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SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-Q

(Mark One)

|/x/ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
|--- | ----------------------------------------------------------------------------------------

For the quarterly period ended October 25, 2001

|/ / | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
|--- | -----------------------------------------------------------------------------------------

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

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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 /x/  No / /

There
were 37,907,861 shares of common stock outstanding as of November 22, 2001.

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Table of Contents

|PART IFINANCIAL INFORMATION |                | 
|---------------------------- | -------------- | 
|                             | Item 1         | 
|                             | Item 2         | 
|                             | Item 3         | 
|PART IIOTHER INFORMATION    |                | 
|                             | Item 2         | 
|                             | Item 6         | 
|                             | Signature Page | 

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PART IFINANCIAL INFORMATION

(a)  Item 1. Condensed Consolidated Financial Statements

Statements of Condensed Consolidated Income (unaudited)

|                                               |                              | 13 weeks ended |           | 39 weeks ended |  
|---------------------------------------------- | ---------------------------- | -------------- | --------- | -------------- | -
|
|
|Sales                                          |                              | $              | 1,017,381 |                | $
|Cost and expenses:                             |                              |                |           |                |  
|                                               | Cost of merchandise sold     |                |           | 761,015        |  
|                                               | Operating and administrative |                |           | 248,707        |  
|                                               | Provision for store closures |                |           |               |  
|                                               | Interest expense             |                |           | 3,969          |  
|                                               | Interest income              |                |           | (558           | )
|                                               |                              |                |           |                |  
|Income before taxes on income                  |                              |                | 4,248     |                |  
|Taxes on income                                |                              |                | 1,700     |                |  
|                                               |                              |                |           |                |  
|Net income                                     |                              | $              | 2,548     |                | $
|                                               |                              |                |           |                |  
|Net income per common share:                   |                              |                |           |                |  
|                                               | Basic                        |                | $         | 0.07           |  
|                                               | Diluted                      |                | $         | 0.07           |  
|                                               | Dividends                    |                | $         | 0.14           |  
|Weighted average number of shares outstanding: |                              |                |           |                |  
|                                               | Basic                        |                |           | 37,510         |  
|                                               | Diluted                      |                |           | 37,788         |  

See notes to Condensed Consolidated Financial Statements.

1

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Condensed Consolidated Balance Sheets

