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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 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, 2007



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

(925) 937-1170

(Registrants telephone number, including area code)

Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x                Accelerated filer ̈Non-accelerated filer ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act):    Yes ̈No  x

There were 37,722,954 shares of common stock, $.50 par value per share, outstanding as of November 22, 2007.



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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Such statements relate to, among other things, our strategic initiatives; supply chain changes; Medicare prescription drug benefits; development of our pharmacy benefit services segment;
merchandise and marketing efforts; operational improvements; safety improvements and workers compensation claims and costs; the number of store openings, closures and remodels; revenues; pharmacy reimbursements; gross profits; operating and
administrative expenses; depreciation and amortization; liquidity and cash requirements; level of capital expenditures; share repurchases; dividends; effective tax rates; contractual obligations; the effect of new accounting pronouncements; our
goals for self-distribution of our front-end merchandise; and factors affecting front-end sales in fiscal 2008 and are indicated by words or phrases such as continuing, expects, estimates, believes,
plans, anticipates, will and other similar words or phrases.

These forward-looking 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 forward-looking statements we make. These risks and uncertainties
include, but are not limited to, those set forth below:



| |  |  | Our ability to execute our previously announced initiatives;
| | - |  | ------------------------------------------------------------



| |  |  | Our ability to successfully manage our prescription drug plans;
| | - |  | ---------------------------------------------------------------



| |  |  | Our ability to increase self-distribution and improve our purchasing of front-end and pharmacy merchandise;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | Our ability to successfully implement new technology, including a perpetual inventory system;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | Disruption in our supply chain due to system and vendor conversions;
| | - |  | --------------------------------------------------------------------



| |  |  | The success of our merchandise and marketing strategies (including price reduction programs implemented in response to competitive pressures);
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our ability to improve the performance of underperforming stores;
| | - |  | -----------------------------------------------------------------



| |  |  | The timing, number and overall impact of store openings, closures and remodels;
| | - |  | -------------------------------------------------------------------------------



| |  |  | Consumer reaction to our remodeled stores;
| | - |  | ------------------------------------------



| |  |  | The effect of the new Medicare prescription drug benefit on our retail drug store and pharmacy benefit services revenues and profitability;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our ability to grow prescription volumes;
| | - |  | -----------------------------------------



| |  |  | Our ability to develop and integrate our pharmacy, mail order and pharmacy benefit services capabilities to take advantage of future growth opportunities;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The frequency and rate of introduction of successful new prescription drugs;
| | - |  | ----------------------------------------------------------------------------



| |  |  | The introduction of lower priced generic drugs, including the timing of introduction and cost structure associated with generic drugs;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The efforts of third-party health plans, including government-sponsored plans, to reduce pharmacy reimbursements;
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | Changes in economic conditions, including economic growth, unemployment levels, consumer preferences and purchasing power and spending patterns generally;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The impact of rising gasoline prices and mortgage payments on economic conditions and consumer spending;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | The effects of war and terrorism on economic conditions and consumer spending;
| | - |  | ------------------------------------------------------------------------------



| |  |  | The impact of state and federal budget deficits on government healthcare spending and on general economic conditions;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | Competition from other drugstore chains, supermarkets, mass merchandisers, discount retailers, on-line retailers, other retailers, pharmacy benefit management
companies and prescription drug plan providers;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The growth of mail order pharmacies, and changes in some third-party health plans requiring mail order fulfillment of certain medications;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Continued good relationships with our employees;
| | - |  | ------------------------------------------------



| |  |  | Interest rate fluctuations and changes in capital market conditions or other events affecting our ability to obtain necessary financing on favorable terms;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our relationships with our suppliers, especially AmerisourceBergen Drug Corporation;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | Our ability to hire and retain pharmacists and other store and management personnel;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | The availability and cost of real estate for new stores;
| | - |  | --------------------------------------------------------



| |  |  | The impact of pending or future litigation or regulatory proceedings;
| | - |  | ---------------------------------------------------------------------



| |  |  | The effectiveness of workers compensation reform efforts, especially in California, and the effect of potential further changes to Californias
workers compensation laws;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Changes in state or federal legislation or regulations affecting our businesses;
| | - |  | --------------------------------------------------------------------------------



| |  |  | Our ability to make and integrate acquisitions;
| | - |  | -----------------------------------------------



| |  |  | Changes to accounting policies and practices or internal controls; and
| | - |  | ----------------------------------------------------------------------



| |  |  | Other factors discussed in this report, in our Annual Report on Form 10-K for fiscal year 2007 under Risk Factors and in our other SEC filings.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------

In addition, because we do not have a comprehensive perpetual inventory system, our ability to accurately forecast and
track our retail drug store gross profit and inventory levels during periods between our quarterly physical inventories is limited. Therefore, our actual retail drug store gross profit and inventory levels may vary materially from those included in
or contemplated by forward-looking statements we make.

We assume no obligation to update our forward-looking statements to reflect
subsequent events or circumstances.



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TABLE OF CONTENTS



|           |  |                                                                                                                                                  |  |     
|---------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----
|           |  |                                                                                                                                                  |  | Page
|PART I     |  | FINANCIAL INFORMATION                                                                                                                            |  |     
|Item 1     |  | Condensed Consolidated Financial Statements (Unaudited)                                                                                          |  |     
|           |  | Condensed Statements of Consolidated Income (Unaudited)For the 13 and 39 Weeks Ended October 25, 2007 and October 26, 2006                       |  | 1   
|           |  | Condensed Consolidated Balance Sheets (Unaudited)As of October 25, 2007, October 26, 2006 and January 25, 2007                                   |  | 2   
|           |  | Condensed Statements of Consolidated Cash Flows (Unaudited)For the 39 Weeks Ended October 25, 2007 and October 26, 2006                          |  | 3   
|           |  | Condensed Statements of Consolidated Stockholders Equity (Unaudited)For the 52 Weeks Ended January 25, 2007 and 39 Weeks Ended October 25, 2007 |  | 4   
|           |  | Notes to Condensed Consolidated Financial Statements                                                                                             |  | 5   
|Item 2     |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                            |  | 13  
|Item 3     |  | Quantitative and Qualitative Disclosures About Market Risk                                                                                       |  | 19  
|Item 4     |  | Controls and Procedures                                                                                                                          |  | 19  
|           |  |                                                                                                                                                 
|PART II    |  | OTHER INFORMATION                                                                                                                                |  |     
|Item 1     |  | Legal Proceedings                                                                                                                                |  | 20  
|Item 1A    |  | Risk Factors                                                                                                                                     |  | 20  
|Item 2     |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                                      |  | 21  
|Item 6     |  | Exhibits                                                                                                                                         |  | 21  
|           |  |                                                                                                                                                 
|Signatures |  |                                                                                                                                                  |  | 22  



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##### Table of Contents

PART I - FINANCIAL INFORMATION



|Item 1. | Condensed Consolidated Financial Statements
|------- | -------------------------------------------

LONGS DRUG STORES CORPORATION

CONDENSED STATEMENTS OF CONSOLIDATED INCOME (unaudited)



|                                                                |  |                                    |           |   |                        |   |           |                 |  |   |                 |   |  |   |           |  
|--------------------------------------------------------------- |  | ---------------------------------- | --------- | - | ---------------------- | - | --------- | --------------- |  | - | --------------- | - |  | - | --------- | -
|                                                                |  | For the 13 weeks ended             |           |   | For the 39 weeks ended |  
|                                                                |  | October 25,2007                    |           |   | October 26,2006        |   |           | October 25,2007 |  |   | October 26,2006 |  
|                                                                |  | Thousands Except Per Share Amounts |          
|Revenues:                                                       |  |                                    |           |   |                        |   |           |                 |  |   |                 |   |  |   |           |  
|Retail drug store sales                                         |  | $                                  | 1,158,422 |   |                        | $ | 1,123,875 |                 |  | $ | 3,539,024       |   |  | $ | 3,420,722 |  
|Pharmacy benefit services revenues                              |  |                                    | 79,731    |   |                        |   | 75,015    |                 |  |   | 270,688         |   |  |   | 243,758   |  
|                                                                |  |                                    |           |   |                        |   |           |                 |  |   |                 |   |  |   |           |  
|Total revenues                                                  |  |                                    | 1,238,153 |   |                        |   | 1,198,890 |                 |  |   | 3,809,712       |   |  |   | 3,664,480 |  
|Costs and expenses:                                             |  |                                    |           |   |                        |   |           |                 |  |   |                 |   |  |   |           |  
|Cost of retail drug store sales                                 |  |                                    | 857,633   |   |                        |   | 843,777   |                 |  |   | 2,619,810       |   |  |   | 2,564,162 |  
|Prescription drug plan benefit costs                            |  |                                    | 45,270    |   |                        |   | 45,033    |                 |  |   | 191,940         |   |  |   | 181,055   |  
|Operating and administrative expenses                           |  |                                    | 302,419   |   |                        |   | 284,905   |                 |  |   | 883,719         |   |  |   | 836,916   |  
|Legal settlements and other disputes, net                       |  |                                    |          |   |                        |   |          |                 |  |   | (431            | ) |  |   | (430      | )
|Provision for store closures and asset impairments, net         |  |                                    | 691       |   |                        |   | 447       |                 |  |   | 10,277          |   |  |   | 447       |  
|                                                                |  |                                    |           |   |                        |   |           |                 |  |   |                 |   |  |   |           |  
|Operating income                                                |  |                                    | 32,140    |   |                        |   | 24,728    |                 |  |   | 104,397         |   |  |   | 82,330    |  
|Interest expense                                                |  |                                    | 2,468     |   |                        |   | 2,938     |                 |  |   | 5,916           |   |  |   | 5,780     |  
|Interest income                                                 |  |                                    | (224      | ) |                        |   | (218      | )               |  |   | (702            | ) |  |   | (1,855    | )
|                                                                |  |                                    |           |   |                        |   |           |                 |  |   |                 |   |  |   |           |  
|Income from continuing operations before income taxes           |  |                                    | 29,896    |   |                        |   | 22,008    |                 |  |   | 99,183          |   |  |   | 78,405    |  
|Income taxes                                                    |  |                                    | 10,604    |   |                        |   | 8,671     |                 |  |   | 38,127          |   |  |   | 29,384    |  
|                                                                |  |                                    |           |   |                        |   |           |                 |  |   |                 |   |  |   |           |  
|Income from continuing operations                               |  |                                    | 19,292    |   |                        |   | 13,337    |                 |  |   | 61,056          |   |  |   | 49,021    |  
|Income (loss) from discontinued operations, net of tax (Note 3) |  |                                    | 106       |   |                        |   | (632      | )               |  |   | (2,013          | ) |  |   | (1,500    | )
|                                                                |  |                                    |           |   |                        |   |           |                 |  |   |                 |   |  |   |           |  
|Net income                                                      |  | $                                  | 19,398    |   |                        | $ | 12,705    |                 |  | $ | 59,043          |   |  | $ | 47,521    |  
|                                                                |  |                                    |           |   |                        |   |           |                 |  |   |                 |   |  |   |           |  
|Earnings per common share:                                      |  |                                    |           |   |                        |   |           |                 |  |   |                 |   |  |   |           |  
|Basic:                                                          |  |                                    |           |   |                        |   |           |                 |  |   |                 |   |  |   |           |  
|Income from continuing operations                               |  | $                                  | 0.52      |   |                        | $ | 0.36      |                 |  | $ | 1.63            |   |  | $ | 1.32      |  
|Income (loss) from discontinued operations                      |  |                                    | 0.00      |   |                        |   | (0.02     | )               |  |   | (0.05           | ) |  |   | (0.04     | )
|                                                                |  |                                    |           |   |                        |   |           |                 |  |   |                 |   |  |   |           |  
|Net income                                                      |  |                                    | 0.52      |   |                        |   | 0.34      |                 |  |   | 1.58            |   |  |   | 1.28      |  
|                                                                |  |                                    |           |   |                        |   |           |                 |  |   |                 |   |  |   |           |  
|Diluted:                                                        |  |                                    |           |   |                        |   |           |                 |  |   |                 |   |  |   |           |  
|Income from continuing operations                               |  | $                                  | 0.51      |   |                        | $ | 0.35      |                 |  | $ | 1.59            |   |  | $ | 1.28      |  
|Income (loss) from discontinued operations                      |  |                                    | 0.00      |   |                        |   | (0.02     | )               |  |   | (0.05           | ) |  |   | (0.04     | )
|                                                                |  |                                    |           |   |                        |   |           |                 |  |   |                 |   |  |   |           |  
|Net income                                                      |  |                                    | 0.51      |   |                        |   | 0.33      |                 |  |   | 1.54            |   |  |   | 1.24      |  
|                                                                |  |                                    |           |   |                        |   |           |                 |  |   |                 |   |  |   |           |  
|Dividends per common share                                      |  | $                                  | 0.14      |   |                        | $ | 0.14      |                 |  | $ | 0.42            |   |  | $ | 0.42      |  
|Weighted average number of shares outstanding:                  |  |                                    |           |   |                        |   |           |                 |  |   |                 |   |  |   |           |  
|Basic                                                           |  |                                    | 37,293    |   |                        |   | 37,109    |                 |  |   | 37,411          |   |  |   | 37,266    |  
|Diluted                                                         |  |                                    | 38,170    |   |                        |   | 38,076    |                 |  |   | 38,331          |   |  |   | 38,259    |  

