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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



FORM 10-Q



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(Mark One)



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



For the quarterly period ended July 28, 2005



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



For the transition period from
 to



Commission file number 1-8978



LONGS DRUG STORES CORPORATION

(Exact name of registrant as specified in its charter)



|                                                              |  |                                    
|------------------------------------------------------------- |  | -----------------------------------
|Maryland                                                      |  | 68-0048627                         
|(State or other jurisdiction ofincorporation or organization) |  | (I.R.S. EmployerIdentification No.)
|                                                              | 
|141 North Civic DriveWalnut Creek, California                 |  | 94596                              
|(Address of principal executive offices)                      |  | (Zip Code)                         



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



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



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).



Yes  x    No ̈



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 37,609,000 shares of common stock outstanding as of August 25, 2005.



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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, pharmacy and front-end sales and gross profits; operating and administrative expenses;
depreciation and amortization expense for fiscal 2006; cost reductions; changes in supply chain practices; workers compensation costs; liquidity and cash requirements; working capital reductions; the number of store openings, closures and
remodels; the level of capital expenditures in fiscal 2006; contractual commitments; third-party sales as a percentage of total pharmacy sales; front-end merchandise assortments; gasoline prices; utilization of generic drugs; continuing reductions
in third-party reimbursement levels; development of our pharmacy benefit management segment and mail-order services; and our effective tax rate 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:



| |  |  | Changes in economic conditions, including economic growth and unemployment levels;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | Changes in consumer preferences and spending patterns;
| | - |  | ------------------------------------------------------



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



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



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



| |  |  | The introduction of lower priced generic drugs;
| | - |  | -----------------------------------------------



| |  |  | The efforts of third-party payers to reduce prescription drug costs;
| | - |  | --------------------------------------------------------------------



| |  |  | The impact of rising gasoline prices on consumer spending and the economy in general;
| | - |  | -------------------------------------------------------------------------------------



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



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



| |  |  | Labor unrest in the same or competitive industries;
| | - |  | ---------------------------------------------------



| |  |  | The success of our advertising and merchandising strategies;
| | - |  | ------------------------------------------------------------



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



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



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



| |  |  | Our relationships with our suppliers;
| | - |  | -------------------------------------



| |  |  | Our ability to obtain adequate insurance coverage;
| | - |  | --------------------------------------------------



| |  |  | 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;
| | - |  | -------------------------------------------



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



| |  |  | The impact of Medicare, Medi-Cal and similar government-sponsored health plans on our pharmacy sales and profitability;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | The effectiveness of workers compensation reform efforts, especially in California;
| | - |  | ------------------------------------------------------------------------------------



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



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



| |  |  | Changes in internal business processes associated with supply chain and other initiatives;
| | - |  | ------------------------------------------------------------------------------------------



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



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



| |  |  | Our ability to increase self-distribution, including the construction of a new front-end distribution center;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | Our ability to improve our purchasing of front-end and pharmacy products;
| | - |  | -------------------------------------------------------------------------



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



| |  |  | Other factors discussed in this report under Risk Factors and elsewhere or in any of our other SEC filings.
| | - |  | -------------------------------------------------------------------------------------------------------------



In addition, because we lack a perpetual inventory system, our ability to
accurately forecast and track our gross profits and inventory levels during periods between our quarterly physical inventories is limited. Therefore, our actual gross profits and inventory levels may vary materially from the gross profits and
inventory levels 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                                           |  | 1   
|Item 2     |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 10  
|Item 3     |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 17  
|Item 4     |  | Controls and Procedures                                                               |  | 17  
|           |  |                                                                                      
|PART II    |  | OTHER INFORMATION                                                                     |  |     
|Item 1     |  | Legal Proceedings                                                                     |  | 18  
|Item 2     |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 18  
|Item 4     |  | Submission of Matters to a Vote of Security Holders                                   |  | 19  
|Item 6     |  | Exhibits and Reports on Form 8-K                                                      |  | 19  
|           | 
|Signatures |  | 20                                                                                   



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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 26 weeks ended |  
|                                               |  | July 28,2005                       |           |   | July 29,2004           |   |           | July 28,2005 |  |   | July 29,2004 |  
|                                               |  | Thousands Except Per Share Amounts |          
|Sales                                          |  | $                                  | 1,157,471 |   |                        | $ | 1,150,482 |              |  | $ | 2,307,899    |   |  | $ | 2,310,178 |  
|Cost of sales                                  |  |                                    | 848,546   |   |                        |   | 855,087   |              |  |   | 1,696,030    |   |  |   | 1,721,826 |  
|                                               |  |                                    |           |   |                        |   |           |              |  |   |              |   |  |   |           |  
|Gross profit                                   |  |                                    | 308,925   |   |                        |   | 295,395   |              |  |   | 611,869      |   |  |   | 588,352   |  
|Operating and administrative expenses          |  |                                    | 258,477   |   |                        |   | 253,393   |              |  |   | 517,078      |   |  |   | 506,416   |  
|Depreciation and amortization                  |  |                                    | 21,341    |   |                        |   | 22,253    |              |  |   | 42,844       |   |  |   | 43,770    |  
|Legal settlements and other disputes, net      |  |                                    |          |   |                        |   | 10,773    |              |  |   |             |   |  |   | 10,773    |  
|                                               |  |                                    |           |   |                        |   |           |              |  |   |              |   |  |   |           |  
|Operating income                               |  |                                    | 29,107    |   |                        |   | 8,976     |              |  |   | 51,947       |   |  |   | 27,393    |  
|Interest expense                               |  |                                    | 2,299     |   |                        |   | 3,692     |              |  |   | 4,749        |   |  |   | 7,442     |  
|Interest income                                |  |                                    | (276      | ) |                        |   | (128      | )            |  |   | (575         | ) |  |   | (280      | )
|                                               |  |                                    |           |   |                        |   |           |              |  |   |              |   |  |   |           |  
|Income before income taxes                     |  |                                    | 27,084    |   |                        |   | 5,412     |              |  |   | 47,773       |   |  |   | 20,231    |  
|Income taxes                                   |  |                                    | 10,292    |   |                        |   | 2,034     |              |  |   | 18,134       |   |  |   | 7,606     |  
|                                               |  |                                    |           |   |                        |   |           |              |  |   |              |   |  |   |           |  
|Net income                                     |  | $                                  | 16,792    |   |                        | $ | 3,378     |              |  | $ | 29,639       |   |  | $ | 12,625    |  
|                                               |  |                                    |           |   |                        |   |           |              |  |   |              |   |  |   |           |  
|Earnings per common share:                     |  |                                    |           |   |                        |   |           |              |  |   |              |   |  |   |           |  
|Basic                                          |  | $                                  | 0.45      |   |                        | $ | 0.09      |              |  | $ | 0.79         |   |  | $ | 0.34      |  
|Diluted                                        |  |                                    | 0.44      |   |                        |   | 0.09      |              |  |   | 0.78         |   |  |   | 0.34      |  
|                                               |  |                                    |           |  
|Dividends per common share                     |  | $                                  | 0.14      |   |                        | $ | 0.14      |              |  | $ | 0.28         |   |  | $ | 0.28      |  
|                                               |  |                                    |           |  
|Weighted average number of shares outstanding: |  |                                    |           |   |                        |   |           |              |  |   |              |   |  |   |           |  
|Basic                                          |  |                                    | 37,507    |   |                        |   | 37,311    |              |  |   | 37,336       |   |  |   | 37,163    |  
|Diluted                                        |  |                                    | 38,565    |   |                        |   | 37,555    |              |  |   | 38,224       |   |  |   | 37,398    |  



See notes to condensed
consolidated financial statements.