|                                                                        |                            | October 25,
2001 |         | October 26,
2000 |           | January 25,
2001
|----------------------------------------------------------------------- | -------------------------- | ---------------- | ------- | ---------------- | --------- | ----------------
|
|
|ASSETS                                                                  |                            |                  |         |                  |           |                 
|Current Assets:                                                         |                            |                  |         |                  |           |                 
|Cash and equivalents                                                    |                            | $                | 78,380  |                  | $         | 29,906          
|Pharmacy and other receivables, net                                     |                            |                  | 153,699 |                  |           | 102,879         
|Merchandise inventories                                                 |                            |                  | 432,898 |                  |           | 450,914         
|Deferred income taxes                                                   |                            |                  | 20,581  |                  |           | 28,958          
|Other                                                                   |                            |                  | 7,480   |                  |           | 9,405           
|                                                                        |                            |                  |         |                  |           |                 
|                                                                        | Total current assets       |                  |         | 693,038          |           |                 
|                                                                        |                            |                  |         |                  |           |                 
|Property:                                                               |                            |                  |         |                  |           |                 
|Land                                                                    |                            |                  | 110,621 |                  |           | 110,065         
|Buildings and leasehold improvements                                    |                            |                  | 489,214 |                  |           | 458,028         
|Equipment and fixtures                                                  |                            |                  | 459,970 |                  |           | 413,119         
|Beverage licenses                                                       |                            |                  | 8,306   |                  |           | 8,111           
|                                                                        |                            |                  |         |                  |           |                 
|                                                                        | Total property at cost     |                  |         | 1,068,111        |           |                 
|Less accumulated depreciation                                           |                            |                  | 461,164 |                  |           | 410,070         
|                                                                        |                            |                  |         |                  |           |                 
|                                                                        |                            | Property, net    |         |                  | 606,947   |                 
|                                                                        |                            |                  |         |                  |           |                 
|Goodwill, net                                                           |                            |                  | 124,495 |                  |           | 136,189         
|Other assets                                                            |                            |                  | 4,563   |                  |           | 20,704          
|                                                                        |                            |                  |         |                  |           |                 
|                                                                        |                            | Total            |         | $                | 1,429,043 |                 
|                                                                        |                            |                  |         |                  |           |                 
|LIABILITIES AND STOCKHOLDERS' EQUITY                                    |                            |                  |         |                  |           |                 
|Current Liabilities:                                                    |                            |                  |         |                  |           |                 
|Accounts payable                                                        |                            | $                | 317,265 |                  | $         | 245,479         
|Short-term borrowings                                                   |                            |                  |        |                  |           | 20,000          
|Employee compensation and benefits                                      |                            |                  | 77,759  |                  |           | 77,903          
|Taxes payable                                                           |                            |                  | 41,663  |                  |           | 52,045          
|Current portion of long-term debt                                       |                            |                  | 2,718   |                  |           | 3,081           
|Other                                                                   |                            |                  | 30,635  |                  |           | 31,041          
|                                                                        |                            |                  |         |                  |           |                 
|                                                                        | Total current liabilities  |                  |         | 470,040          |           |                 
|                                                                        |                            |                  |         |                  |           |                 
|Long-term debt                                                          |                            |                  | 228,742 |                  |           | 223,316         
|Deferred income taxes and other long-term liabilities                   |                            |                  | 30,118  |                  |           | 32,399          
|Commitments and contingencies                                           |                            |                  |         |                  |           |                 
|Stockholders' Equity:                                                   |                            |                  |         |                  |           |                 
|Common stock (37,909,000, 37,381,000 and 37,367,000 shares outstanding) |                            |                  | 18,954  |                  |           | 18,691          
|Additional capital                                                      |                            |                  | 150,980 |                  |           | 136,351         
|Common stock contribution to Profit Sharing Plan                        |                            |                  |        |                  |           |                
|Retained earnings                                                       |                            |                  | 530,209 |                  |           | 517,902         
|                                                                        |                            |                  |         |                  |           |                 
|                                                                        | Total stockholders' equity |                  |         | 700,143          |           |                 
|                                                                        |                            |                  |         |                  |           |                 
|                                                                        |                            | Total            |         | $                | 1,429,043 |                 
|                                                                        |                            |                  |         |                  |           |                 

See notes to Condensed Consolidated Financial Statements.

2

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Statements of Condensed Consolidated Cash Flows (unaudited)

|                                                  |                                                                                   | 39 weeks ended                                      |                                              
|------------------------------------------------- | --------------------------------------------------------------------------------- | --------------------------------------------------- | ---------------------------------------------
|
|
|Operating Activities                              |                                                                                   |                                                     |                                              
|                                                  | Net income                                                                        |                                                     | $                                            
|                                                  | Adjustments to reconcile net income to net cash provided by operating activities: |                                                     |                                              
|                                                  |                                                                                   |                                                     | Depreciation                                 
|                                                  |                                                                                   |                                                     | Amortization                                 
|                                                  |                                                                                   |                                                     | 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:           
|                                                  |                                                                                   |                                                     |                                              
|                                                  |                                                                                   |                                                     |                                              
|                                                  |                                                                                   |                                                     |                                              
|                                                  |                                                                                   |                                                     |                                              
|                                                  |                                                                                   |                                                     |                                              
|                                                  |                                                                                   | Net cash provided by operating activities           |                                              
|                                                  |                                                                                   |                                                     |                                              
|Investing Activities:                             |                                                                                   |                                                     |                                              
|                                                  | Payments for acquisition of assets from RxAmerica, net of cash                    |                                                     |                                              
|                                                  | Payments for property additions, store acquisitions and other assets              |                                                     |                                              
|                                                  | Receipts from property dispositions                                               |                                                     |                                              
|                                                  |                                                                                   |                                                     |                                              
|                                                  |                                                                                   | Net cash used in investing activities               |                                              
|                                                  |                                                                                   |                                                     |                                              
|Financing Activities:                             |                                                                                   |                                                     |                                              
|                                                  | Proceeds from long-term borrowings, net                                           |                                                     |                                              
|                                                  | Repayments of short-term borrowings                                               |                                                     |                                              
|                                                  | Repurchase of common stock from Profit Sharing Plan, net                          |                                                     |                                              
|                                                  | Repurchase of common stock                                                        |                                                     |                                              
|                                                  | Dividend payments                                                                 |                                                     |                                              
|                                                  |                                                                                   |                                                     |                                              
|                                                  |                                                                                   | Net cash provided by (used in) financing activities |                                              
|                                                  |                                                                                   |                                                     |                                              
|Increase in cash and equivalents                  |                                                                                   |                                                     | 33,688                                       
|Cash and equivalents at beginning of period       |                                                                                   |                                                     | 44,692                                       
|                                                  |                                                                                   |                                                     |                                              
|Cash and equivalents at end of period             |                                                                                   | $                                                   | 78,380                                       
|                                                  |                                                                                   |                                                     |                                              
|Supplemental disclosure of cash flow information: |                                                                                   |                                                     |                                              
|                                                  | Income taxes paid                                                                 |                                                     | $                                            