See notes to condensed consolidated financial statements.



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LONGS DRUG STORES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)



|                                                                                                                                 |  |                                    |           |                 |   |                 |  |   |          
|-------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------- | --------- | --------------- | - | --------------- |  | - | ---------
|                                                                                                                                 |  | October 25,2007                    |           | October 26,2006 |   | January 25,2007
|                                                                                                                                 |  | Thousands Except Share Information
|Assets                                                                                                                           |  |                                    |           |                 |   |                 |  |   |          
|Current Assets:                                                                                                                  |  |                                    |           |                 |   |                 |  |   |          
|Cash and cash equivalents                                                                                                        |  | $                                  | 32,066    |                 | $ | 24,555          |  | $ | 27,596   
|Accounts receivable, net                                                                                                         |  |                                    | 301,893   |                 |   | 319,691         |  |   | 282,728  
|Merchandise inventories, net                                                                                                     |  |                                    | 534,708   |                 |   | 530,756         |  |   | 491,295  
|Deferred income taxes                                                                                                            |  |                                    | 64,041    |                 |   | 41,198          |  |   | 60,153   
|Prepaid expenses and other current assets                                                                                        |  |                                    | 23,626    |                 |   | 21,898          |  |   | 22,017   
|Assets held for sale                                                                                                             |  |                                    | 4,173     |                 |   |                |  |   |         
|                                                                                                                                 |  |                                    |           |                 |   |                 |  |   |          
|Total current assets                                                                                                             |  |                                    | 960,507   |                 |   | 938,098         |  |   | 883,789  
|                                                                                                                                 |  |                                    |           |                 |   |                 |  |   |          
|Property:                                                                                                                        |  |                                    |           |                 |   |                 |  |   |          
|Land                                                                                                                             |  |                                    | 116,564   |                 |   | 116,171         |  |   | 116,171  
|Buildings and leasehold improvements                                                                                             |  |                                    | 712,085   |                 |   | 643,812         |  |   | 668,800  
|Equipment and fixtures                                                                                                           |  |                                    | 623,189   |                 |   | 613,429         |  |   | 621,068  
|                                                                                                                                 |  |                                    |           |                 |   |                 |  |   |          
|Total                                                                                                                            |  |                                    | 1,451,838 |                 |   | 1,373,412       |  |   | 1,406,039
|Less accumulated depreciation                                                                                                    |  |                                    | 713,153   |                 |   | 704,798         |  |   | 705,856  
|                                                                                                                                 |  |                                    |           |                 |   |                 |  |   |          
|Property, net                                                                                                                    |  |                                    | 738,685   |                 |   | 668,614         |  |   | 700,183  
|                                                                                                                                 |  |                                    |           |                 |   |                 |  |   |          
|Goodwill                                                                                                                         |  |                                    | 84,450    |                 |   | 84,403          |  |   | 84,450   
|Intangible assets, net                                                                                                           |  |                                    | 29,904    |                 |   | 13,269          |  |   | 14,904   
|Other non-current assets                                                                                                         |  |                                    | 11,824    |                 |   | 6,357           |  |   | 4,342    
|                                                                                                                                 |  |                                    |           |                 |   |                 |  |   |          
|Total                                                                                                                            |  | $                                  | 1,825,370 |                 | $ | 1,710,741       |  | $ | 1,687,668
|                                                                                                                                 |  |                                    |           |                 |   |                 |  |   |          
|Liabilities and Stockholders Equity                                                                                             |  |                                    |           |                 |   |                 |  |   |          
|Current Liabilities:                                                                                                             |  |                                    |           |                 |   |                 |  |   |          
|Trade accounts payable                                                                                                           |  | $                                  | 269,481   |                 | $ | 266,847         |  | $ | 230,754  
|Pharmacy benefits payable                                                                                                        |  |                                    | 124,070   |                 |   | 119,110         |  |   | 148,595  
|Accrued employee compensation and benefits                                                                                       |  |                                    | 113,966   |                 |   | 117,815         |  |   | 131,088  
|Taxes payable                                                                                                                    |  |                                    | 49,469    |                 |   | 48,263          |  |   | 59,715   
|Other accrued expenses                                                                                                           |  |                                    | 70,418    |                 |   | 63,840          |  |   | 73,682   
|Current maturities of debt                                                                                                       |  |                                    | 36,727    |                 |   | 43,727          |  |   | 6,727    
|                                                                                                                                 |  |                                    |           |                 |   |                 |  |   |          
|Total current liabilities                                                                                                        |  |                                    | 664,131   |                 |   | 659,602         |  |   | 650,561  
|                                                                                                                                 |  |                                    |           |                 |   |                 |  |   |          
|Long-term debt                                                                                                                   |  |                                    | 189,364   |                 |   | 192,091         |  |   | 118,091  
|Deferred income taxes and other long-term liabilities                                                                            |  |                                    | 115,253   |                 |   | 72,077          |  |   | 103,459  
|Commitments and Contingencies                                                                                                    |  |                                    |           |                 |   |                 |  |   |          
|Stockholders Equity:                                                                                                            |  |                                    |           |                 |   |                 |  |   |          
|Common stock: par value $0.50 per share, 120,000,000 shares authorized, 37,594,000, 37,352,000 and 37,406,000 shares
outstanding |  |                                    | 18,797    |                 |   | 18,676          |  |   | 18,703   
|Additional capital                                                                                                               |  |                                    | 292,194   |                 |   | 243,347         |  |   | 250,113  
|Retained earnings                                                                                                                |  |                                    | 545,631   |                 |   | 524,948         |  |   | 546,741  
|                                                                                                                                 |  |                                    |           |                 |   |                 |  |   |          
|Total stockholders equity                                                                                                       |  |                                    | 856,622   |                 |   | 786,971         |  |   | 815,557  
|                                                                                                                                 |  |                                    |           |                 |   |                 |  |   |          
|Total                                                                                                                            |  | $                                  | 1,825,370 |                 | $ | 1,710,741       |  | $ | 1,687,668
|                                                                                                                                 |  |                                    |           |                 |   |                 |  |   |          

See notes to condensed consolidated financial statements.



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LONGS DRUG STORES CORPORATION

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (unaudited)



|                                                                                  |  |                        |          |   |                 |   |          |  
|--------------------------------------------------------------------------------- |  | ---------------------- | -------- | - | --------------- | - | -------- | -
|                                                                                  |  | For the 39 weeks ended |         
|                                                                                  |  | October 25,2007        |          |   | October 26,2006 |  
|                                                                                  |  | Thousands              |         
|Operating Activities:                                                             |  |                        |          |   |                 |   |          |  
|Net income                                                                        |  | $                      | 59,043   |   |                 | $ | 47,521   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                        |          |   |                 |   |          |  
|Depreciation and amortization                                                     |  |                        | 70,332   |   |                 |   | 65,033   |  
|Provision for store closures and asset impairments, net                           |  |                        | 6,089    |   |                 |   | 447      |  
|Deferred income taxes and other                                                   |  |                        | (9,188   | ) |                 |   | (7,142   | )
|Stock awards and options, net                                                     |  |                        | 21,279   |   |                 |   | 14,400   |  
|Excess tax benefits related to stock awards and options                           |  |                        | (7,579   | ) |                 |   | (4,414   | )
|Common stock contribution to benefit plan                                         |  |                        | 12,765   |   |                 |   | 10,669   |  
|Changes in assets and liabilities:                                                |  |                        |          |   |                 |   |          |  
|Accounts receivable                                                               |  |                        | 18,687   |   |                 |   | (32,139  | )
|Merchandise inventories                                                           |  |                        | (45,803  | ) |                 |   | (65,875  | )
|Other assets                                                                      |  |                        | (2,407   | ) |                 |   | (2,352   | )
|Current liabilities and other                                                     |  |                        | (16,659  | ) |                 |   | 67,221   |  
|                                                                                  |  |                        |          |   |                 |   |          |  
|Net cash provided by operating activities                                         |  |                        | 106,559  |   |                 |   | 93,369   |  
|                                                                                  |  |                        |          |   |                 |   |          |  
|Investing Activities:                                                             |  |                        |          |   |                 |   |          |  
|Capital expenditures                                                              |  |                        | (117,634 | ) |                 |   | (110,914 | )
|Acquisitions                                                                      |  |                        | (23,777  | ) |                 |   | (17,736  | )
|Proceeds from dispositions of property and intangible assets                      |  |                        | 20,193   |   |                 |   | 1,248    |  
|                                                                                  |  |                        |          |   |                 |   |          |  
|Net cash used in investing activities                                             |  |                        | (121,218 | ) |                 |   | (127,402 | )
|                                                                                  |  |                        |          |   |                 |   |          |  
|Financing Activities:                                                             |  |                        |          |   |                 |   |          |  
|Proceeds from revolving line of credit borrowings, net                            |  |                        | 108,000  |   |                 |   | 139,000  |  
|Repayments of private placement notes and other borrowings                        |  |                        | (6,727   | ) |                 |   | (8,870   | )
|Repurchase of common stock                                                        |  |                        | (51,310  | ) |                 |   | (44,134  | )
|Proceeds from exercise of stock options                                           |  |                        | 15,715   |   |                 |   | 11,732   |  
|Dividend payments                                                                 |  |                        | (15,901  | ) |                 |   | (15,806  | )
|Medicare Part D subsidy disbursements, net                                        |  |                        | (37,852  | ) |                 |   | (102,341 | )
|Excess tax benefits related to stock awards and options                           |  |                        | 7,579    |   |                 |   | 4,414    |  
|Other                                                                             |  |                        | (375     | ) |                 |   | (69      | )
|                                                                                  |  |                        |          |   |                 |   |          |  
|Net cash provided by (used in) financing activities                               |  |                        | 19,129   |   |                 |   | (16,074  | )
|                                                                                  |  |                        |          |   |                 |   |          |  
|Increase (decrease) in cash and cash equivalents                                  |  |                        | 4,470    |   |                 |   | (50,107  | )
|Cash and cash equivalents at beginning of period                                  |  |                        | 27,596   |   |                 |   | 74,662   |  
|                                                                                  |  |                        |          |   |                 |   |          |  
|Cash and cash equivalents at end of period                                        |  | $                      | 32,066   |   |                 | $ | 24,555   |  
|                                                                                  |  |                        |          |   |                 |   |          |  
|Supplemental disclosure of cash flow information:                                 |  |                        |          |   |                 |   |          |  
|Cash paid for interest, net of amounts capitalized                                |  | $                      | 6,567    |   |                 | $ | 5,471    |  
|Cash paid for income taxes                                                        |  |                        | 41,534   |   |                 |   | 38,682   |  