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LONGS DRUG STORES CORPORATION



CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)



|                                                                                                                                 |  |                                    |           |   |              |   |           |                 |  |   |           |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------- | --------- | - | ------------ | - | --------- | --------------- |  | - | --------- | -
|                                                                                                                                 |  | July 28,2005                       |           |   | July 29,2004 |   |           | January 28,2005 | 
|                                                                                                                                 |  | Thousands Except Share Information |          
|Assets                                                                                                                           |  |                                    |           |   |              |   |           |                 |  |   |           |  
|Current Assets:                                                                                                                  |  |                                    |           |   |              |   |           |                 |  |   |           |  
|Cash and cash equivalents                                                                                                        |  | $                                  | 55,309    |   |              | $ | 44,979    |                 |  | $ | 53,890    |  
|Pharmacy and other receivables, net                                                                                              |  |                                    | 164,300   |   |              |   | 178,172   |                 |  |   | 158,345   |  
|Merchandise inventories, net                                                                                                     |  |                                    | 445,618   |   |              |   | 430,702   |                 |  |   | 433,280   |  
|Deferred income taxes                                                                                                            |  |                                    | 43,009    |   |              |   | 41,089    |                 |  |   | 43,074    |  
|Prepaid expenses and other current assets                                                                                        |  |                                    | 10,518    |   |              |   | 9,397     |                 |  |   | 11,990    |  
|                                                                                                                                 |  |                                    |           |   |              |   |           |                 |  |   |           |  
|Total current assets                                                                                                             |  |                                    | 718,754   |   |              |   | 704,339   |                 |  |   | 700,579   |  
|                                                                                                                                 |  |                                    |           |   |              |   |           |                 |  |   |           |  
|Property:                                                                                                                        |  |                                    |           |   |              |   |           |                 |  |   |           |  
|Land                                                                                                                             |  |                                    | 106,788   |   |              |   | 107,053   |                 |  |   | 108,198   |  
|Buildings and leasehold improvements                                                                                             |  |                                    | 581,566   |   |              |   | 563,908   |                 |  |   | 577,773   |  
|Equipment and fixtures                                                                                                           |  |                                    | 582,219   |   |              |   | 555,150   |                 |  |   | 565,161   |  
|                                                                                                                                 |  |                                    |           |   |              |   |           |                 |  |   |           |  
|Total                                                                                                                            |  |                                    | 1,270,573 |   |              |   | 1,226,111 |                 |  |   | 1,251,132 |  
|Less accumulated depreciation                                                                                                    |  |                                    | 655,854   |   |              |   | 609,464   |                 |  |   | 632,778   |  
|                                                                                                                                 |  |                                    |           |   |              |   |           |                 |  |   |           |  
|Property, net                                                                                                                    |  |                                    | 614,719   |   |              |   | 616,647   |                 |  |   | 618,354   |  
|                                                                                                                                 |  |                                    |           |   |              |   |           |                 |  |   |           |  
|Goodwill                                                                                                                         |  |                                    | 82,085    |   |              |   | 82,085    |                 |  |   | 82,085    |  
|Intangible assets, net                                                                                                           |  |                                    | 6,055     |   |              |   | 6,546     |                 |  |   | 6,354     |  
|Other non-current assets                                                                                                         |  |                                    | 3,489     |   |              |   | 3,255     |                 |  |   | 3,791     |  
|                                                                                                                                 |  |                                    |           |   |              |   |           |                 |  |   |           |  
|Total                                                                                                                            |  | $                                  | 1,425,102 |   |              | $ | 1,412,872 |                 |  | $ | 1,411,163 |  
|                                                                                                                                 |  |                                    |           |   |              |   |           |                 |  |   |           |  
|Liabilities and Stockholders Equity                                                                                             |  |                                    |           |   |              |   |           |                 |  |   |           |  
|Current Liabilities:                                                                                                             |  |                                    |           |   |              |   |           |                 |  |   |           |  
|Accounts payable and accrued expenses                                                                                            |  | $                                  | 319,330   |   |              | $ | 283,642   |                 |  | $ | 273,957   |  
|Employee compensation and benefits                                                                                               |  |                                    | 128,745   |   |              |   | 118,174   |                 |  |   | 129,214   |  
|Taxes payable                                                                                                                    |  |                                    | 56,153    |   |              |   | 46,261    |                 |  |   | 52,999    |  
|Current maturities of debt                                                                                                       |  |                                    | 8,870     |   |              |   | 41,870    |                 |  |   | 8,870     |  
|                                                                                                                                 |  |                                    |           |   |              |   |           |                 |  |   |           |  
|Total current liabilities                                                                                                        |  |                                    | 513,098   |   |              |   | 489,947   |                 |  |   | 465,040   |  
|                                                                                                                                 |  |                                    |           |   |              |   |           |                 |  |   |           |  
|Long-term debt                                                                                                                   |  |                                    | 100,818   |   |              |   | 164,688   |                 |  |   | 145,688   |  
|Deferred income taxes and other long-term liabilities                                                                            |  |                                    | 65,610    |   |              |   | 44,772    |                 |  |   | 73,298    |  
|Commitments and Contingencies                                                                                                    |  |                                    |           |   |              |   |           |                 |  |   |           |  
|Stockholders Equity:                                                                                                            |  |                                    |           |   |              |   |           |                 |  |   |           |  
|Common stock: par value $0.50 per share, 120,000,000 shares authorized, 37,527,000, 37,370,000 and 37,418,000 shares
outstanding |  |                                    | 18,763    |   |              |   | 18,685    |                 |  |   | 18,709    |  
|Additional capital                                                                                                               |  |                                    | 203,265   |   |              |   | 172,326   |                 |  |   | 180,072   |  
|Unearned compensation                                                                                                            |  |                                    | (1,584    | ) |              |   | (1,784    | )               |  |   | (1,528    | )
|Retained earnings                                                                                                                |  |                                    | 525,132   |   |              |   | 524,238   |                 |  |   | 529,884   |  
|                                                                                                                                 |  |                                    |           |   |              |   |           |                 |  |   |           |  
|Total stockholders equity                                                                                                       |  |                                    | 745,576   |   |              |   | 713,465   |                 |  |   | 727,137   |  
|                                                                                                                                 |  |                                    |           |   |              |   |           |                 |  |   |           |  
|Total                                                                                                                            |  | $                                  | 1,425,102 |   |              | $ | 1,412,872 |                 |  | $ | 1,411,163 |  
|                                                                                                                                 |  |                                    |           |   |              |   |           |                 |  |   |           |  



See notes to condensed
consolidated financial statements.