See notes to Condensed Consolidated Financial Statements.

3

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Statements of Condensed Consolidated Stockholders' Equity        For the 52 weeks ended January 25, 2001 and the 39 weeks ended October 25, 2001

|                                     |                                         | Common Stock
Shares |      | Amount |        | Additional
Capital |   | Common
Stock
Contributions
to Profit
Sharing Plan |        | Retained
Earnings |        | Total
Stockholders'
Equity |  
|------------------------------------ | --------------------------------------- | ------------------- | ---- | ------ | ------ | ------------------ | - | ------------------------------------------------- | ------ | ----------------- | ------ | -------------------------- | -
|
|Balance at January 27, 2000          |                                         | 39,385              |      | $      | 19,692 |                    | $ | 135,358                                           |        | $                 | 10,181 |                            | $
|                                     |                                         |                     |      |        |        |                    |   |                                                   |        |                   |        |                            |  
|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 | )                 |        |                            |  
|Restricted stock awards, net         |                                         | 147                 |      |        | 73     |                    |   | 2,394                                             |        |                   |        |                            |  
|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 |                    | $ | 136,734                                           |        | $                 | 7,695  |                            | $
|                                     |                                         |                     |      |        |        |                    |   |                                                   |        |                   |        |                            |  
|Unaudited:                           |                                         |                     |      |        |        |                    |   |                                                   |        |                   |        |                            |  
|Net income                           |                                         |                     |      |        |        |                    |   |                                                   |        |                   |        |                            |  
|Dividends ($.42 per share)           |                                         |                     |      |        |        |                    |   |                                                   |        |                   |        |                            |  
|Profit Sharing Plan:                 |                                         |                     |      |        |        |                    |   |                                                   |        |                   |        |                            |  
|                                     | Issuance of stock for FY01 contribution |                     | 288  |        |        | 144                |   |                                                   | 7,551  |                   |        | (7,695                     | )
|Contribution of stock to 401(k) plan |                                         | 214                 |      |        | 107    |                    |   | 5,207                                             |        |                   |        |                            |  
|Restricted stock awards, net         |                                         | 40                  |      |        | 20     |                    |   | 1,347                                             |        |                   |        |                            |  
|Tax benefit related to stock awards  |                                         |                     |      |        |        |                    |   | 141                                               |        |                   |        |                            |  
|                                     |                                         |                     |      |        |        |                    |   |                                                   |        |                   |        |                            |  
|Balance at October 25, 2001          |                                         | 37,909              |      | $      | 18,954 |                    | $ | 150,980                                           |        | $                 |       |                            | $
|                                     |                                         |                     |      |        |        |                    |   |                                                   |        |                   |        |                            |  

See notes to Condensed Consolidated Financial Statements.