See notes to condensed consolidated financial statements.



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##### Table of Contents

LONGS DRUG STORES CORPORATION

CONDENSED STATEMENTS OF CONSOLIDATED STOCKHOLDERS EQUITY (unaudited)

For the 52 weeks ended January 25, 2007 and the 39 weeks ended October 25, 2007



|                                                                |  |              |   |  |                    |        |   |                   |   |         |                           |  |   |         |   |  |   |         |  
|--------------------------------------------------------------- |  | ------------ | - |  | ------------------ | ------ | - | ----------------- | - | ------- | ------------------------- |  | - | ------- | - |  | - | ------- | -
|                                                                |  | Common Stock |   |  | Additional Capital |        |   | Retained Earnings |   |         | TotalStockholders Equity | 
|                                                                |  | Shares       |   |  | Amount             |        |   |                   |  
|                                                                |  | Thousands    |  
|Balance at January 26, 2006                                     |  | 37,216       |   |  | $                  | 18,608 |   |                   | $ | 213,374 |                           |  | $ | 530,607 |   |  | $ | 762,589 |  
|Net income                                                      |  |              |   |  |                    |        |   |                   |   |         |                           |  |   | 74,461  |   |  |   | 74,461  |  
|Dividends ($0.56 per share)                                     |  |              |   |  |                    |        |   |                   |   |         |                           |  |   | (20,953 | ) |  |   | (20,953 | )
|Stock contributions to Employee Savings and Profit Sharing Plan |  | 258          |   |  |                    | 129    |   |                   |   | 10,540  |                           |  |   |         |   |  |   | 10,669  |  
|Stock awards, net of forfeitures                                |  | 340          |   |  |                    | 170    |   |                   |   | (1,597  | )                         |  |   |         |   |  |   | (1,427  | )
|Stock-based compensation expense                                |  |              |   |  |                    |        |   |                   |   | 15,320  |                           |  |   |         |   |  |   | 15,320  |  
|Stock options exercised                                         |  | 576          |   |  |                    | 288    |   |                   |   | 12,829  |                           |  |   |         |   |  |   | 13,117  |  
|Tax benefit related to stock awards and stock options, net      |  |              |   |  |                    |        |   |                   |   | 5,915   |                           |  |   |         |   |  |   | 5,915   |  
|Repurchase of common stock                                      |  | (984         | ) |  |                    | (492   | ) |                   |   | (6,268  | )                         |  |   | (37,374 | ) |  |   | (44,134 | )
|                                                                |  |              |   |  |                    |        |   |                   |   |         |                           |  |   |         |   |  |   |         |  
|Balance at January 25, 2007                                     |  | 37,406       |   |  |                    | 18,703 |   |                   |   | 250,113 |                           |  |   | 546,741 |   |  |   | 815,557 |  
|                                                                |  |              |   |  |                    |        |   |                   |   |         |                           |  |   |         |   |  |   |         |  
|Cumulative effect of accounting change (Note 2)                 |  |              |   |  |                    |        |   |                   |   |         |                           |  |   | (526    | ) |  |   | (526    | )
|Net income                                                      |  |              |   |  |                    |        |   |                   |   |         |                           |  |   | 59,043  |   |  |   | 59,043  |  
|Dividends ($0.42 per share)                                     |  |              |   |  |                    |        |   |                   |   |         |                           |  |   | (15,901 | ) |  |   | (15,901 | )
|Stock contributions to Employee Savings and Profit Sharing Plan |  | 262          |   |  |                    | 131    |   |                   |   | 12,634  |                           |  |   |         |   |  |   | 12,765  |  
|Stock awards, net of forfeitures                                |  | 202          |   |  |                    | 101    |   |                   |   | (2,750  | )                         |  |   |         |   |  |   | (2,649  | )
|Stock-based compensation expense                                |  |              |   |  |                    |        |   |                   |   | 14,970  |                           |  |   |         |   |  |   | 14,970  |  
|Stock options exercised                                         |  | 698          |   |  |                    | 349    |   |                   |   | 15,366  |                           |  |   |         |   |  |   | 15,715  |  
|Tax benefit related to stock awards and stock options, net      |  |              |   |  |                    |        |   |                   |   | 8,958   |                           |  |   |         |   |  |   | 8,958   |  
|Repurchase of common stock                                      |  | (974         | ) |  |                    | (487   | ) |                   |   | (7,097  | )                         |  |   | (43,726 | ) |  |   | (51,310 | )
|                                                                |  |              |   |  |                    |        |   |                   |   |         |                           |  |   |         |   |  |   |         |  
|Balance at October 25, 2007                                     |  | 37,594       |   |  | $                  | 18,797 |   |                   | $ | 292,194 |                           |  | $ | 545,631 |   |  | $ | 856,622 |  
|                                                                |  |              |   |  |                    |        |   |                   |   |         |                           |  |   |         |   |  |   |         |  

See notes to condensed consolidated financial statements.



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##### Table of Contents

LONGS DRUG STORES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The accompanying interim
condensed consolidated financial statements include the financial statements of Longs Drug Stores Corporation (Longs or the Company) and its wholly-owned subsidiaries. Inter-company accounts and transactions have been
eliminated. The interim condensed consolidated financial statements have been prepared on a basis consistent in all material respects with the accounting policies described and applied in the Annual Report of the Company on Form 10-K for the fiscal
year ended January 25, 2007, except for the accounting change discussed in Note 2, and reflect all adjustments that are, in managements opinion, necessary for a fair presentation of the results for the periods presented. The condensed
consolidated financial statements as of and for the periods ended October 25, 2007 and October 26, 2006 are unaudited. The condensed consolidated balance sheet as of January 25, 2007, and condensed consolidated statement of
stockholders equity for the year then ended, presented herein, have been derived from the audited consolidated financial statements of the Company included in the Form 10-K for the fiscal year ended January 25, 2007. Reclassifications
have been made to certain prior period amounts to conform to the fiscal 2008 presentation, including the combination of depreciation and amortization expenses with operating and administrative expenses on our condensed statements of consolidated
income, and the separate presentation of various current liabilities on the Companys condensed consolidated balance sheets. The condensed statement of consolidated income for the 13 and 39 weeks ended October 26, 2006, has been revised to
present certain components as discontinued operations (see Note 3). Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United
States of America have been omitted. The interim condensed consolidated financial statements should be read together with the financial statements in the Companys Annual Report on Form 10-K for the fiscal year ended January 25, 2007.

2. Accounting Change

In the first
quarter of fiscal 2008, the Company adopted FASB Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxes, which clarifies the accounting for uncertainty in income taxes recognized in a companys financial
statements in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. FIN 48 requires the recognition of tax positions when it is more likely than not that such positions will
be sustained upon examination. Tax positions that meet this recognition threshold are to be measured at the largest amount of tax benefit that is cumulatively greater than 50% likely of being realized upon settlement with the taxing authority. The
adoption of FIN 48 resulted in a $0.5 million decrease to retained earnings for the cumulative effect of the change in accounting principle as of January 26, 2007 (the first day of fiscal 2008). The Companys total unrecognized tax
benefits, including the portion that would affect the Companys effective tax rate if recognized, are not material.

The
Companys federal income tax returns for the years ended January 2004 and later are subject to examination by the Internal Revenue Service (IRS) under the federal statute of limitations. The Companys California income tax
returns for the years ended January 2003 and later are subject to examination by the California Franchise Tax Board under Californias statute of limitations. Income tax returns for the Companys other major state jurisdictions are subject
to examination by the respective state tax authorities for the years ended January 2004 and later. During fiscal 2008, the IRS commenced an examination of the Companys federal income tax returns for the years ended January 29, 2004 and
January 27, 2005. It is reasonably possible that the outcome of this examination could result in an adjustment to the Companys unrecognized tax benefits in the next 12 months. However, the amount and timing of the adjustment, if any,
cannot be estimated at this time.

The Company includes interest and penalties related to income taxes in income tax expense on the
statement of consolidated income and in taxes payable (the non-current portion of which is included in other long-term liabilities) on the consolidated balance sheet. Such amounts are not material to any period presented.



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##### Table of Contents

LONGS DRUG STORES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



3. Store Dispositions

In February 2007, the Companys board of directors approved a plan to dispose of 31 stores during fiscal 2008, including all of the 23 stores located in Washington, Oregon and Colorado and eight stores in
California. Most of the stores were located in markets the Company entered in the 1980s and 1990s that remained underdeveloped. Sufficiently developing the Companys presence in these markets would have required significant investment that
management believed would be better directed toward markets that offer greater opportunities for more satisfactory returns. As of October 25, 2007, the Company had closed 30 of these stores. One California store previously included in the
planned disposition will remain open. Approximately two-thirds of the store locations have been sold or sub-leased and the remainder are being actively marketed.

Each of these 30 stores constitutes a component as defined in SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.The stores located in Washington, Oregon and
Colorado are reported as discontinued operations effective in fiscal 2008 in accordance with SFAS No. 144, and as such both current and prior year results for these stores are classified within discontinued operations on the Companys
condensed statements of consolidated income. Net property  primarily land, buildings and leasehold improvements  of $4.2 million associated with these stores is classified in assets held for sale as of October 25, 2007. The stores
located in California are reported within continuing operations.

The Company records the net costs associated with the disposition of
these 30 stores as the stores are sold or closed and the related assets are disposed of, in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. For the seven stores located in California, the
Company incurred $10.3 million of pre-tax net costs, primarily for lease-related costs net of sublease income and severance, during the 39 weeks ended October 25, 2007. These costs are included in the provision for store closures and asset
impairments within continuing operations.