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LONGS DRUG STORES CORPORATION



CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (unaudited)



|                                                                                  |  |                        |         |   |              |   |         |  
|--------------------------------------------------------------------------------- |  | ---------------------- | ------- | - | ------------ | - | ------- | -
|                                                                                  |  | For the 26 weeks ended |        
|                                                                                  |  | July 28,2005           |         |   | July 29,2004 |  
|                                                                                  |  | Thousands              |        
|Operating Activities:                                                             |  |                        |         |   |              |   |         |  
|Net income                                                                        |  | $                      | 29,639  |   |              | $ | 12,625  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                        |         |   |              |   |         |  
|Depreciation and amortization                                                     |  |                        | 42,844  |   |              |   | 43,770  |  
|Deferred income taxes and other                                                   |  |                        | (7,321  | ) |              |   | (5,866  | )
|Stock awards and options, net                                                     |  |                        | 7,557   |   |              |   | 215     |  
|Common stock contribution to benefit plan                                         |  |                        | 5,960   |   |              |   | 4,144   |  
|Changes in assets and liabilities:                                                |  |                        |         |   |              |   |         |  
|Pharmacy and other receivables                                                    |  |                        | (5,955  | ) |              |   | (10,429 | )
|Merchandise inventories                                                           |  |                        | (12,338 | ) |              |   | 46,420  |  
|Other assets                                                                      |  |                        | 1,774   |   |              |   | 4,385   |  
|Current liabilities and other                                                     |  |                        | 48,577  |   |              |   | (22,996 | )
|                                                                                  |  |                        |         |   |              |   |         |  
|Net cash provided by operating activities                                         |  |                        | 110,737 |   |              |   | 72,268  |  
|                                                                                  |  |                        |         |   |              |   |         |  
|Investing Activities:                                                             |  |                        |         |   |              |   |         |  
|Capital expenditures and acquisitions                                             |  |                        | (45,365 | ) |              |   | (52,378 | )
|Proceeds from property dispositions                                               |  |                        | 5,634   |   |              |   | 2,177   |  
|                                                                                  |  |                        |         |   |              |   |         |  
|Net cash used in investing activities                                             |  |                        | (39,731 | ) |              |   | (50,201 | )
|                                                                                  |  |                        |         |   |              |   |         |  
|Financing Activities:                                                             |  |                        |         |   |              |   |         |  
|Proceeds from (repayments of) line of credit borrowings, net                      |  |                        | (40,000 | ) |              |   | 5,000   |  
|Repayments of private placement and other borrowings                              |  |                        | (4,870  | ) |              |   | (4,870  | )
|Repurchase of common stock                                                        |  |                        | (27,866 | ) |              |   | (7,236  | )
|Dividend payments                                                                 |  |                        | (10,494 | ) |              |   | (10,431 | )
|Proceeds from exercise of stock options                                           |  |                        | 13,643  |   |              |   | 227     |  
|                                                                                  |  |                        |         |   |              |   |         |  
|Net cash used in financing activities                                             |  |                        | (69,587 | ) |              |   | (17,310 | )
|                                                                                  |  |                        |         |   |              |   |         |  
|Increase in cash and cash equivalents                                             |  |                        | 1,419   |   |              |   | 4,757   |  
|Cash and cash equivalents at beginning of period                                  |  |                        | 53,890  |   |              |   | 40,222  |  
|                                                                                  |  |                        |         |   |              |   |         |  
|Cash and cash equivalents at end of period                                        |  | $                      | 55,309  |   |              | $ | 44,979  |  
|                                                                                  |  |                        |         |   |              |   |         |  
|Supplemental disclosure of cash flow information:                                 |  |                        |         |   |              |   |         |  
|Cash paid for interest, net of amounts capitalized                                |  | $                      | 4,590   |   |              | $ | 7,432   |  
|Cash paid for income taxes                                                        |  |                        | 10,043  |   |              |   | 21,697  |  



See notes to condensed
consolidated financial statements.



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LONGS DRUG STORES CORPORATION



CONDENSED STATEMENTS OF CONSOLIDATED STOCKHOLDERS EQUITY (unaudited)



For the 52 weeks ended January 27, 2005 and the 26 weeks ended July 28,
2005



|                                                                |  |              |   |  |                   |        |   |                      |   |         |                  |  |   |                          |   |  |   |         |   |  |   |         |  
|--------------------------------------------------------------- |  | ------------ | - |  | ----------------- | ------ | - | -------------------- | - | ------- | ---------------- |  | - | ------------------------ | - |  | - | ------- | - |  | - | ------- | -
|                                                                |  | Common Stock |   |  | AdditionalCapital |        |   | UnearnedCompensation |   |         | RetainedEarnings |  |   | TotalStockholdersEquity |  
|                                                                |  | Shares       |   |  | Amount            |        |   |                      |   |        
|                                                                |  | Thousands    |  
|Balance at January 29, 2004                                     |  | 37,544       |   |  | $                 | 18,772 |   |                      | $ | 170,321 |                  |  | $ | (2,525                   | ) |  | $ | 527,353 |   |  | $ | 713,921 |  
|Net income                                                      |  |              |   |  |                   |        |   |                      |   |         |                  |  |   |                          |   |  |   | 36,560  |   |  |   | 36,560  |  
|Dividends ($0.56 per share)                                     |  |              |   |  |                   |        |   |                      |   |         |                  |  |   |                          |   |  |   | (20,948 | ) |  |   | (20,948 | )
|Stock contributions to Employee Savings and Profit Sharing Plan |  | 320          |   |  |                   | 160    |   |                      |   | 6,917   |                  |  |   |                          |   |  |   |         |   |  |   | 7,077   |  
|Stock awards, net of forfeitures                                |  | 2            |   |  |                   | 1      |   |                      |   | (400    | )                |  |   | (267                     | ) |  |   |         |   |  |   | (666    | )
|Stock-based compensation expense                                |  |              |   |  |                   |        |   |                      |   |         |                  |  |   | 1,264                    |   |  |   |         |   |  |   | 1,264   |  
|Stock options exercised                                         |  | 288          |   |  |                   | 144    |   |                      |   | 6,067   |                  |  |   |                          |   |  |   |         |   |  |   | 6,211   |  
|Tax benefit related to stock awards and stock options, net      |  |              |   |  |                   |        |   |                      |   | 573     |                  |  |   |                          |   |  |   |         |   |  |   | 573     |  
|Repurchase of common stock                                      |  | (736         | ) |  |                   | (368   | ) |                      |   | (3,406  | )                |  |   |                          |   |  |   | (13,081 | ) |  |   | (16,855 | )
|                                                                |  |              |   |  |                   |        |   |                      |   |         |                  |  |   |                          |   |  |   |         |   |  |   |         |  
|Balance at January 27, 2005                                     |  | 37,418       |   |  |                   | 18,709 |   |                      |   | 180,072 |                  |  |   | (1,528                   | ) |  |   | 529,884 |   |  |   | 727,137 |  
|                                                                |  |              |   |  |                   |        |   |                      |   |         |                  |  |   |                          |   |  |   |         |   |  |   |         |  
|Net income                                                      |  |              |   |  |                   |        |   |                      |   |         |                  |  |   |                          |   |  |   | 29,639  |   |  |   | 29,639  |  
|Dividends ($0.28 per share)                                     |  |              |   |  |                   |        |   |                      |   |         |                  |  |   |                          |   |  |   | (10,494 | ) |  |   | (10,494 | )
|Stock contributions to Employee Savings and Profit Sharing Plan |  | 178          |   |  |                   | 89     |   |                      |   | 5,871   |                  |  |   |                          |   |  |   |         |   |  |   | 5,960   |  
|Stock awards, net of forfeitures                                |  | 53           |   |  |                   | 25     |   |                      |   | 2,002   |                  |  |   | (2,571                   | ) |  |   |         |   |  |   | (544    | )
|Stock-based compensation expense                                |  |              |   |  |                   |        |   |                      |   | 1,413   |                  |  |   | 2,515                    |   |  |   |         |   |  |   | 3,928   |  
|Stock options exercised                                         |  | 616          |   |  |                   | 308    |   |                      |   | 13,335  |                  |  |   |                          |   |  |   |         |   |  |   | 13,643  |  
|Tax benefit related to stock awards and stock options, net      |  |              |   |  |                   |        |   |                      |   | 4,173   |                  |  |   |                          |   |  |   |         |   |  |   | 4,173   |  
|Repurchase of common stock                                      |  | (738         | ) |  |                   | (368   | ) |                      |   | (3,601  | )                |  |   |                          |   |  |   | (23,897 | ) |  |   | (27,866 | )
|                                                                |  |              |   |  |                   |        |   |                      |   |         |                  |  |   |                          |   |  |   |         |   |  |   |         |  
|Balance at July 28, 2005                                        |  | 37,527       |   |  | $                 | 18,763 |   |                      | $ | 203,265 |                  |  | $ | (1,584                   | ) |  | $ | 525,132 |   |  | $ | 745,576 |  
|                                                                |  |              |   |  |                   |        |   |                      |   |         |                  |  |   |                          |   |  |   |         |   |  |   |         |  