4

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



5

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|                             |                         | 13 weeks ended |     | 39 weeks ended
|---------------------------- | ----------------------- | -------------- | --- | --------------
|
|
|Basic net income per share   |                         | 37,510         |     | $             
|Effect of dilution from:     |                         |                |     |               
|                             | Restricted stock awards |                | 183 |               
|                             | Stock options           |                | 95  |               
|                             |                         |                |     |               
|Diluted net income per share |                         | 37,788         |     | $             



(In millions)Description

Reserve Balance at January 25,
2001

Increases/
(Decreases) to Reserve Amount

Amounts Charged Against Reserve

Reserve Balance at October 25,
2001Loss on disposition of fixed assets

$
7.7

$


$
(5.6
)
$
2.1Write-off of goodwill


5.6





(5.6
)

Real estate related expenses


11.2





(3.1
)

8.1Other closing costs


1.1





(0.7
)

0.4Employment related costs





1.0


(0.8
)

0.2Gain on sale of other assets





(1.0
)

1.0


Total

$
25.6

$


$
(14.8
)
$
10.8




6

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For the 13 weeks ended
October 25, 2001:

Retail Pharmacy Segment
(in thousands)

Pharmacy Benefit Management Segment
(in thousands)

Consolidated Totals (in thousands)Net sales

$
1,015,750

$
1,631

$
1,017,381Income before taxes on income


3,517


731

$
4,248For the 39 weeks ended
October 25 2001:Net sales

$
3,089,739

$
1,631

$
3,091,370Income before taxes on income


41,463


731

$
42,194Total assets at October 25, 2001

$
1,372,050

$
56,993

$
1,429,043


7

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

RESULTS OF OPERATIONS

This quarterly 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 sales trends, prescription margins, margin improvement, warehouse performance, 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; 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 ability to integrate the acquisition of RxAmerica; the availability and cost of real estate and construction; 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; our ability to smoothly transition our California warehouse operations from third-party
to self-operation; adverse determinations with respect to litigation or other claims; and other factors discussed in this quarterly report under "Factors Affecting Our Future Prospects"
and elsewhere or in any of our other SEC filings. We assume no obligation to update our forward-looking statements to reflect subsequent events or circumstances.

Sales

Sales for the 13-weeks ended October 25, 2001 increased 4.5% to $1.017 billion compared to $974 million in the same period
last year. Total same-store sales increased 3.7% as compared to the corresponding period last year. The acquisition of RxAmerica was made late in the third quarter of fiscal 2002.
RxAmerica sales during the 13-week period were $1.6 million and did not have a significant impact on total sales for the period.

Pharmacy
same-store sales increased 10.9% for the 13-weeks representing a 10.1% increase in the average retail price per prescription and a 0.8% increase in
prescription volume. Total pharmacy sales increased 11.6% over the comparable period of the prior fiscal year. Pharmacy represented 45.2% of total sales for the period, up from 42.3% in the third
period of the prior year and up from 41.1% of
total sales for the preceding fiscal year. Pharmacy sales as a percent of total sales continued to increase as retail drug prices continued to increase and front-end sales remained
relatively flat

Front-end
same-store sales for the 39-week period ended October 25, 2001declined 1.5% from the comparable period last year.
Year-to-date front-end sales increased 0.6% over the similar period last year. Front-end sales were adversely affected in the immediate aftermath of the
terrorist attacks of September 11, 2001, as well as by an overall softer economy throughout the quarter.

Sales
for the 39-week period ended October 25, 2001 increased 5.8% to $3.091 billion compared to $2.921 billion in the similar period of the prior
year. Year-to-date same-store sales increased 5.0%, led by same-store pharmacy sales, which increased 12.4%. Front-end
same-store sales decreased 0.3% for the 39-week period ended October 25, 2001 compared to the same period last year.

8

---

Gross Margins

Gross margin dollars (after the charge for LIFO) for the period increased 2.9% to $256.4 million from $249.1 million in the comparable period
last year. Gross margin as a percent of sales for 13-weeks ended October 25, 2001 declined to 25.2% from 25.6% in the similar period of the prior year. The overall margin decline
was due primarily to continued growth in pharmacy sales which typically have lower margins than front-end merchandise. Pharmacy margins for the 13-weeks ended
October 25, 2001 declined from the comparable period of the prior year as a result of increased third-party sales, which have a lower reimbursement rate than non third-party sales as well as a
decrease in the margin on non third-party pharmacy sales.