For the 23 stores located in Washington, Oregon and Colorado, the Company incurred a pre-tax net
loss of $3.4 million ($2.0 million after tax) in discontinued operations during the 39 weeks ended October 25, 2007. This pre-tax net loss included costs of $10.4 million for lease-related costs net of estimated sublease rental income and $3.2
million for employee severance, and pre-tax operating losses of $7.6 million, offset by $17.8 million of pre-tax gains on the sale of store properties and related assets.

Additional charges or gains related to the planned disposition of stores may be incurred as a result of sales of property or changes to managements current estimates and assumptions regarding the disposition of
the remaining store locations. The timing of future transactions and charges related to this disposition are subject to significant uncertainty including the variability in future vacancy periods, sublease income and the timing of property sales.

Results from discontinued operations were as follows:



|                                                                  |  |                 |      |   |                 |   |        |                 |  |   |                 |   |  |   |        |  
|----------------------------------------------------------------- |  | --------------- | ---- | - | --------------- | - | ------ | --------------- |  | - | --------------- | - |  | - | ------ | -
|                                                                  |  | 13 weeks ended  |      |   | 39 weeks ended  |  
|                                                                  |  | October 25,2007 |      |   | October 26,2006 |   |        | October 25,2007 |  |   | October 26,2006 |  
|                                                                  |  | Thousands       |      |   | Thousands       |  
|Retail drug store sales                                           |  | $               |     |   |                 | $ | 29,942 |                 |  | $ | 35,331          |   |  | $ | 91,673 |  
|Costs and expenses:                                               |  |                 |      |   |                 |   |        |                 |  |   |                 |   |  |   |        |  
|Cost of retail drug store sales                                   |  |                 |     |   |                 |   | 23,250 |                 |  |   | 32,042          |   |  |   | 70,954 |  
|Operating and administrative expenses                             |  |                 | 201  |   |                 |   | 7,749  |                 |  |   | 10,847          |   |  |   | 23,228 |  
|Provision (benefit) for store closures and asset impairments, net |  |                 | (377 | ) |                 |   |       |                 |  |   | (4,191          | ) |  |   |       |  
|                                                                  |  |                 |      |   |                 |   |        |                 |  |   |                 |   |  |   |        |  
|Income (loss) before income taxes                                 |  |                 | 176  |   |                 |   | (1,057 | )               |  |   | (3,367          | ) |  |   | (2,509 | )
|Income tax (expense) benefit                                      |  |                 | (70  | ) |                 |   | 425    |                 |  |   | 1,354           |   |  |   | 1,009  |  
|                                                                  |  |                 |      |   |                 |   |        |                 |  |   |                 |   |  |   |        |  
|Income (loss) from discontinued operations, net of tax            |  | $               | 106  |   |                 | $ | (632   | )               |  | $ | (2,013          | ) |  | $ | (1,500 | )
|                                                                  |  |                 |      |   |                 |   |        |                 |  |   |                 |   |  |   |        |  



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##### Table of Contents

LONGS DRUG STORES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Following is a summary of the reserve for store closures, which is included in other long-term
liabilities, for the 39 weeks ended October 25, 2007 (in thousands):



|                                                                                                                   |  |                               |        |  
|------------------------------------------------------------------------------------------------------------------ |  | ----------------------------- | ------ | -
|                                                                                                                   |  | 39 Weeks EndedOctober 25,2007 |       
|                                                                                                                   |  | Thousands                     |       
|Reserve balance - January 25, 2007                                                                                 |  | $                             | 3,456  |  
|Provision for present value of noncancellable lease obligations of stores closed, net of estimated sublease income |  |                               | 13,290 |  
|Provision for severance                                                                                            |  |                               | 3,201  |  
|                                                                                                                   |  |                               |        |  
|Total provision for store closures                                                                                 |  |                               | 16,491 |  
|                                                                                                                   |  |                               |        |  
|Reserve accretion                                                                                                  |  |                               | 413    |  
|Cash payments for leases                                                                                           |  |                               | (2,546 | )
|Cash payments for severance                                                                                        |  |                               | (3,201 | )
|                                                                                                                   |  |                               |        |  
|Reserve balance - October 25, 2007                                                                                 |  | $                             | 14,613 |  
|                                                                                                                   |  |                               |        |  

4. Acquisitions

In the first quarter of fiscal 2008, the Company purchased the assets of six retail pharmacies, including four from PharMerica, Inc., a subsidiary of AmerisourceBergen Corporation, for a total of $10.2 million. These
acquisitions increased the Companys portfolio of smaller retail pharmacies, many of which are close to the point of care, such as hospitals, clinics and medical office buildings. Three of the acquired stores are located in California, and
three are in Hawaii. The Company allocated the $10.2 million total acquisition cost to pharmacy prescription files ($8.3 million), inventory ($1.8 million) and property and equipment ($0.1 million). The results of operations of the acquired
locations are included in the Companys consolidated financial statements within the retail drug store segment as of their various acquisition dates. The pro forma effects of these acquisitions on the Companys consolidated financial
statements for periods prior to the acquisitions are not significant, either individually or in the aggregate.

During the second quarter
of fiscal 2008, the Company acquired the assets of six stores in the Reno, Nevada area from Rite Aid Corporation (Rite Aid) and sold to Rite Aid assets of certain of the stores included in the Companys disposition plans announced
in February 2007 (see Note 3). This transaction increased the Companys presence in the Reno area while accelerating the disposition of stores in Washington and Oregon. The Company accounted for this purchase and sale transaction based on the
fair values of the net assets exchanged. The Company allocated the $4.2 million total fair value of net assets acquired to property and equipment ($4.4 million), inventory ($3.1 million) and pharmacy prescription files ($3.4 million), partially
offset by under market lease obligations ($6.7 million). The results of operations of the acquired stores are included in the Companys consolidated financial statements within the retail drug store segment as of their acquisition date. The pro
forma effects of the acquisition of these six stores on the Companys consolidated financial statements for periods prior to the acquisition are not significant, either individually or in the aggregate.

During the third quarter of fiscal 2008, through its wholly-owned subsidiary, RxAmerica L.L.C. (RxAmerica), the Company acquired Nutmeg Life
Insurance Company (Nutmeg), from Hartford Life Insurance Company. Nutmeg is a registered insurance company and has licenses to operate as an insurance company in 46 states where it also maintains related statutorily required deposits.
Nutmeg has no existing insurance policies in force. The acquisition of Nutmeg will allow RxAmerica to continue to offer prescription drug plans under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 after the expiration of
its insurance waivers from the Centers for Medicare and Medicaid Services (CMS) on January 1, 2009. The Company allocated the $11.4 million total acquisition cost to marketable securities ($6.5 million, consisting of United States
treasury notes with a fair value of $6.5 million as of October 25, 2007, maturing at various dates through 2011 and included in other non-current assets) and insurance licenses ($4.9 million, included in intangible assets  see Note 7).
Nutmegs results of operations primarily consist of interest income, and are included in the Companys consolidated financial statements within the pharmacy benefit services segment as of the acquisition date. The pro forma effects of the
acquisition on the Companys consolidated financial statements for periods prior to the acquisition are not significant. On November 8, 2007, Nutmeg was renamed Accendo Insurance Company (Accendo) and redomesticated from the
state of Iowa to Utah.



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##### Table of Contents

LONGS DRUG STORES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



5. Earnings Per Share

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



|                                                      |  |                 |  |                 |  |                 |  |                
|----------------------------------------------------- |  | --------------- |  | --------------- |  | --------------- |  | ---------------
|                                                      |  | 13 weeks ended  |  | 39 weeks ended 
|                                                      |  | October 25,2007 |  | October 26,2006 |  | October 25,2007 |  | October 26,2006
|                                                      |  | Thousands       |  | Thousands      
|Basic weighted average number of shares outstanding   |  | 37,293          |  | 37,109          |  | 37,411          |  | 37,266         
|Effect of dilution from:                              |  |                 |  |                 |  |                 |  |                
|Stock options                                         |  | 602             |  | 780             |  | 692             |  | 808            
|Restricted stock awards                               |  | 275             |  | 187             |  | 228             |  | 185            
|                                                      |  |                 |  |                 |  |                 |  |                
|Diluted weighted average number of shares outstanding |  | 38,170          |  | 38,076          |  | 38,331          |  | 38,259         
|                                                      |  |                 |  |                 |  |                 |  |                

The computation of diluted earnings per share excluded 0.2 million and 0.3 million stock
option shares for the 13 weeks ended October 25, 2007, and October 26, 2006, respectively, and 0.1 million and 0.3 million for the 39 weeks ended October 25, 2007, and October 26, 2006, respectively, because their
inclusion would have been anti-dilutive.

6. Merchandise Inventories

Merchandise inventories are stated at the lower of cost or market value. Cost is determined using the last-in, first-out (LIFO) method. The excess of current cost over LIFO values was $202.9 million as of
October 25, 2007, $191.4 million as of October 26, 2006, and $195.9 million as of January 25, 2007. LIFO costs for interim financial statements are estimated based on projected annual inflation rates, inventory levels, and merchandise
mix. Actual LIFO costs are calculated during the fourth quarter of the fiscal year when final inflation rates, inventory levels and merchandise mix are determined.



8



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##### Table of Contents

LONGS DRUG STORES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



7. Goodwill and Intangible Assets

All of the Companys goodwill, pharmacy prescription files and non-compete agreements are included in the retail drug store segment. Insurance
licenses are included in the pharmacy benefit services segment.