See notes to condensed
consolidated financial statements.



4



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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. All significant 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 27, 2005, 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 July 28, 2005 and July 29, 2004 are unaudited. The condensed consolidated balance sheet as of January 27,
2005, 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 27, 2005. The interim condensed consolidated financial statements should be read in connection with the financial statements in the Companys Annual Report on Form 10-K for the fiscal year ended January 27, 2005.



2. Stock-Based Compensation



The Company accounts for stock-based employee compensation using the
intrinsic value method in accordance with the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, as allowed by Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation. Stock awards are valued at fair market value at the date of grant, and are recorded as compensation expense over the vesting period. Compensation expense for performance-based stock awards is estimated until the measurement date,
which is the earliest date at which the Company can determine the number of shares an employee is entitled to receive under the performance-based stock award arrangement. No compensation expense is recognized for employee stock options, because it
is the Companys practice to grant stock options with an exercise price equal to the market price of the underlying common stock on the date of grant.



The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS
No. 123 to all stock-based employee compensation, including stock options:



|                                                                                                                                            |  |                             |        |   |                        |   |       |              |  |   |              |   |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---------------------- | - | ----- | ------------ |  | - | ------------ | - |  | - | ------ | -
|                                                                                                                                            |  | For the 13 weeks ended      |        |   | For the 26 weeks ended |  
|                                                                                                                                            |  | July 28,2005                |        |   | July 29,2004           |   |       | July 28,2005 |  |   | July 29,2004 |  
|                                                                                                                                            |  | Thousands, except per share |       
|Net income, as reported                                                                                                                     |  | $                           | 16,792 |   |                        | $ | 3,378 |              |  | $ | 29,639       |   |  | $ | 12,625 |  
|Add: Stock-based employee compensation expense included in reported net income, net of related tax effects                                  |  |                             | 582    |   |                        |   | 175   |              |  |   | 2,140        |   |  |   | 364    |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                             | (1,090 | ) |                        |   | (987  | )            |  |   | (2,745       | ) |  |   | (2,031 | )
|                                                                                                                                            |  |                             |        |   |                        |   |       |              |  |   |              |   |  |   |        |  
|Pro forma net income                                                                                                                        |  | $                           | 16,284 |   |                        | $ | 2,566 |              |  | $ | 29,034       |   |  | $ | 10,958 |  
|                                                                                                                                            |  |                             |        |   |                        |   |       |              |  |   |              |   |  |   |        |  
|Basic earnings per share:                                                                                                                   |  |                             |        |   |                        |   |       |              |  |   |              |   |  |   |        |  
|As reported                                                                                                                                 |  | $                           | 0.45   |   |                        | $ | 0.09  |              |  | $ | 0.79         |   |  | $ | 0.34   |  
|Pro forma                                                                                                                                   |  | $                           | 0.43   |   |                        | $ | 0.07  |              |  | $ | 0.78         |   |  | $ | 0.29   |  
|Diluted earnings per share:                                                                                                                 |  |                             |        |   |                        |   |       |              |  |   |              |   |  |   |        |  
|As reported                                                                                                                                 |  | $                           | 0.44   |   |                        | $ | 0.09  |              |  | $ | 0.78         |   |  | $ | 0.34   |  
|Pro forma                                                                                                                                   |  | $                           | 0.42   |   |                        | $ | 0.07  |              |  | $ | 0.76         |   |  | $ | 0.29   |  



5



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##### Table of Contents

LONGS DRUG STORES CORPORATION



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



3. Earnings Per Share



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



|                                                      |  |                |  |                |  |              |  |             
|----------------------------------------------------- |  | -------------- |  | -------------- |  | ------------ |  | ------------
|                                                      |  | 13 weeks ended |  | 26 weeks ended
|                                                      |  | July 28,2005   |  | July 29,2004   |  | July 28,2005 |  | July 29,2004
|                                                      |  | Thousands     
|Basic weighted average number of shares outstanding   |  | 37,507         |  | 37,311         |  | 37,336       |  | 37,163      
|Effect of dilution from:                              |  |                |  |                |  |              |  |             
|Restricted stock awards                               |  | 97             |  | 146            |  | 102          |  | 150         
|Stock options                                         |  | 961            |  | 98             |  | 786          |  | 85          
|                                                      |  |                |  |                |  |              |  |             
|Diluted weighted average number of shares outstanding |  | 38,565         |  | 37,555         |  | 38,224       |  | 37,398      
|                                                      |  |                |  |                |  |              |  |             



The computations of
diluted earnings per share excluded 3.0 million stock options for the 13-week period ended July 29, 2004 and 3.1 million stock options for the 26 week period ended July 29, 2004 because the exercise prices of the stock options were greater than or
equal to the average share price for the respective periods, and therefore their inclusion would have been anti-dilutive.