Third-party
prescription sales represented 88.9% of overall prescription sales for the 13-week period ended October 25, 2001 compared to 88.2% in the comparable
period of the prior year. Margins on third-party prescription sales are lower than margins on non third-party prescription sales. We anticipate this trend to continue as sales to third-party plans
continue to increase.

We
use the Last-In First-Out (LIFO) method of inventory valuation. The LIFO provision was $1.4 million for the 13-weeks ended
October 25, 2001 compared to $1.6 million in the comparable period last year. The LIFO provision for the 39-weeks ended October 25, 2001 was $4.8 million
compared to $6.8 million for the comparable period last year.

Operating and Administrative Expenses

Operating and administrative expenses for the 13-weeks ended October 25, 2001increased as a percent of sales to 24.5% from 23.9% for the
comparable period last year. The additional increase in operating and administrative expenses as a percent of sales was caused primarily by: incremental costs associated with new store openings; costs
associated with e-retailing and the consolidation of RxAmerica expenses from September 17, 2001, the date of acquisition,versus reporting on the equity method of accounting prior to
that date. As we continue to expand our market presence, our costs associated with new stores cause an increase in operating and administrative expense as a percent of sales. We also experienced an
increase in depreciation of our initial investment and other expenses related to our e-retail business. The growth in e-retail business has been slower than originally
forecasted and our operating expenses reflect the charge for depreciation expense and other expenses which were not incurred in the comparable period last year. While RxAmerica was profitable for us
during the 13-weeks ended October 25, 2001, we previously accounted for our allocable share of net income in operating and administrative costs under the equity method of
accounting. RxAmerica is now accounted for on a consolidated basis, which includes sales with our store sales and includes only the expense items in the operating and administrative expense line from
the date of acquisition.

Year-to-date
operating and administrative expenses for the 39-weeks ended October 25, 2001 as a percent of sales increased to 23.8% from
23.4% for the comparable period last year.

Provision for Store Closures

We accrue an estimate for the costs associated with closing stores in 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 and the difference
between book value and estimated recovery of fixed assets.

In
January 2001 our board of directors approved a plan to close 15 underperforming stores ("2001 Closure Plan"). We recorded an expense of $25.6 million in fiscal 2001
in association with the 2001 Closure Plan. We closed 14 stores pursuant to the 2001 Closure Plan during the 13-week period ended April 26, 2001. We have successfully terminated 2
leases and sublet 4 properties as of October 25, 2001.

9

---

We are actively negotiating similar transactions on other locations. A summary of the costs associated with the 2001 Closure Plan incurred to date and revisions to the original estimates are as
follows:

(In millions)Description

Reserve Balance at January 25,
2001

Increases/
(Decreases) to Reserve Amount

Amounts Charged Against Reserve

Reserve Balance at October 25,
2001Loss on disposition of fixed assets

$
7.7

$


$
(5.6
)
$
2.1Write-off of goodwill


5.6





(5.6
)

Real estate related expenses


11.2





(3.1
)

8.1Other closing costs


1.1





(0.7
)

0.4Employment related costs





1.0


(0.8
)

0.2Gain on sale of other assets





(1.0
)

1.0


Total

$
25.6

$


$
(14.8
)
$
10.8


Consistent
with prior years, we make decisions to close stores in the normal course of business. During the 13-week period ended April 26, 2001 we closed one store
in addition to those closed pursuant to the 2001 Closure Plan.

We
have recognized a year-to-date benefit of $1.0 million in fiscal 2002 from a reduction of the provision for store closures not included in the 2001
Closure Plan, compared to a benefit for the comparable period of the prior year of $0.7 million. No benefit or charge was made to earnings through the provision for store closures in the
13-weeks ended October 25, 2001, while the comparable period last year included a charge of $0.4 million.