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



|                                               |  |                      |  |                    |        |                         |   |         |                  |  |   |       
|---------------------------------------------- |  | -------------------- |  | ------------------ | ------ | ----------------------- | - | ------- | ---------------- |  | - | ------
|                                               |  | EstimatedUsefulLives |  | GrossCarryingValue |        | AccumulatedAmortization |   |         | NetCarryingValue
|                                               |  |                      |  |                    |        | Thousands               |   |         |                 
|As of October 25, 2007:                        |  |                      |  |                    |        |                         |   |         |                  |  |   |       
|Intangible assets subject to amortization:     |  |                      |  |                    |        |                         |   |         |                  |  |   |       
|Pharmacy prescription files                    |  | 5 years              |  | $                  | 29,680 |                         | $ | (10,525 | )                |  | $ | 19,155
|Non-compete agreements and other               |  | 4-5 years            |  |                    | 2,108  |                         |   | (1,552  | )                |  |   | 556   
|                                               |  |                      |  |                    |        |                         |   |         |                  |  |   |       
|Total                                          |  |                      |  |                    | 31,788 |                         |   | (12,077 | )                |  |   | 19,711
|Intangible assets not subject to amortization: |  |                      |  |                    |        |                         |   |         |                  |  |   |       
|Beverage licenses                              |  | N/A                  |  |                    | 5,335  |                         |   |        |                  |  |   | 5,335 
|Insurance licenses                             |  | N/A                  |  |                    | 4,858  |                         |   |        |                  |  |   | 4,858 
|                                               |  |                      |  |                    |        |                         |   |         |                  |  |   |       
|Total                                          |  |                      |  |                    | 10,193 |                         |   |        |                  |  |   | 10,193
|                                               |  |                      |  |                    |        |                         |   |         |                  |  |   |       
|Total intangible assets, net                   |  |                      |  | $                  | 41,981 |                         | $ | (12,077 | )                |  | $ | 29,904
|                                               |  |                      |  |                    |        |                         |   |         |                  |  |   |       
|As of January 25, 2007:                        |  |                      |  |                    |        |                         |   |         |                  |  |   |       
|Intangible assets subject to amortization:     |  |                      |  |                    |        |                         |   |         |                  |  |   |       
|Pharmacy prescription files                    |  | 1-5 years            |  | $                  | 12,519 |                         | $ | (2,699  | )                |  | $ | 9,820 
|Non-compete agreements and other               |  | 2-5 years            |  |                    | 5      |                         |   | (4      | )                |  |   | 1     
|                                               |  |                      |  |                    |        |                         |   |         |                  |  |   |       
|Total                                          |  |                      |  |                    | 12,524 |                         |   | (2,703  | )                |  |   | 9,821 
|Intangible assets not subject to amortization: |  |                      |  |                    |        |                         |   |         |                  |  |   |       
|Beverage licenses                              |  | N/A                  |  |                    | 5,083  |                         |   |        |                  |  |   | 5,083 
|                                               |  |                      |  |                    |        |                         |   |         |                  |  |   |       
|Total intangible assets, net                   |  |                      |  | $                  | 17,607 |                         | $ | (2,703  | )                |  | $ | 14,904
|                                               |  |                      |  |                    |        |                         |   |         |                  |  |   |       

The increase in pharmacy prescription files was primarily due to the acquisition of 12 stores
during the 39-week period ended October 25, 2007. Insurance licenses as of October 25, 2007 are related to the Nutmeg/Accendo acquisition during the third quarter of fiscal 2008 (see Note 4).

Amortization expense for intangible assets with finite useful lives was $3.2 million and $1.0 million for the 39-week periods ended October 25, 2007
and October 26, 2006, respectively. Estimated future annual amortization expense of these intangibles is as follows (in thousands):



|                         |  |   |       
|------------------------ |  | - | ------
|Fiscal year ending:      |  |   |       
|2008 (remainder of year) |  | $ | 1,358 
|2009                     |  |   | 4,897 
|2010                     |  |   | 4,648 
|2011                     |  |   | 4,585 
|2012                     |  |   | 3,463 
|Thereafter               |  |   | 760   
|                         |  |   |       
|Total                    |  | $ | 19,711
|                         |  |   |       



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##### Table of Contents

LONGS DRUG STORES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



8. Debt

Debt consisted of the following:



|                                                                                                                                  |  |                 |         |                 |   |                 |  |   |        
|--------------------------------------------------------------------------------------------------------------------------------- |  | --------------- | ------- | --------------- | - | --------------- |  | - | -------
|                                                                                                                                  |  | October 25,2007 |         | October 26,2006 |   | January 25,2007
|                                                                                                                                  |  | Thousands      
|Secured revolving line of credit, variable interest (weighted average rate of 6.69% as of October 25, 2007), expires January
2012 |  | $               | 173,000 |                 | $ | 96,818          |  | $ | 65,000 
|Private placement notes, fixed interest rates ranging from 6.19% to 6.71%, mature at various dates through 2014                   |  |                 | 53,091  |                 |   | 139,000         |  |   | 59,818 
|                                                                                                                                  |  |                 |         |                 |   |                 |  |   |        
|Total debt                                                                                                                        |  |                 | 226,091 |                 |   | 235,818         |  |   | 124,818
|Less current maturities                                                                                                           |  |                 | 36,727  |                 |   | 43,727          |  |   | 6,727  
|                                                                                                                                  |  |                 |         |                 |   |                 |  |   |        
|Long-term portion                                                                                                                 |  | $               | 189,364 |                 | $ | 192,091         |  | $ | 118,091
|                                                                                                                                  |  |                 |         |                 |   |                 |  |   |        

On October 30, 2007, the Company exercised an option to increase its secured revolving line
of credit facilitys borrowing and letter of credit capacity from $325 million to $400 million, with no change to its existing covenant requirements.

The Companys debt agreements contain customary restrictions, and the private placement notes also include various customary financial covenants. As of October 25, 2007, the Company was in compliance with
the restrictions and limitations included in these provisions.

9. Commitments and Contingencies

Rankin v. Longs Drug Stores California, Inc. was filed in the Superior Court of California, San Diego County, in October 2004, and was subsequently
certified as a class action. The lawsuit alleged that the Companys employment application violated California Labor Code Section 432.8 by inquiring about criminal convictions within the last seven years, without providing an exception for
misdemeanor marijuana convictions more than two years old. The plaintiff sought to recover statutory damages and attorneys fees for himself and all similarly situated individuals who applied for employment with us during the class period.
Trial commenced on August 20, 2007 and concluded with a dismissal of plaintiffs case by the court on September 26, 2007. The plaintiff has until January 7, 2008, to appeal the dismissal.

During the third quarter of fiscal 2007, the Company completed a self-audit of certain of its California drug stores located in three counties that was
initiated at the request of the State of California Department of Industrial Relations (DIR). The audit related to compliance with California law relating to meal period requirements. The Company made compensatory payments resulting from
this audit, which were not material, during the fourth quarter of fiscal 2007. The DIR has also requested that the Company conduct an audit related to meal period compliance for all of its California drug stores. At this time the Company cannot
reasonably estimate the amount of any possible payments that might be required as a result of an additional audit.

In addition to the
matters described above, the Company is subject to various lawsuits, claims and federal and state regulatory reviews and actions arising in the normal course of its businesses. The Company accrues amounts it believes are adequate to address the
liabilities related to lawsuits and other proceedings that it believes will result in a probable loss if the loss can be reasonably estimated. However, the ultimate resolution of such matters is uncertain and outcomes are not predictable with
assurance. It is possible that the matters described above or other proceedings brought against the Company could have a material adverse impact on its financial condition and results of operations.

10. Stockholders Equity

In May 2005, the
Companys board of directors authorized the repurchase of up to $150 million of the Companys outstanding common stock through May, 2008. As of October 25, 2007, approximately $24.7 million remains under the May 2005 repurchase
program. On November 13, 2007, the Companys board of directors authorized the additional repurchase of up to $200 million of the Companys outstanding common stock through February 2011.



10



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##### Table of Contents

LONGS DRUG STORES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



11. Segment Information

The Company operates in two business segments: retail drug stores and pharmacy benefit services. These segments were identified based on their separate and distinct products and services, technology, marketing
strategies and management reporting. Management evaluates the segments operating performance separately and allocates resources based on the segments respective financial condition, results of operations and cash flows. Inter-segment
transactions and balances are eliminated in consolidation.

Pharmacy is the cornerstone of the retail drug store segment, complemented by
such core front-end categories as cosmetics, over-the-counter medications, health and beauty products, photo and photo processing, and food and beverage items. As of October 25, 2007, the retail drug store segment operated 505 retail stores in
the western United States, primarily under the names Longs, Longs Drugs, Longs Drug Stores and Longs Pharmacy. The retail drug store segment also operates a mail order pharmacy business.

The pharmacy benefit services segment, operated through the Companys subsidiary, RxAmerica L.L.C., provides pharmacy benefit management services
whereby RxAmerica contracts with third-party health plans, retail pharmacies and drug manufacturers to provide a range of services to third-party health plan members, including pharmacy benefit plan design and implementation, claims administration
and formulary management. The pharmacy benefit services segment also operates prescription drug plans under Medicare Part D as established by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003.

The following tables summarize significant financial information by segment:



|                          |  |                        |           |                        |   |                 |  |                 |           |  |   |          
|------------------------- |  | ---------------------- | --------- | ---------------------- | - | --------------- |  | --------------- | --------- |  | - | ---------
|                          |  | For the 13 weeks ended |           | For the 39 weeks ended
|                          |  | October 25,2007        |           | October 26,2006        |   | October 25,2007 |  | October 26,2006
|                          |  | Thousands              |           | Thousands             
|Revenues:                 |  |                        |           |                        |   |                 |  |                 |           |  |   |          
|Retail Drug Stores        |  | $                      | 1,158,422 |                        | $ | 1,123,875       |  | $               | 3,539,024 |  | $ | 3,420,722
|Pharmacy Benefit Services |  |                        | 79,731    |                        |   | 75,015          |  |                 | 270,688   |  |   | 243,758  
|                          |  |                        |           |                        |   |                 |  |                 |           |  |   |          
|Consolidated Totals       |  | $                      | 1,238,153 |                        | $ | 1,198,890       |  | $               | 3,809,712 |  | $ | 3,664,480
|                          |  |                        |           |                        |   |                 |  |                 |           |  |   |          
|Operating Income:         |  |                        |           |                        |   |                 |  |                 |           |  |   |          
|Retail Drug Stores        |  | $                      | 14,156    |                        | $ | 6,599           |  | $               | 70,981    |  | $ | 56,508   
|Pharmacy Benefit Services |  |                        | 17,984    |                        |   | 18,129          |  |                 | 33,416    |  |   | 25,822   
|                          |  |                        |           |                        |   |                 |  |                 |           |  |   |          
|Consolidated Totals       |  | $                      | 32,140    |                        | $ | 24,728          |  | $               | 104,397   |  | $ | 82,330   
|                          |  |                        |           |                        |   |                 |  |                 |           |  |   |          



|                           |  |                 |           |   |                 |   |           |                 |  |   |           |  
|-------------------------- |  | --------------- | --------- | - | --------------- | - | --------- | --------------- |  | - | --------- | -
|                           |  | October 25,2007 |           |   | October 26,2006 |   |           | January 25,2007 | 
|                           |  | Thousands       |          
|Total Assets:              |  |                 |           |   |                 |   |           |                 |  |   |           |  
|Retail Drug Stores         |  | $               | 1,668,818 |   |                 | $ | 1,538,526 |                 |  | $ | 1,568,619 |  
|Pharmacy Benefit Services  |  |                 | 235,577   |   |                 |   | 224,215   |                 |  |   | 223,342   |  
|Inter-segment Eliminations |  |                 | (79,025   | ) |                 |   | (52,000   | )               |  |   | (104,293  | )
|                           |  |                 |           |   |                 |   |           |                 |  |   |           |  
|Consolidated Totals        |  | $               | 1,825,370 |   |                 | $ | 1,710,741 |                 |  | $ | 1,687,668 |  
|                           |  |                 |           |   |                 |   |           |                 |  |   |           |  



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LONGS DRUG STORES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Consolidated total revenues include the following product and service types:



|                                     |  |                        |           |                        |   |                 |  |                 |           |  |   |          
|------------------------------------ |  | ---------------------- | --------- | ---------------------- | - | --------------- |  | --------------- | --------- |  | - | ---------
|                                     |  | For the 13 weeks ended |           | For the 39 weeks ended
|                                     |  | October 25,2007        |           | October 26,2006        |   | October 25,2007 |  | October 26,2006
|                                     |  | Thousands              |           | Thousands             
|Pharmacy sales                       |  | $                      | 609,135   |                        | $ | 583,229         |  | $               | 1,843,418 |  | $ | 1,750,768
|Front-end sales                      |  |                        | 549,287   |                        |   | 540,646         |  |                 | 1,695,606 |  |   | 1,669,954
|Prescription drug plan revenues      |  |                        | 60,681    |                        |   | 65,299          |  |                 | 222,909   |  |   | 216,382  
|Pharmacy benefit management revenues |  |                        | 19,050    |                        |   | 9,716           |  |                 | 47,779    |  |   | 27,376   
|                                     |  |                        |           |                        |   |                 |  |                 |           |  |   |          
|Consolidated total revenues          |  | $                      | 1,238,153 |                        | $ | 1,198,890       |  | $               | 3,809,712 |  | $ | 3,664,480
|                                     |  |                        |           |                        |   |                 |  |                 |           |  |   |          



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|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

The following Managements Discussion and Analysis of Financial Condition and Results of Operations should be read together with our consolidated
financial statements and the related notes. This discussion contains forward-looking statements relating to, among other things, matters set forth under Cautionary Statement Regarding Forward-Looking Statements. Our actual results and
the timing of events could differ materially from those anticipated in these forward-looking statements as a result of many factors, including, but not limited to, those set forth in the following discussion, under Cautionary Statement
Regarding Forward-Looking Statements and under Risk Factors in our Annual Report on Form 10-K for fiscal year 2007 and elsewhere in this Form 10-Q.