4. 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 $182.3 million as of July 28, 2005, $177.3 million as of July 29, 2004, and $178.3 million as of January 27, 2005. 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.



5. Goodwill and Intangible Assets



All of the Companys goodwill and other intangible assets are included
in the retail drug store segment. Goodwill and other intangible assets with indefinite useful lives are not amortized, but are subject to annual impairment testing. The Companys intangible assets other than goodwill include the following:



|                                               |  |                       |  |                    |       |                         |   |        |                  |  |   |      
|---------------------------------------------- |  | --------------------- |  | ------------------ | ----- | ----------------------- | - | ------ | ---------------- |  | - | -----
|                                               |  | EstimatedUseful Lives |  | GrossCarryingValue |       | AccumulatedAmortization |   |        | NetCarryingValue
|                                               |  | Thousands            
|As of July 28, 2005:                           |  |                       |  |                    |       |                         |   |        |                  |  |   |      
|Intangible assets subject to amortization:     |  |                       |  |                    |       |                         |   |        |                  |  |   |      
|Pharmacy customer lists                        |  | 1-5 years             |  | $                  | 2,979 |                         | $ | (1,794 | )                |  | $ | 1,185
|Non-compete agreements and other               |  | 2-5 years             |  |                    | 50    |                         |   | (39    | )                |  |   | 11   
|                                               |  |                       |  |                    |       |                         |   |        |                  |  |   |      
|Total                                          |  |                       |  |                    | 3,029 |                         |   | (1,833 | )                |  |   | 1,196
|Intangible assets not subject to amortization: |  |                       |  |                    |       |                         |   |        |                  |  |   |      
|Beverage licenses                              |  | N/A                   |  |                    | 4,859 |                         |   |       |                  |  |   | 4,859
|                                               |  |                       |  |                    |       |                         |   |        |                  |  |   |      
|Total                                          |  |                       |  | $                  | 7,888 |                         | $ | (1,833 | )                |  | $ | 6,055
|                                               |  |                       |  |                    |       |                         |   |        |                  |  |   |      
|As of January 27, 2005:                        |  |                       |  |                    |       |                         |   |        |                  |  |   |      
|Intangible assets subject to amortization:     |  |                       |  |                    |       |                         |   |        |                  |  |   |      
|Pharmacy customer lists                        |  | 1-5 years             |  | $                  | 3,020 |                         | $ | (1,502 | )                |  | $ | 1,518
|Non-compete agreements and other               |  | 2-5 years             |  |                    | 50    |                         |   | (32    | )                |  |   | 18   
|                                               |  |                       |  |                    |       |                         |   |        |                  |  |   |      
|Total                                          |  |                       |  |                    | 3,070 |                         |   | (1,534 | )                |  |   | 1,536
|Intangible assets not subject to amortization: |  |                       |  |                    |       |                         |   |        |                  |  |   |      
|Beverage licenses                              |  | N/A                   |  |                    | 4,818 |                         |   |       |                  |  |   | 4,818
|                                               |  |                       |  |                    |       |                         |   |        |                  |  |   |      
|Total                                          |  |                       |  | $                  | 7,888 |                         | $ | (1,534 | )                |  | $ | 6,354
|                                               |  |                       |  |                    |       |                         |   |        |                  |  |   |      



6



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##### Table of Contents

LONGS DRUG STORES CORPORATION



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Amortization expense for intangible assets with finite useful lives was $0.3 million for each of the
26-week periods ended July 28, 2005 and July 29, 2004. Estimated annual amortization expense on these intangibles for their remaining estimated useful lives is as follows (in thousands):



|                         |  |   |      
|------------------------ |  | - | -----
|Fiscal year ending:      |  |   |      
|2006 (remainder of year) |  | $ | 311  
|2007                     |  |   | 537  
|2008                     |  |   | 260  
|2009                     |  |   | 88   
|                         |  |   |      
|Total                    |  | $ | 1,196
|                         |  |   |      



6. Debt



Debt at July 28, 2005 and January 27, 2005 consisted of the
following:



|                                                                                                                        |  |              |         |                 |   |        
|----------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | --------------- | - | -------
|                                                                                                                        |  | July 28,2005 |         | January 27,2005
|                                                                                                                        |  | Thousands   
|Secured revolving line of credit, variable interest, expires August 2009                                                |  | $            |        |                 | $ | 40,000 
|Secured private placement notes, fixed interest rates ranging from 5.85% to 7.85%, mature at various dates through 2014 |  |              | 109,688 |                 |   | 114,558
|                                                                                                                        |  |              |         |                 |   |        
|Total debt                                                                                                              |  |              | 109,688 |                 |   | 154,558
|Less current maturities                                                                                                 |  |              | 8,870   |                 |   | 8,870  
|                                                                                                                        |  |              |         |                 |   |        
|Long-term portion                                                                                                       |  | $            | 100,818 |                 | $ | 145,688
|                                                                                                                        |  |              |         |                 |   |        



The Companys
debt agreements contain customary restrictions, and the private placement notes also include various customary financial covenants. As of July 28, 2005, the Company was in compliance with the restrictions and limitations included in these
provisions.



7. Store Closure Reserves



The Company regularly reviews store operating results and projections and
periodically makes decisions to close stores in the normal course of business. The Company recognizes costs associated with store closures when the related liabilities are incurred. Such costs are included in the provision for store closures and
asset impairments, a component of operating income.



The following is a summary of the Companys store closure reserves, which are included in long-term liabilities:



|                                                              |  |                        |        |   |              |   |        |  
|------------------------------------------------------------- |  | ---------------------- | ------ | - | ------------ | - | ------ | -
|                                                              |  | For the 26 weeks ended |       
|                                                              |  | July 28,2005           |        |   | July 29,2004 |  
|                                                              |  | Thousands              |       
|Reserve balance - beginning of period                         |  | $                      | 7,011  |   |              | $ | 9,544  |  
|Provision for store closures                                  |  |                        |       |   |              |   |       |  
|Reserve accretion                                             |  |                        | 18     |   |              |   | 20     |  
|Cash payments for lease related costs, net of sublease income |  |                        | (1,735 | ) |              |   | (1,372 | )
|                                                              |  |                        |        |   |              |   |        |  
|Reserve balance - end of period                               |  | $                      | 5,294  |   |              | $ | 8,192  |  
|                                                              |  |                        |        |   |              |   |        |  



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##### Table of Contents

LONGS DRUG STORES CORPORATION



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



8. Commitments and Contingencies



Rankin v. Longs Drug Stores California, Inc., as amended on January 19, 2005, was originally filed in the Superior
Court of California, San Diego County on October 13, 2004. The lawsuit was certified as a class action on July 19, 2005 and alleges that the Companys employment application violates 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 seeks to recover statutory damages and attorneys fees for him and all similarly
situated individuals who applied for employment with the Company during the class period. The Company is vigorously investigating and defending this litigation. Because the case is in the very early stages, the financial impact to the Company, if
any, cannot be predicted.