Income Before Taxes/Net Income

Income before taxes decreased to $4.3 million from $12.4 million for the similar period of the prior year. The decrease was a result of lower
gross margins as a result of the continued growth of lower-margin pharmacy sales, expenses associated with our e-retail business, and incremental expenses related to opening new stores.
Net interest expense for the 13-weeks ended October 25, 2001 was $3.4 million compared to $4.5 million for the comparable period last year. The decrease in net
interest expense was primarily due to lower interest rates from a year ago and lower borrowings than last year.

Our
effective tax rate for the 39-weeks ended October 25, 2001 remained relatively unchanged for the comparable period last year.

LIQUIDITY AND CAPITAL RESOURCES

Cash Position

Cash provided by operating activities for the 39-weeks ended October 25, 2001 decreased by $8.0 million compared to the comparable
period last year. Net income after adding back non-cash depreciation and amortization was the most significant contributing factor to the decline in cash from operating activities. Net
cash from operations for the period were favorably affected by an increase in current liabilities. The increase in current liabilities was greater in the comparable period of the prior year but was
partially offset by greater increases in receivables and investment in inventory.

Cash
used in investing activities for the first three quarters of fiscal 2002 decreased by $16.8 million, primarily due to decreases in capital expenditures. The first three
quarters of fiscal 2001 included capital expenditures for renovations of stores acquired in the third quarter of fiscal 2000, and investment in e-retail technology.

10

---

We opened four stores in the 13-week period ended October 25, 2001. We intend to open 10 stores by the end of the fiscal year, bringing the total number of stores
to be opened in fiscal 2002 to 25. Net
capital expenditures for the 39-weeks ended October 25, 2001 were $78.5 million. We estimate our capital expenditures for fiscal 2002 to be approximately $100 million, supporting
the increase in new stores and continued investment in technology.

We
replaced our $130 million unsecured revolving line of credit with an Amended and Restated unsecured line of credit of $150 million, which expires on
October 12, 2004, and accrues interest at LIBOR-based rates. Borrowings do not require payment for three years. At October 25, 2001, $70 million was outstanding under this line of
credit with a weighted average interest rate of 3.71%. The amount outstanding has been included in long-term debt in the accompanying condensed consolidated balance sheet, as we do not
plan to pay down this line of credit over the next 12 months

Additionally,
we have other long-term debt associated with private placement financings, including $50 million completed during the period ended October 25,
2001. The notes consist of $20 million of fully amortized notes through 2008 bearing interest at a rate of 6.46% and $30 million of interest-only notes bearing interest at a
rate of 6.71%, with the principal due in full in 2008. The amount outstanding on the private placement and other equipment financing agreements amounted to $158.7 million at the end of the
third quarter fiscal 2002 and mature at various dates from 2004 to 2017 at interest rates ranging from 5.85% to 7.85%.

Our
unsecured committed revolving line of credit limits our adjusted debt and contains various quarterly financial covenants that provide for a minimum fixed charge coverage ratio and
a maximum leverage ratio. The agreement allows for the exclusion of a $25.6 million charge recorded in the fourth quarter of fiscal 2001 from the computation of the fixed charge coverage ratio
and the leverage ratio. We were in compliance with restrictions and limitations included in these provisions as of October 25, 2001.

Our
board of directors authorized the repurchase of up to 2,000,000 shares of our common stock in November 1999. The authorization provided for a maximum expenditure of
$80.0 million and expires in November 2004. We have purchased 1,146,868 shares to date under this authorization at a total cost of $22.5 million. No repurchases were made during
the first three quarters of fiscal 2002. Stock repurchases are made at the discretion of our board of directors and are dependent upon the market price of our common stock and available cash.

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.

New Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, "Business Combinations," and
No. 142, "Goodwill and Other Intangible Assets," effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the statements. Other intangible assets will continue to be amortized over their useful
lives. We will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of fiscal 2003. Also during fiscal 2003, we will perform the first of the
required impairment tests of goodwill and indefinite lived intangible assets, to the extent applicable. We have not yet determined what the effect of these statements will be on our results of
operations and financial position.