OVERVIEW

Longs Drug Stores Corporation is one of the most recognized retail
drug store chains on the West Coast and in Hawaii. With 505 stores as of October 25, 2007, we provide expert pharmacy services and a wide assortment of merchandise focusing on health, wellness, beauty and convenience.

We also provide pharmacy benefit services, including pharmacy benefit management and Medicare beneficiary prescription drug plans, through our
wholly-owned subsidiary, RxAmerica L.L.C. We participate in the Medicare drug benefit program through both our retail drug store pharmacies and our pharmacy benefit services subsidiary. RxAmerica has contracted with the federal Centers for Medicare
and Medicaid Services (CMS) to be a prescription drug plan sponsor in all 50 states and the District of Columbia.

Our fiscal
2008 financial results reflect the progress we have made on our initiatives to make Longs a stronger competitor and more profitable company. We made significant progress on our initiatives to improve our profitability and the longer term growth
prospects of our core retail business by realigning and upgrading our store base, increasing our self-distribution of front-end merchandise, installing supply chain system technology and improving our operations. Our consolidated results also
reflect the continued profitable growth of our pharmacy benefit services segment.

In February 2007, we announced a plan to dispose of 31
stores during fiscal 2008, including all of our 23 stores located in Washington, Oregon and Colorado and eight stores in California. Most of the stores were located in markets we entered in the 1980s and 1990s that remained underdeveloped.
Sufficiently developing our presence in these markets would have required significant investment that we believed would be better directed toward markets that offer greater opportunities for more satisfactory returns. We, therefore, decided to close
the stores and market the assets. As of October 25, 2007, we have closed 30 of these stores. One California store previously included in the planned disposition will remain open. Approximately two-thirds of the store locations have been sold or
sub-leased and the remainder are being actively marketed.



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RESULTS OF OPERATIONS

Revenues



|                                                                        |  |                        |           |    |                        |   |           |                 |  |   |                 |   |  |   |           |   
|----------------------------------------------------------------------- |  | ---------------------- | --------- | -- | ---------------------- | - | --------- | --------------- |  | - | --------------- | - |  | - | --------- | --
|                                                                        |  | For the 13 weeks ended |           |    | For the 39 weeks ended |  
|                                                                        |  | October 25,2007        |           |    | October 26,2006        |   |           | October 25,2007 |  |   | October 26,2006 |  
|                                                                        |  | Dollars in thousands   |          
|Retail drug store sales:                                                |  |                        |           |   
|Pharmacy sales                                                          |  | $                      | 609,135   |    |                        | $ | 583,229   |                 |  | $ | 1,843,418       |   |  | $ | 1,750,768 |   
|Front-end sales                                                         |  |                        | 549,287   |    |                        |   | 540,646   |                 |  |   | 1,695,606       |   |  |   | 1,669,954 |   
|                                                                        |  |                        |           |    |                        |   |           |                 |  |   |                 |   |  |   |           |   
|Total                                                                   |  | $                      | 1,158,422 |    |                        | $ | 1,123,875 |                 |  | $ | 3,539,024       |   |  | $ | 3,420,722 |   
|                                                                        |  |                        |           |    |                        |   |           |                 |  |   |                 |   |  |   |           |   
|Pharmacy benefit services revenues:                                     |  |                        |           |    |                        |   |           |                 |  |   |                 |   |  |   |           |   
|Prescription drug plan revenues                                         |  | $                      | 60,681    |    |                        | $ | 65,299    |                 |  | $ | 222,909         |   |  | $ | 216,382   |   
|Pharmacy benefit management revenues                                    |  |                        | 19,050    |    |                        |   | 9,716     |                 |  |   | 47,779          |   |  |   | 27,376    |   
|                                                                        |  |                        |           |    |                        |   |           |                 |  |   |                 |   |  |   |           |   
|Total                                                                   |  | $                      | 79,731    |    |                        | $ | 75,015    |                 |  | $ | 270,688         |   |  | $ | 243,758   |   
|                                                                        |  |                        |           |    |                        |   |           |                 |  |   |                 |   |  |   |           |   
|Total revenues                                                          |  | $                      | 1,238,153 |    |                        | $ | 1,198,890 |                 |  | $ | 3,809,712       |   |  | $ | 3,664,480 |   
|                                                                        |  |                        |           |    |                        |   |           |                 |  |   |                 |   |  |   |           |   
|Retail drug store sales:                                                |  |                        |           |    |                        |   |           |                 |  |   |                 |   |  |   |           |   
|Total sales growth over previous year                                   |  |                        | 3.1       | %  |                        |   | 3.9       | %               |  |   | 3.5             | % |  |   | 3.4       | % 
|Same-store sales growth                                                 |  |                        | 1.4       | %  |                        |   | 1.8       | %               |  |   | 1.5             | % |  |   | 2.0       | % 
|Pharmacy sales growth                                                   |  |                        | 4.4       | %  |                        |   | 8.7       | %               |  |   | 5.3             | % |  |   | 7.9       | % 
|Same-store pharmacy sales growth                                        |  |                        | 2.0       | %  |                        |   | 5.5       | %               |  |   | 2.2             | % |  |   | 5.6       | % 
|Pharmacy as a % of total retail drug store sales                        |  |                        | 52.6      | %  |                        |   | 51.9      | %               |  |   | 52.1            | % |  |   | 51.2      | % 
|% of pharmacy sales covered by third party health plans                 |  |                        | 95.1      | %  |                        |   | 94.7      | %               |  |   | 94.9            | % |  |   | 94.3      | % 
|Front-end sales growth (decline)                                        |  |                        | 1.6       | %  |                        |   | (0.8      | )%              |  |   | 1.5             | % |  |   | (0.9      | )%
|Same-store front-end sales growth (decline)                             |  |                        | 0.8       | %  |                        |   | (1.7      | )%              |  |   | 0.7             | % |  |   | (1.5      | )%
|Front-end as a % of total retail drug store sales                       |  |                        | 47.4      | %  |                        |   | 48.1      | %               |  |   | 47.9            | % |  |   | 48.8      | % 
|Pharmacy benefit services revenues:                                     |  |                        |           |    |                        |   |           |                 |  |   |                 |   |  |   |           |   
|Prescription drug plan revenue growth (decline) over previous year      |  |                        | (7.1      | )% |                        |   | N/A       |                 |  |   | 3.0             | % |  |   | N/A       |   
|Pharmacy benefit management revenue growth (decline) over previous year |  |                        | 96.1      | %  |                        |   | 9.8       | %               |  |   | 74.5            | % |  |   | (2.4      | )%

Thirteen Weeks Ended October 25 2007 versus Thirteen Weeks Ended October 26, 2006

Total revenues increased 3.3% in the third quarter of fiscal 2008 over the third quarter of fiscal 2007. Retail drug store sales were $1.16 billion, a
3.1% increase over the third quarter of fiscal 2007, with same-store sales increasing 1.4%. Growth in the number of stores and higher mail order sales also contributed to total retail drug store sales growth. Pharmacy benefit services revenues were
$79.7 million in the third quarter of fiscal 2008, a 6.3% increase over the third quarter of fiscal 2007. Pharmacy benefit management revenues increased $9.3 million, or 96.1%, while prescription drug plan revenues decreased $4.6 million, or 7.1%.

Retail Drug Store Sales

Pharmacy sales increased 4.4% in the third quarter of fiscal 2008 over the third quarter of fiscal 2007, with same-store pharmacy sales increasing 2.0%. The increase in same-store pharmacy sales was primarily due to continued increases in
average prescription prices. Average prescription prices increased due to pharmaceutical cost inflation and the continued introduction and utilization of newer and more expensive drugs. The increase in average prescription prices was mitigated in
part by the increased utilization of lower-priced generic drugs. We estimate that generic utilization negatively impacted our same-store pharmacy sales by approximately 3.6 to 3.8 percentage points in the third quarter of fiscal 2008 compared with
2.3 percentage points for the same period a year ago. We expect that average retail prices for prescription drugs will continue to rise due to pharmaceutical cost inflation and the continued introduction and utilization of newer and more expensive
drugs, partially offset by continuing increases in utilization of generic drugs.

Pharmacy sales were 52.6% of total drug store sales in
the third quarter of fiscal 2008, compared with 51.9 % in the third quarter of fiscal 2007. We expect pharmacy sales to continue to increase as a percentage of total drug store sales as pharmacy sales continue to increase faster than front-end
sales.



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##### Table of Contents

Third-party health plans covered 95.1% of our pharmacy sales in the third quarter of fiscal 2008,
compared with 94.7% in the same quarter last year. We expect third-party sales to remain over 90% of our total pharmacy sales for the foreseeable future due to significant consumer participation in managed care and other third-party plans, including
the new Medicare prescription drug plans.

Front-end sales increased 1.6% in the third quarter of fiscal 2008 from the same quarter last
year, with same-store front-end sales increasing 0.8%. The increase was primarily due to the performance of our core categories of health, wellness, beauty and convenience as a result of our ongoing merchandise strategy.

Pharmacy Benefit Services Revenues

Pharmacy benefit management revenues increased 96.1% to $19.1 million in the third quarter of fiscal 2008 due to growth in our existing client base and the addition of new clients. RxAmericas Medicare prescription drug plan revenues
decreased $4.6 million, or 7.1% compared with the third quarter of last year. Prescription drug plan revenues include fixed monthly premiums paid by beneficiaries and CMS, as well as a CMS risk share component. The fixed monthly premiums are
recognized on a straight-line basis over the coverage period. The risk share component is variable, depending on drug costs, and can cause revenues to fluctuate from period to period. RxAmericas per-life drug costs were lower in the third
quarter of fiscal 2008 compared with the same period last year, resulting from better formulary management and increased generic utilization. The resulting impact to the risk share component decreased revenues for the third quarter compared to last
year.