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



9. Stockholders Equity



In the first half of fiscal 2006, the Company repurchased 737,500 shares of its outstanding common stock at a total cost of $27.9 million. In the first
half of fiscal 2005, the Company repurchased 382,600 shares at a total cost of $7.2 million. These shares were repurchased under two separate programs authorized by the Companys Board of Directors, in May 2005 and March 2003. Under the May
2005 share repurchase program, the Company is authorized to repurchase additional shares of its outstanding common stock for a maximum additional expenditure of $147.4 million. The Company has completed the March 2003 share repurchase program.



10. Segment Information



The Company operates in two business segments, retail drug stores and
pharmacy benefit management (PBM). These segments were identified based on their separate and distinct products and services, technology, marketing strategies and management reporting. Management evaluates the segments operating
performance separately and allocates resources based on their respective financial condition, results of operations and cash flows. 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, photo and photo processing, food and beverage items and health and beauty products. As of July 28, 2005, the retail drug store segment operated 473 retail stores in six
western states under the names Longs, Longs Drugs, Longs Drug Stores and Longs Pharmacy; and one mail order pharmacy under the name American Diversified Pharmacies.



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



8



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LONGS DRUG STORES CORPORATION



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



The following tables summarize significant financial information by segment:



|                            |  |                        |           |                        |   |              |  |              |           |  |   |          
|--------------------------- |  | ---------------------- | --------- | ---------------------- | - | ------------ |  | ------------ | --------- |  | - | ---------
|                            |  | For the 13 weeks ended |           | For the 26 weeks ended
|                            |  | July 28,2005           |           | July 29,2004           |   | July 28,2005 |  | July 29,2004
|                            |  | Thousands             
|Sales:                      |  |                        |           |                        |   |              |  |              |           |  |   |          
|Retail Drug Stores          |  | $                      | 1,147,895 |                        | $ | 1,142,129    |  | $            | 2,288,715 |  | $ | 2,293,884
|Pharmacy Benefit Management |  |                        | 9,576     |                        |   | 8,353        |  |              | 19,184    |  |   | 16,294   
|                            |  |                        |           |                        |   |              |  |              |           |  |   |          
|Consolidated Totals         |  | $                      | 1,157,471 |                        | $ | 1,150,482    |  | $            | 2,307,899 |  | $ | 2,310,178
|                            |  |                        |           |                        |   |              |  |              |           |  |   |          
|Operating Income:           |  |                        |           |                        |   |              |  |              |           |  |   |          
|Retail Drug Stores          |  | $                      | 26,252    |                        | $ | 5,700        |  | $            | 46,189    |  | $ | 20,914   
|Pharmacy Benefit Management |  |                        | 2,855     |                        |   | 3,276        |  |              | 5,758     |  |   | 6,479    
|                            |  |                        |           |                        |   |              |  |              |           |  |   |          
|Consolidated Totals         |  | $                      | 29,107    |                        | $ | 8,976        |  | $            | 51,947    |  | $ | 27,393   
|                            |  |                        |           |                        |   |              |  |              |           |  |   |          



|                            |  |              |           |   |              |   |           |                 |  |   |           |  
|--------------------------- |  | ------------ | --------- | - | ------------ | - | --------- | --------------- |  | - | --------- | -
|                            |  | July 28,2005 |           |   | July 29,2004 |   |           | January 27,2005 | 
|                            |  | Thousands    |          
|Total Assets:               |  |              |           |   |              |   |           |                 |  |   |           |  
|Retail Drug Stores          |  | $            | 1,322,155 |   |              | $ | 1,332,192 |                 |  | $ | 1,325,307 |  
|Pharmacy Benefit Management |  |              | 104,525   |   |              |   | 82,022    |                 |  |   | 87,259    |  
|Inter-segment Eliminations  |  |              | (1,578    | ) |              |   | (1,342    | )               |  |   | (1,403    | )
|                            |  |              |           |   |              |   |           |                 |  |   |           |  
|Consolidated Totals         |  | $            | 1,425,102 |   |              | $ | 1,412,872 |                 |  | $ | 1,411,163 |  
|                            |  |              |           |   |              |   |           |                 |  |   |           |  



Consolidated total
sales include the following product and service types:



|                                     |  |                        |           |                        |   |              |  |              |           |  |   |          
|------------------------------------ |  | ---------------------- | --------- | ---------------------- | - | ------------ |  | ------------ | --------- |  | - | ---------
|                                     |  | For the 13 weeks ended |           | For the 26 weeks ended
|                                     |  | July 28,2005           |           | July 29,2004           |   | July 28,2005 |  | July 29,2004
|                                     |  | Thousands             
|Pharmacy sales                       |  | $                      | 554,813   |                        | $ | 540,667      |  | $            | 1,119,229 |  | $ | 1,090,719
|Front-end sales                      |  |                        | 593,082   |                        |   | 601,462      |  |              | 1,169,486 |  |   | 1,203,165
|Pharmacy benefit management revenues |  |                        | 9,576     |                        |   | 8,353        |  |              | 19,184    |  |   | 16,294   
|                                     |  |                        |           |                        |   |              |  |              |           |  |   |          
|Consolidated total sales             |  | $                      | 1,157,471 |                        | $ | 1,150,482    |  | $            | 2,307,899 |  | $ | 2,310,178
|                                     |  |                        |           |                        |   |              |  |              |           |  |   |          



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##### Table of Contents

|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 in conjunction with our unaudited consolidated financial statements and the related notes. This discussion contains forward-looking statements based upon our current expectations that involve risks
and uncertainties, such as our plans, objectives, expectations and intentions, as 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 and under Risk Factors and elsewhere in this Form 10-Q.



RESULTS OF OPERATIONS



Sales



|                                                         |  |                        |           |    |                        |   |           |              |  |   |              |    |  |   |           |  
|-------------------------------------------------------- |  | ---------------------- | --------- | -- | ---------------------- | - | --------- | ------------ |  | - | ------------ | -- |  | - | --------- | -
|                                                         |  | For the 13 weeks ended |           |    | For the 26 weeks ended |  
|                                                         |  | July 28,2005           |           |    | July 29,2004           |   |           | July 28,2005 |  |   | July 29,2004 |   
|Sales (Thousands)                                        |  | $                      | 1,157,471 |    |                        | $ | 1,150,482 |              |  | $ | 2,307,899    |    |  | $ | 2,310,178 |  
|Sales Growth (Decline) over Same Period in Previous Year |  |                        | 0.6       | %  |                        |   | 3.7       | %            |  |   | (0.1         | )% |  |   | 4.4       | %
|Same-Store Sales Growth (Decline)                        |  |                        | 0.3       | %  |                        |   | 2.2       | %            |  |   | (0.5         | )% |  |   | 2.5       | %
|Pharmacy Sales Growth                                    |  |                        | 2.6       | %  |                        |   | 4.9       | %            |  |   | 2.6          | %  |  |   | 5.9       | %
|Same-Store Pharmacy Sales Growth                         |  |                        | 2.4       | %  |                        |   | 3.2       | %            |  |   | 2.4          | %  |  |   | 3.4       | %
|Pharmacy as a % of Total Retail Drug Store Sales         |  |                        | 48.3      | %  |                        |   | 47.3      | %            |  |   | 48.9         | %  |  |   | 47.5      | %
|% of Pharmacy Sales Covered by Third Party Health Plans  |  |                        | 92.7      | %  |                        |   | 91.9      | %            |  |   | 92.6         | %  |  |   | 91.8      | %
|Front-End Sales Growth (Decline)                         |  |                        | (1.4      | )% |                        |   | 2.4       | %            |  |   | (2.8         | )% |  |   | 2.9       | %
|Same-Store Front-End Sales Growth (Decline)              |  |                        | (1.6      | )% |                        |   | 1.4       | %            |  |   | (3.0         | )% |  |   | 1.6       | %
|Front-End as a % of Total Retail Drug Store Sales        |  |                        | 51.7      | %  |                        |   | 52.7      | %            |  |   | 51.1         | %  |  |   | 52.5      | %