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Factors Affecting Our Future Prospects

You should carefully read the following factors affecting our future prospects.

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. We may not be able to compete effectively against them. 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.

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

We are reimbursed by third-party payors for approximately 89% of all the prescription drugs that we sell which continues to increase each period. Pharmacy
sales to third parties have lower gross margins than non third-party pharmacy sales. Third-party payors continue to reduce the levels at which they will 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 payors reduce their reimbursement levels, or if Medicare covers prescription drugs at reimbursement levels lower than our current retail prices, our margins on these sales would be
reduced and the profitability of our business could be adversely affected.

We are substantially dependent on a single supplier of pharmaceutical products and our other suppliers to sell products to us on satisfactory terms.

We obtain approximately 95% of our pharmaceutical supplies from a single supplier, Amerisource Bergen, pursuant to a long-term supply contract.
Pharmacy sales represented approximately 45% of our total sales during 39-week period ended October 25, 2001, and therefore our relationship with Amerisource Bergen is significant
to us. Any significant disruptions in our relationships with our major suppliers, particularly our relationship with Amerisource Bergen, 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 several federal, state, and local regulations. These include local registrations of pharmacies in the states where our
pharmacies are located, applicable Medicare and Medicaid regulations and prohibitions against paid referrals of patients. Failure to properly adhere to these and other applicable regulations could
result in the imposition of civil and criminal penalties and could adversely affect us. Furthermore, our pharmacies could be affected by federal and state reform programs, such as healthcare reform
initiatives, and any new federal or state programs could also adversely affect us.

Certain risks are inherent in the provision of pharmacy services, and our insurance may not be adequate to cover all 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

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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.

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

The economy has shown signs of slowing since the beginning of our fiscal year. The terrorist attack on September 11, 2001, adversely affected sales for
that week and has had an impact on the tourist trade. We operate 32 stores in the state of Hawaii which are 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, and to attract and retain other key personnel is important to the continued success or
our business.

There is currently a shortage of licensed pharmacists in some of the markets where 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 Bergen Brunswig to operate prescription fill centers. We opened our first such fill
center during the second quarter of fiscal 2002 and have begun to fill orders for approximately 170 stores at the end of the third quarter. The center has the capacity to fill more than 10,000
prescriptions per shift. The success of this fill center and possible other locations is important to our ability to meet the shortage of pharmacists.

The energy crisis may result in increases in operating and administrative expenses in fiscal 2002.

We currently operate 354 stores in the state of California, which has experienced an energy crisis causing some power outages. California utility companies
have announced significant increases in energy rates, which began being reflected in billings received 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.

Changes in the supply chain, including the transition from third-party warehouse distribution to self-distribution, could result in increased costs.

We terminated our agreement with our third-party warehouse operator in Northern and Southern California during the period ended July 26, 2001. We
incurred additional costs during the 13-week period ended October 25, 2001 as we continued to transition the operation of the warehouses. Transition costs could continue to
adversely affect net income in the near future.

We
are reevaluating our entire supply chain, which we believe puts us at a competitive disadvantage with our competitors in our cost of merchandise. These changes could result in
significant investment in systems.

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Item 3. Quantitative and Qualitative Disclosures of Market Risk

Market Risk

We do not undertake any specific actions to cover 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
37 basis point move in interest rates (10% of our floating financial instruments) would have an immaterial effect on our pretax income and cash flow over the next year. The 37 basis
point move in interest rates would also have an immaterial effect on the fair value of our fixed rate financial instruments.

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PART IIOTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds



Item 6. Exhibits and Reports on Form 8-K





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SIGNATURES

Pursuant to the requirements of the Securities and 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: |  | December 7, 2001 |  |                                                                                                                           
|      |  |                  |  | /s/ STEVEN F. McCANNSteven F. McCann Senior Vice PresidentChief Financial Officer
and Treasurer
(Chief Financial Officer)
|Date: |  | December 7, 2001 |  |                                                                                                                           
|      |  |                  |  | /s/GROVER L. WHITEGrover L. White Vice President, Controller
(Principal Accounting Officer)                               

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