Thirty-nine Weeks Ended October 25, 2007 versus Thirty-nine Weeks Ended October 26, 2006

Total revenues increased 4.0% in the first three quarters of fiscal 2008 over the same period of fiscal 2007. Retail drug store sales were $3.54 billion,
a 3.5% increase over the first three quarters of fiscal 2007, with same-store sales increasing 1.5%. Growth in the number of stores and higher mail order sales also contributed to total retail drug store sales growth. Pharmacy benefit services
revenues were $270.7 million in the first three quarters of fiscal 2008, an 11.0% increase over the same period of fiscal 2007. Pharmacy benefit management revenues increased $20.4 million, or 74.5%, while prescription drug plan revenues increased
$6.5 million, or 3.0%.

Retail Drug Store Sales

Pharmacy sales increased 5.3% in the first three quarters of fiscal 2008 over the same period of fiscal 2007, with same-store pharmacy sales increasing 2.2%. The increase in same-store pharmacy sales was primarily due
to continued increases in average prescription prices. Average prescription prices increased due to pharmaceutical cost inflation and the continued introduction and utilization of newer and more expensive drugs. The increase in average prescription
prices was mitigated in part by the increased utilization of lower-priced generic drugs.

Pharmacy sales were 52.1% of total drug store
sales in the first three quarters of fiscal 2008, compared with 51.2% in the same period of fiscal 2007. Third-party health plans covered 94.9% of our pharmacy sales in the first three quarters of fiscal 2008, compared with 94.3% in the same period
last year.

Front-end sales increased 1.5% in the first three quarters of fiscal 2008 from the same period last year, with same-store
front-end sales increasing 0.7%. The increase was primarily due to the performance of our core categories of health, wellness, beauty and convenience as a result of our on-going merchandise strategy.

Pharmacy Benefit Services Revenues

The increase in pharmacy benefit services revenues in the first three quarters of fiscal 2008 reflects the continued growth of RxAmerica, our pharmacy benefit services subsidiary. Pharmacy benefit management revenues were $47.8 million, an
increase of 74.5% from $27.4 million in the first three quarters of fiscal 2007. Last years pharmacy benefit management revenues included a reduction of $3 million due to adjustments of certain rebate accruals recorded during the second
quarter. RxAmericas Medicare prescription drug plan revenues were $222.9 million, an increase of 3.0% from $216.4 million in the first three quarters of fiscal 2007.



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##### Table of Contents

Gross Profit



|                                                |  |                        |         |   |                        |   |         |                 |  |   |                 |   |  |   |         |  
|----------------------------------------------- |  | ---------------------- | ------- | - | ---------------------- | - | ------- | --------------- |  | - | --------------- | - |  | - | ------- | -
|                                                |  | For the 13 weeks ended |         |   | For the 39 weeks ended |  
|                                                |  | October 25,2007        |         |   | October 26,2006        |   |         | October 25,2007 |  |   | October 26,2006 |  
|Retail drug store gross profit (thousands)      |  | $                      | 300,789 |   |                        | $ | 280,098 |                 |  | $ | 919,214         |   |  | $ | 856,560 |  
|Retail drug store gross profit margin           |  |                        | 26.0    | % |                        |   | 24.9    | %               |  |   | 26.0            | % |  |   | 25.0    | %
|LIFO provision (thousands)                      |  | $                      | 2,000   |   |                        | $ | 3,000   |                 |  | $ | 7,000           |   |  | $ | 8,250   |  
|Prescription drug plan gross profit (thousands) |  | $                      | 15,411  |   |                        | $ | 20,266  |                 |  | $ | 30,969          |   |  | $ | 35,327  |  
|Prescription drug plan gross margin             |  |                        | 25.4    | % |                        |   | 31.0    | %               |  |   | 13.9            | % |  |   | 16.3    | %

Thirteen Weeks Ended October 25, 2007 versus Thirteen Weeks Ended October 26, 2006

Retail Drug Stores

Retail drug store
gross profit was 26.0% of retail drug store sales in the third quarter of fiscal 2008, compared with 24.9% in the third quarter of fiscal 2007. The increase was primarily due to increased utilization of generic drugs, which have higher gross profit
margins than brand-name drugs, increased self-distribution of front-end merchandise and improved inventory management.

Our LIFO provision,
which is included in the cost of retail drug store sales, was $2.0 million and $3.0 million in the third quarter of fiscal 2008 and fiscal 2007, respectively. The LIFO provision fluctuates with inflation rates, inventory levels and merchandise mix.
We estimate LIFO costs for interim financial statements based on projected annual inflation rates, inventory levels and merchandise mix. We calculate actual LIFO costs during the fourth quarter of the fiscal year when we determine final inflation
rates, inventory levels and merchandise mix.

Prescription Drug Plans (Pharmacy Benefit Services Segment)

Prescription drug plan benefit costs relate only to prescription drug plan revenues. Revenues generated from pharmacy benefit management services are
reported net of reimbursements to participating pharmacies.

Prescription drug plan gross profit was 25.4% of prescription drug plan
revenues in the third quarter of fiscal 2008, compared with 31.0% in the same period last year. The decrease was primarily due to more competitive bidding by prescription drug plan sponsors in the second year of the Medicare prescription drug
benefit resulting in lower premiums as we expanded our prescription drug plans to all 50 states.

Thirty-nine Weeks Ended October 25, 2007 versus
Thirty-nine Weeks Ended October 26, 2006

Retail Drug Stores

Retail drug store gross profit was 26.0% of retail drug store sales in the first three quarters of fiscal 2008, compared with 25.0% in the same period
last year. The increase was primarily due to higher generic utilization, increased self-distribution of front-end merchandise, improved inventory management and merchandise mix.

Our LIFO provision, which is included in the cost of retail drug store sales, was $7.0 million and $8.3 million in the first three quarters of fiscal
2008 and fiscal 2007, respectively.

Prescription Drug Plans (Pharmacy Benefit Services Segment)

Prescription drug plan gross profit was 13.9% of prescription drug plan revenues in the first three quarters of fiscal 2008, compared with 16.3% in the
same period last year. The decrease was primarily due to more competitive bidding by prescription drug plan sponsors in the second year of the Medicare prescription drug benefit resulting in lower premiums as we expanded our prescription drug plans
to all 50 states.



16



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##### Table of Contents

Operating and Administrative Expenses

Operating and administrative expenses were $302.4 million, or 24.4% of revenues, and $883.7 million, or 23.2% of revenues, in the third quarter and first
three quarters of fiscal 2008, respectively, compared with $284.9 million, or 23.8% of revenues, and $836.9 million, or 22.8% of revenues, in the third quarter and first three quarters of fiscal 2007, respectively. The increase in operating and
administrative expenses is primarily due to store expansion and increased expenses in the pharmacy benefit services segment due to new pharmacy benefit management business.

Provision for Store Closures and Asset Impairments

The provision for store closures and asset
impairments of $10.3 million in the first three quarters of fiscal 2008 primarily includes lease-related costs, net of estimated sublease income, related to the planned disposition of stores in California as announced in February 2007. We closed or
sold seven of the eight stores during the first half of fiscal 2008 and one store previously included in the planned disposition will remain open. Additional charges or gains related to this planned disposition of stores may be incurred as a result
of sales of property or changes to managements current estimates and assumptions regarding the disposition of the remaining store locations. The timing of future charges and gains related to this disposition are subject to significant
uncertainty including the variability in future vacancy periods, sublease income and the timing of property sales. Costs related to the planned disposition of 23 stores in Washington, Oregon and Colorado are included in discontinued operations. See
Note 3 to our Condensed Consolidated Financial Statements and Discontinued Operations below for further information.

Net Interest
Expense

Net interest expense was $2.2 million and $5.2 million in the third quarter and first three quarters of fiscal 2008,
respectively, compared with $2.7 million and $3.9 million in the third quarter and first three quarters of fiscal 2007, respectively. The decrease in third quarter net interest expense in fiscal 2008 compared with fiscal 2007 is due to lower average
borrowings and higher capitalized interest. The increase in the first three quarters of fiscal 2008 compared to the same period of fiscal 2007 was a result of higher average borrowings, lower capitalized interest and less invested cash.

Income Taxes

Our effective income tax rate
was 35.5% and 38.4% in the third quarter and first three quarters of fiscal 2008, respectively, compared with 39.4% and 37.5% in the third quarter and first three quarters of 2007, respectively. We expect that our effective income tax rate for the
full 2008 fiscal year will be approximately 38%.

Discontinued Operations

In February 2007, we announced a plan to dispose of 31 stores during fiscal 2008, including all of the 23 stores located in Washington, Oregon and
Colorado and eight stores in California. Most of the stores were located in markets we entered in the 1980s and 1990s that remained underdeveloped. Sufficiently developing our presence in these markets would have required significant investment that
we believed would be better directed toward markets that offer greater opportunities for more satisfactory returns. As of October 25, 2007, we had closed 30 of these stores and one California store previously included in the planned disposition
will remain open. Approximately two-thirds of the store locations have been sold or sub-leased and the remainder are being actively marketed.

In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the stores located in Washington, Oregon and Colorado are reported as
discontinued operations effective in fiscal 2008, and as such both current and prior year results for these stores are classified within discontinued operations on our condensed statements of consolidated income. The stores located in California
will continue to be reported within continuing operations.

We record the net costs associated with the disposition of these 30 stores
during fiscal 2008 as the stores are sold or closed and the related assets are disposed of, in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities.

For the 23 stores located in Washington, Oregon and Colorado, we incurred a pre-tax net loss of $3.4 million ($2.0 million after tax) in discontinued
operations during the 39 weeks ended October 25, 2007. This pre-tax net loss included costs of $10.4 million for lease-related costs net of estimated sublease rental income and $3.2 million for employee severance, and pre-tax operating losses
of $7.6 million, offset by $17.8 million of pre-tax gains on the sale of store properties and related assets. Additional charges or gains related to the planned disposition of stores may be incurred as a result of sales of property or changes to our
current estimates and assumptions regarding the disposition of the remaining store locations. The timing of future transactions and charges related to this disposition are subject to significant uncertainty including the variability in future
vacancy periods, sublease income and the timing of property sales.



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LIQUIDITY AND CAPITAL RESOURCES

General

Our primary sources of liquidity are operating cash flows and availability on our
line of credit. We use cash to provide working capital for our operations, finance capital expenditures and acquisitions, repay debt, repurchase shares of our common stock and pay dividends.

As of October 25, 2007, we had a secured $325 million revolving line of credit with a syndication of banks, which expires in January 2012 and
accrues interest at LIBOR-based rates. On October 30, 2007, we exercised an option to increase the credit facilitys borrowing and letter of credit capacity from $325 million to $400 million. Borrowings on this line of credit are secured
by inventory, accounts receivable and certain intangible assets. As of October 25, 2007, borrowings of $173 million with a weighted average interest rate of 6.69% were outstanding on the secured line of credit. The secured revolving line of
credit agreement contains customary restrictions but no financial covenants and no limitations on capital expenditures or share repurchases if availability of credit remains above a minimum level. Borrowings on the line of credit do not require
repayment until the expiration date but may be prepaid without penalty. We pay a commitment fee of 0.25% per annum on the unused portion of the line of credit.

