income taxes                       |                                                   |                    | 70,182    |                                |   | 5,083               |     
|Total assets                                     |                                                   |                    | 1,359,415 |                                |   | 52,176              |     
|Items included in income before income taxes:    |                                                   |                    |           |                                |   |                     |     
|                                                 | Interest expense                                  |                    |           | 15,475                         |   |                     |    
|                                                 | Interest (income)                                 |                    |           | (982                           | ) |                     | (477
|                                                 | Depreciation and amortization                     |                    |           | 78,050                         |   |                     | 143 
|                                                 | Provision for store closures and asset impairment |                    |           | (1,682                         | ) |                     |    
|                                                 | Legal settlements and other disputes              |                    |           | 860                            |   |                     |    
|Payments for property additions and other assets |                                                   |                    | 111,024   |                                |   | 338                 |     
|Joint venture investments                        |                                                   |                    | 2,959     |                                |   |                    |     

---

31

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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 "Corporation") as of January 31, 2002 and January 25,
2001, 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 31, 2002.
These financial statements are the responsibility of the Corporation'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 as of
January 31, 2002 and January 25, 2001, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 31, 2002, in
conformity with accounting principles generally accepted in the United States of America.

LOGO

San
Francisco, California
March 1, 2002

32

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

Not applicable.

PART III

Item 10.Directors and Executive Officers of the Registrant

Officers and Directors

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 2002 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 2002 annual meeting of stockholders and is incorporated herein by reference.

Item 12.Security Ownership of Certain Beneficial Owners and Management

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 2002 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 2002 annual meeting of stockholders and is incorporated herein by reference.

33

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PART IV

Item 14.Exhibits, Financial Statement Schedules, and Reports on Form 8-K

Financial Statements and Schedules



(a)(1)
Not applicable

(a)(2)
Not applicable.

(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.                                    |  | By-Laws of Longs Drug Stores Corporation, dated November 14, 2000, is incorporated herein as Exhibit 3(b) to Form 10-K.                                                                                                                                                                                                                                                                                                 
|10.         |  | Material Contracts                   
|            |  | a.                                    |  | The 1995 Long-Term Incentive Plan of Longs Drug Stores Corporation is incorporated herein by reference as previously filed with the Commission on August 5, 1994, on Form S-8, Registration
No. 033-54959.                                                                                                                                                                                                              
|            |  | b.                                    |  | 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.                                                                                                                                                                                                              
|            |  | c.                                    |  | Renewal of the Agreements for Termination Benefits dated August 22, 1996, are incorporated herein by reference 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; Exhibit 3, as executed by Select Key Executives and Store Managers as previously filed with the Commission on December 6, 1996.
|            |  | d.                                    |  | Amendments to the Longs Drug Stores Corporation Deferred Compensation Plan of 1995.                                                                                                                                                                                                                                                                                                                                     
|            |  | e.                                    |  | 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.                                                                                                                                                                                                        
|            |  | f.                                    |  | Credit Agreement dated October 14, 1999 is incorporated herein by reference as previously filed with the Commission on April 13, 2000, as Exhibit 10(h) to Form 10-K.                                                                                                                                                                                                                                                   
|            |  | g.                                    |  | 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.                                                                                                                                            
|            |  | h.                                    |  | 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.                                                                                                                     

34

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|    |  | i.                             |  | The Non-Executive Long-Term Incentive Plan.                                                                                                                                                                                                                               
|--- |  | ------------------------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |  | j.                             |  | 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.                   
|    |  | k.                             |  | 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.
|    |  | l.                             |  | Employment agreement between the Company and Todd J. Vasos, Senior Vice PresidentMarketing, dated November 21, 2001.                                                                                                                                                     
|    |  | m.                             |  | Retirement agreement between the Company and Dan R. Wilson, dated December 19, 2001.                                                                                                                                                                                      
|21. |  | Subsidiaries of the Registrant
|23. |  | Independent Auditors' Consent 

(b) REPORTS ON FORM 8-K

There
have been no reports on Form 8-K filed during the quarter ended January 31, 2002.

35

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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 17, 2002 |  | /s/S. F. MCCANN(S. F. McCann)
Senior Vice President, Chief Financial Officer and Treasurer
|     |                |  |                                                                                           
|Date | April 17, 2002 |  | /s/G. L. WHITE(G. L. White)
Vice PresidentController and Assistant Secretary             

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.

|Date           |  |    | Signature                                                                      
|-------------- |  | -- | -------------------------------------------------------------------------------
|               |  |    |                                                                                
|April 17, 2002 |  | By | /s/R. M. LONG(R. M. Long)
Chairman of the Board and Director                   
|               |  |    |                                                                                
|April 17, 2002 |  | By | /s/H.R. SOMERSET(H.R. Somerset)
President, Chief Executive Officer and Director
|               |  |    |                                                                                
|April 17, 2002 |  | By | /s/L. T. BARNES, JR.(L. T. Barnes, Jr.)
Director                               
|               |  |    |                                                                                
|April 17, 2002 |  | By | /s/R. M. BROOKS(R. M. Brooks)
Director                                         
|               |  |    |                                                                                
|April 17, 2002 |  | By | /s/W. L. CHENEVICH(W. L. Chenevich)
Director                                   

36

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|               |  |    |                                                                             
|-------------- |  | -- | ----------------------------------------------------------------------------
|April 17, 2002 |  | By | /s/W. G. COMBS(W. G. Combs)
Director                                        
|               |  |    |                                                                             
|April 17, 2002 |  | By | /s/M. S. METZ, PHD.(M. S. Metz, PhD.)
Director                              
|               |  |    |                                                                             
|April 17, 2002 |  | By | /s/R. A. PLOMGREN(R. A. Plomgren)
Retired Senior Vice President and Director
|               |  |    |                                                                             
|April 17, 2002 |  | By | /s/G. H. SAITO(G. H. Saito)
Director                                        
|               |  |    |                                                                             
|April 17, 2002 |  | By | /s/D. L. SORBY, PHD.(D. L. Sorby, PhD.)
Director                            
|               |  |    |                                                                             
|April 17, 2002 |  | By | /s/T. R. SWEENEY(T. R. Sweeney)
Director                                    
|               |  |    |                                                                             
|April 17, 2002 |  | By | /s/F. E. TROTTER(F. E. Trotter)
Director                                    
|               |  |    |                                                                             
|April 17, 2002 |  | By | /s/A. G. WAGNER(A. G. Wagner)
Director                                      

37

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