Thirteen Weeks Ended July 28, 2005
versus Thirteen Weeks Ended July 29, 2004



Sales increased
0.6% in the second quarter of fiscal 2006 from the same quarter of fiscal 2005, and same-store sales increased 0.3%. Higher mail-order sales and pharmacy benefit management (PBM) revenues also contributed to total sales growth.



Pharmacy sales increased 2.6% in the second quarter of fiscal
2006 over the same quarter last year, with same-store pharmacy sales increasing 2.4%. Same-store prescription volumes increased, partially due to a strong allergy season, improved employment statistics in our primary markets and certain pharmacy
marketing initiatives we have undertaken. The average retail price per prescription also increased, but at a lower rate than in recent years, due in part to the increased utilization of lower-priced, high-volume generic drugs. We estimate that
generic utilization negatively impacted our same-store pharmacy sales by approximately 2.5 percentage points. We expect that our pharmacy sales will continue to increase as a result of several industry trends, including an aging U.S. population
consuming a greater number of prescription drugs, the growing use of prescription drugs as preventive therapy by healthcare providers and the introduction of newer and more expensive drugs. Factors that could offset these trends include continuing
increases in utilization of generic drugs, increasing competition and rising prescription drug costs, which could cause consumers to reduce their purchases of prescription drugs or third-party health plans to reduce their coverage of prescription
drug costs for their members.



Pharmacy sales were 48.3% of
total drug store sales in the second quarter of fiscal 2006, compared to 47.3% in the second quarter of fiscal 2005. 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.



Third-party health plans covered
92.7% of our pharmacy sales in the second quarter of fiscal 2006, compared to 91.9% 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. The scheduled addition of a prescription drug benefit to Medicare in January 2006 could further increase third-party sales as a percentage of total pharmacy sales.



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Front-end sales decreased 1.4% in the second quarter of fiscal 2006 from the same quarter last year, with
same-store front-end sales decreasing 1.6%. As part of our efforts to improve our merchandise offering, we have shifted our front-end merchandise mix toward our core categories of health, wellness, beauty and convenience, resulting in lower sales in
non-core categories. We will continue to make adjustments to our front-end merchandise assortments in an effort to further improve our competitive position and profitability.



The west coast economic environment continued to improve during the quarter, with economic growth increasing and
unemployment falling. However, the recovery in California, our primary market, has been more gradual than that of the broader national economy, and the states unemployment rate remains above the national average. Higher gasoline prices have
also had a significant impact on consumer spending in our markets. We expect these trends to continue throughout fiscal 2006.



Twenty-Six Weeks Ended July 28, 2005 versus Twenty-Six Weeks Ended July 29, 2004



Sales decreased 0.1% in the first half of fiscal 2006 from the same period of fiscal 2005, with same-store sales decreasing
0.5%. Higher mail order sales and PBM revenues partially offset the decline in same-store sales.



Pharmacy sales increased 2.6% in the first half of fiscal 2006 over the same period last year, with same-store pharmacy sales increasing 2.4%. The
increase in same-store pharmacy sales was driven by an increase in both prescription volumes and the average retail price per prescription. The increase in prescription volumes was due to a strong allergy season, improved employment statistics in
our primary markets and certain pharmacy marketing initiatives we have undertaken.



Pharmacy sales were 48.9% of total drug store sales in the first half of fiscal 2006, compared to 47.5% in the same period of fiscal 2005. Third-party health plans covered 92.6% of our pharmacy sales in the first half
of fiscal 2006, compared to 91.8% in the same period last year.



Front-end sales decreased 2.8% in the first half of fiscal 2006 from the same period last year, with same-store front-end sales decreasing 3.0%. The decline in same-store front-end sales was primarily due to lower sales in non-core
categories as a result of adjustments to our front-end merchandise mix, in addition to a strike against three major grocery chains in Southern California that ended in the first quarter of fiscal 2005, which favorably affected last years
front-end sales.



Gross Profit



|                           |  |                        |         |   |                        |   |         |              |  |   |              |   |  |   |         |  
|-------------------------- |  | ---------------------- | ------- | - | ---------------------- | - | ------- | ------------ |  | - | ------------ | - |  | - | ------- | -
|                           |  | For the 13 weeks ended |         |   | For the 26 weeks ended |  
|                           |  | July 28,2005           |         |   | July 29,2004           |   |         | July 28,2005 |  |   | July 29,2004 |  
|                           |  | Thousands              |        
|Gross Profit (Thousands)   |  | $                      | 308,925 |   |                        | $ | 295,395 |              |  | $ | 611,869      |   |  | $ | 588,352 |  
|Gross Profit %             |  |                        | 26.7    | % |                        |   | 25.7    | %            |  |   | 26.5         | % |  |   | 25.5    | %
|LIFO Provision (Thousands) |  | $                      | 2,000   |   |                        | $ | 2,500   |              |  | $ | 4,000        |   |  | $ | 4,500   |  



Thirteen Weeks Ended July 28, 2005
versus Thirteen Weeks Ended July 29, 2004



Gross profit
was 26.7% of sales in the second quarter of fiscal 2006, compared to 25.7% in the second quarter of fiscal 2005. The increase was primarily due to improvements resulting from more centralized merchandising, increased utilization of lower-priced,
higher-margin generic drugs, better buying practices and lower distribution costs.



Continued reductions in prescription drug reimbursement rates from third-party health plans, including government-sponsored plans such as Medi-Cal, partially offset the increase in our gross profit percentage. In
addition, pharmacy sales have lower gross profit percentages than front-end sales, and as pharmacy sales continued to grow as a percent of total sales, our overall gross profit as a percent of sales was adversely affected.



We will continue to make adjustments to our front-end merchandise assortments
in an effort to further improve the profitability of our sales mix. Further, our supply chain initiative includes continuing efforts to improve our buying practices and inventory management and reduce our distribution costs. We also expect that the
utilization of generic drugs will continue to increase. We expect that continuing reductions in third-party reimbursement levels and increasing pharmacy sales as a percent of total sales will at least partially offset these favorable effects on our
gross profit percentage.