Additionally, as of October 25, 2007, we had $53.1 million in outstanding privately placed promissory notes. These notes, which mature at various dates through 2014, bear interest at fixed rates ranging from
6.19% to 6.71%, and are secured on the same basis as the secured revolving line of credit. The notes include penalties for repayment prior to their scheduled maturities. Current maturities of $36.7 million as of October 25, 2007 constitute
regularly scheduled principal payments due in the next twelve months, the majority of which will be paid in the third quarter of fiscal 2009.

The privately placed promissory notes contain various customary financial covenants and restrictions. Failure to comply with these covenants and restrictions, or with the restrictions included in our secured revolving line of credit, could
result in higher interest costs and potentially accelerated repayment requirements, and could affect our liquidity. As of October 25, 2007, we were in compliance with the restrictions and limitations included in these provisions.

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

Operating Cash Flows

Net cash provided by operating activities was $106.6 million in the first three quarters of fiscal 2008, compared with $93.4 million in the same period in
fiscal 2007. The increase in our net operating cash flows in fiscal 2008 from fiscal 2007 was primarily due to higher net income adjusted for non-cash expenses, including the provision for store closures and asset impairments, stock-based
compensation expense, and depreciation and amortization. This increase was partially offset by lower cash provided by our pharmacy benefit services segment due to the timing of benefit payments to pharmacies relative to our fiscal calendar. This
timing difference will negatively impact the comparison of fiscal 2008 operating cash flows versus fiscal 2007.

Operating cash flows
associated with the planned disposition of stores announced in February 2007 included severance and lease-related payments, and were not material to our operating cash flows during the first three quarters of fiscal 2008.

Investing Cash Flows

Net cash used in
investing activities was $121.2 million in the first three quarters of fiscal 2008, compared with $127.4 million in the same period last year. The first three quarters of fiscal 2008 includes $20.2 million in proceeds from the sale of property,
primarily prescription files and real estate associated with the planned disposition of stores announced in February 2007. We expect capital expenditures in fiscal 2008 to be between $170 million and $200 million, primarily for new store
investments, remodels and improvements to existing stores, technology and supply chain improvements. During the first three quarters of fiscal 2008 we opened or acquired 28 stores, relocated one store, closed 32 stores (including 30 stores from the
planned disposition announced in February 2007) and remodeled 39 stores. For the full fiscal year, we plan to open or relocate 30 to 35 stores and remodel up to 46 stores. In addition, in the ordinary course of business we may acquire additional
stores, store-related assets including pharmacy prescription files, or other complementary businesses.

Financing Cash Flows

Net cash provided by financing activities was $19.1 million in the first three quarters of fiscal 2008, compared with net cash used in financing
activities of $16.1 million in the same period in fiscal 2007. Our financing activities primarily consist of long-term borrowings and repayments, repurchases of common stock, dividend payments, proceeds from the exercise of stock options, and
Medicare Part D subsidy receipts and disbursements.



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Our borrowing levels on our revolving line of credit fluctuate based largely on the levels of our cash
flows from operations, capital expenditures, Medicare Part D subsidy receipts and disbursements, and stock repurchases. There were net borrowings of $108.0 million on our revolving line of credit during the first three quarters of fiscal 2008,
compared with net borrowings of $139.0 million in the same period last year. We also made regularly scheduled principal payments of $6.7 million on our private placement notes in the first three quarters of fiscal 2008, compared with payments of
$8.9 million in the first three quarters of fiscal 2007. We are scheduled to make additional principal payments of $36.7 million on our private placement notes in the next 12 months.

We repurchased 974,000 shares of our outstanding common stock in the first three quarters of fiscal 2008 at a total cost of $51.3 million. In the first
three quarters of fiscal 2007, we repurchased 984,000 shares at a total cost of $44.1 million. We repurchased these shares under a program authorized by our board of directors in May 2005. Under this share repurchase program, as of October 25,
2007, we are authorized to repurchase additional shares of our outstanding common stock for a maximum additional expenditure of $24.7 million through May 2008. On November 13, 2007 our board of directors authorized the additional repurchase of
up to $200 million of the Companys outstanding common stock through February 2011. Any future repurchase of our common stock will be made in open market transactions from time-to-time depending on market conditions and the availability of
funds.

Our board of directors makes decisions about the declaration of quarterly dividends based on, among other things, our results of
operations and financial position. We paid regular quarterly dividends totaling $15.9 million in the first three quarters of fiscal 2008 and $15.8 million in the first three quarters of 2007.

Financing cash flows include prescription drug plan disbursements covered by CMS, including reinsurance payments and low-income cost subsidies, net of
amounts received from CMS for these payments. Differences between receipts and payments for these amounts depend on the timing and extent of the related claims from beneficiaries. In the first three quarters of fiscal 2008, our payments for these
claims exceeded reimbursements from CMS by $37.9 million, compared with $102.3 million in the first three quarters of fiscal 2007. Final settlement of the outstanding balance with CMS is made subsequent to the end of the plan year.

Accounting Change

See Note 2,
Accounting Change, in the accompanying notes to our condensed consolidated financial statements.



|Item 3. | Quantitative and Qualitative Disclosures About 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, dividend payments, share
repurchases and other general corporate purposes. Our revolving line of credit, on which $173.0 million in borrowings were outstanding as of October 25, 2007, bears interest at LIBOR-based rates, and therefore, an increase in interest rates
could increase our interest expense. A 10% change in interest rates (67 basis points on our floating-rate debt as of October 25, 2007) would have an immaterial effect on our earnings and cash flows and on the fair value of our fixed rate debt.
We do not currently undertake any specific actions to cover our exposure to interest rate risk, and we are not currently a party to any interest rate risk management transactions. We have not purchased and do not currently hold any derivative
financial instruments. Depending on the interest rate environment and subject to approval by our board of directors, we may make use of derivative financial instruments or other interest rate management vehicles in the future.



|Item 4. | Controls and Procedures
|------- | -----------------------

We
maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SECs rules
and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As of October 25, 2007, the end of the period covered by this quarterly report, we carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and procedures were effective and adequate to provide reasonable assurance that material information relating to the company would be made known to them on a timely basis.

There have been no changes in our internal control over financial reporting that occurred during the quarter covered by this quarterly
report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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##### Table of Contents

PART II - OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

Rankin
v. Longs Drug Stores California, Inc. was filed in the Superior Court of California, San Diego County, in October 2004, and was subsequently certified as a class action. The lawsuit alleged that our employment application violated California
Labor Code Section 432.8 by inquiring about criminal convictions within the last seven years, without providing an exception for misdemeanor marijuana convictions more than two years old. The plaintiff sought to recover statutory damages and
attorneys fees for himself and all similarly situated individuals who applied for employment with us during the class period. Trial commenced on August 20, 2007 and concluded with a dismissal of plaintiffs case by the
court on September 26, 2007. The plaintiff has until January 7, 2008, to appeal the dismissal.

During the third quarter of fiscal
2007, we completed a self-audit of certain of our California drug stores located in three counties that was initiated at the request of the State of California Department of Industrial Relations (DIR). The audit related to compliance
with California law relating to meal period requirements. We made compensatory payments resulting from this audit, which were not material to us, during the fourth quarter of fiscal 2007. The DIR has also requested that we conduct an audit related
to meal period compliance for all of our California drug stores. At this time we cannot reasonably estimate the amount of any possible payments that might be required as a result of an additional audit.

In addition to the matters described above, we are subject to various lawsuits, claims and federal and state regulatory reviews and actions arising in
the normal course of our businesses. We accrue amounts we believe are adequate to address the liabilities related to lawsuits and other proceedings that we believe will result in a probable loss if the loss can be reasonably estimated. However, the
ultimate resolution of such matters is uncertain and outcomes are not predictable with assurance. It is possible that the matters described above or other proceedings brought against us could have a material adverse impact on our financial condition
and results of operations.



|Item 1A. | Risk Factors
|-------- | ------------

There have been
no material changes from risk factors previously disclosed in the Companys Annual Report on Form 10-K for the year ended January 25, 2007.



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##### Table of Contents

|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------

We made the following repurchases of our common stock during the quarter ended October 25, 2007:



|                                      |  |                                 |  |                             |       |                                                                   |         |                                                                                        |   |             
|------------------------------------- |  | ------------------------------- |  | --------------------------- | ----- | ----------------------------------------------------------------- | ------- | -------------------------------------------------------------------------------------- | - | ------------
|Period                                |  | Total Number ofShares Purchased |  | Average PricePaid per Share |       | Shares Purchased asPart of PubliclyAnnounced Plans orPrograms (1) |         | Apprioximate Dollar Value ofShares that May Yetbe Purchased Under thePlans or Programs
|Month #1                              |  |                                 |  |                             |       |                                                                   |         |                                                                                        |   |             
|July 27, 2007 - August 23, 2007       |  |                                |  |                             |      |                                                                   |        |                                                                                        | $ | 46.0 million
|Month #2                              |  |                                 |  |                             |       |                                                                   |         |                                                                                        |   |             
|August 24, 2007 - September 27, 2007  |  | 340,000                         |  | $                           | 51.48 |                                                                   | 340,000 |                                                                                        | $ | 28.5 million
|Month #3                              |  |                                 |  |                             |       |                                                                   |         |                                                                                        |   |             
|September 28, 2007 - October 25, 2007 |  | 79,000                          |  | $                           | 48.10 |                                                                   | 79,000  |                                                                                        | $ | 24.7 million
|                                      |  |                                 |  |                             |       |                                                                   |         |                                                                                        |   |             
|Total                                 |  | 419,000                         |  | $                           | 50.84 |                                                                   | 419,000 |                                                                                        |   |             



|(1) | All of the shares repurchased during the quarter ended October 25, 2007 were
under the May 2005 authorization by our board of directors. On November 13, 2007 our board of directors authorized the additional repurchase of up to $200 million of the Companys outstanding common stock through February 2011.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Item  6. | Exhibits
|-------- | --------



|(a) | EXHIBITS
|--- | --------



|            |  |                                                                                                                                                                            
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit Name                                                                                                                                                               
|31.         |  | Certification of the Chief Executive Officer and the Chief Financial Officer of Longs Drug Stores Corporation, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
|            | 
|32.         |  | Certification of the Chief Executive Officer and the Chief Financial Officer of Longs Drug Stores Corporation, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *



|* | These certifications are being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. §1350, and are not being filed for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference in any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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SIGNATURES

Pursuant to the requirements 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: November 29, 2007 |  |  |  | /s/  S. F. MCCANN                                                                     
|                        |  |  |  | (S. F. McCann)                                                                        
|                        |  |  |  | Executive Vice President, Chief Financial Officer (Principal Financial Officer)       
|                        |  | 
|Date: November 29, 2007 |  |  |  | /s/  R. L. CHELEMEDOS                                                                 
|                        |  |  |  | (R. L. Chelemedos)                                                                    
|                        |  |  |  | Senior Vice PresidentFinance, Controller and Treasurer (Principal Accounting
Officer)



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