Our LIFO provision, which is included
in cost of sales, was $2.0 million in the second quarter of fiscal 2006 and $2.5 million in the second quarter of fiscal 2005. The decrease, which positively affected our gross profit, was primarily due to lower net inflation compared to last year.
The LIFO provision fluctuates with inflation rates, inventory levels and merchandise



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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.



Twenty-Six Weeks Ended July 28, 2005 versus Twenty-Six Weeks Ended July 29, 2004



Gross profit was 26.5% of sales in the first half of fiscal 2006, compared to 25.5% in the same period of fiscal 2005. The
increase was primarily due to improvements resulting from more centralized merchandising, better buying practices, a more profitable sales mix, improved inventory management, lower distribution costs and increased utilization of generic drugs.
Continued reductions in prescription drug reimbursement rates from third-party health plans and higher pharmacy sales as a percentage of total sales partially offset the increase in our gross profit percentage.



Our LIFO provision, which is included in cost of sales, was $4.0 million in
the second half of fiscal 2006 and $4.5 million in the second half of fiscal 2005. The decrease, which positively affected our gross profit, was primarily due to lower net inflation compared to last year.



Operating and Administrative Expenses



Thirteen Weeks Ended July 28, 2005 versus Thirteen Weeks Ended July 29, 2004



Operating and administrative expenses were 22.3% of sales
in the second quarter of fiscal 2006, compared to 22.0% in the second quarter of fiscal 2005. The increased expense rate related primarily to compensation and the development of our PBM segment to support potential future growth. We expect these
trends to continue for the remainder of fiscal 2006.



A
decrease in self-insurance expenses, primarily workers compensation, partially offset the increase in our operating and administrative expense rate in the second quarter of fiscal 2006. This decrease included a $3.5 million adjustment to our
self-insurance reserves based on a third-party actuarial study. The decrease in our insurance-related expenses, including the actuarial reserve adjustments, primarily reflected a decline in workers compensation claims and lower costs per
claim. These improvements are a result of our focus on developing our companys safety culture in an effort to reduce the number of work related injuries, combined with recent changes in Californias workers compensation laws. We
expect these factors to continue to favorably affect our self-insurance expenses.



Twenty-Six Weeks Ended July 28, 2005 versus Twenty-Six Weeks Ended July 29, 2004



Operating and administrative expenses were 22.4% of sales in the first half of fiscal 2006, compared to 21.9% in the same period of fiscal 2005. The
increased expense rate related primarily to compensation, our supply chain improvement efforts and development of our PBM segment and mail-order services to support potential future growth. These increases were partially offset by decreases in our
self-insurance expenses, primarily workers compensation. We also experienced a lack of leverage on expenses against lower sales in the first half of fiscal 2006 compared to the same period last year.



Depreciation and Amortization



Depreciation and amortization expenses were $21.3 million and $42.8 million
in the second quarter and first half of fiscal 2006, compared to $22.3 million and $43.8 million in the same periods of fiscal 2005. Our depreciation and amortization expenses include accelerated depreciation for assets to be retired before the
completion of their originally estimated useful lives, including assets to be removed or replaced in our remodeled stores. The amount of accelerated depreciation expenses related to store remodels will vary based on the level and timing of our
remodel activity. We expect depreciation and amortization expense for fiscal 2006 to be in the range of $85 to $90 million.



Legal Settlements and Other Disputes



In the second quarter of fiscal 2005, we recorded a charge of $11.6 million for the total cost of the settlement of two purported class action lawsuits
relating to the calculation of earned overtime wages for certain of our former and current store managers and assistant store managers in California. The lawsuits alleged that we improperly classified such employees as exempt under Californias
wage and hour laws. We denied all liability in these cases, but agreed to the settlement in order to resolve the plaintiffs claims while avoiding protracted litigation.



In the second quarter of fiscal 2005, we also recorded a gain of $0.8 million from the favorable settlement of a separate,
unrelated class action lawsuit, for which we had filed a claim as a member of the plaintiff class, which alleged unlawful price



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fixing and market allocation by certain vitamin manufacturers. The combined net charge resulting from these two settlements was $10.8 million.



Net Interest Expense



Net interest expense was $2.0 million and $4.2 million in the second quarter
and first six months of fiscal 2006, compared to $3.6 million and $7.2 million in the same periods last year. The decrease in the second quarter and first half of fiscal 2006 from the same periods last year was due primarily to lower average
borrowings in fiscal 2006, partially offset by higher average interest rates.



Income Taxes



Our effective income tax
rate was 38.0% in the second quarter and first half of fiscal 2006 and 37.6% in the same periods of fiscal 2005. The increase reflects higher projected pre-tax income in fiscal 2006.



LIQUIDITY AND CAPITAL RESOURCES



General



Our primary sources of liquidity are operating cash flows and borrowings 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.



We have a secured $280 million revolving line of credit with a syndication of banks, which expires in August 2009 and accrues interest at LIBOR-based
rates. Borrowings on this line of credit are secured with inventory, accounts receivable and certain intangible assets. As of July 28, 2005, no borrowings were outstanding on our 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. The agreement also includes an option to increase the credit
facilitys borrowing and letter-of-credit capacity from $280 million to $345 million, subject to certain conditions. Borrowings on the line of credit do not require repayment until the expiration date but may be prepaid without penalty. We pay
a monthly commitment fee of 0.25% per annum on the unused portion of the line of credit.



Additionally, as of July 28, 2005 we had $109.7 million in outstanding privately placed promissory notes. These notes, which mature at various dates through 2014, bear interest at fixed rates ranging from 5.85% to
7.85%, 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 $8.9 million as of July 28, 2005 constitute regularly scheduled
principal payments, the majority of which are due in the fourth quarter of fiscal 2006.



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 adversely affect our ability to manage our cash requirements, and could result in higher interest costs and potentially accelerated repayment requirements. As of July 28, 2005, 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 $110.7 million in the first
half of fiscal 2006, compared to $72.3 million in the first half of fiscal 2005. The increase in our operating cash flows was primarily due to higher net income and improved management of working capital, primarily receivables, accounts payable and
accrued expenses.



Investing Cash Flows



Net cash used in investing activities was $39.7 million in the first half of
fiscal 2006, compared to $50.2 million in the same period last year. We opened one new store and remodeled 24 stores in the first half of fiscal 2006, and we opened one new store and remodeled 22 stores in the first half of last year. We plan to
open or relocate 5 to 10 new stores and remodel up to 40 stores during the year. We are also constructing a new front-end distribution center in Patterson, California, scheduled for completion in the fall of fiscal 2007. In addition, in the ordinary
course of business we may acquire stores, store-related assets



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including pharmacy customer lists, or other complementary businesses. We expect net capital expenditures in fiscal 2006 to be between $135 million and $145
million, primarily for new store investments, remodels and improvements to existing stores, technology and supply chain improvements, and the purchase and construction of a new front-end distribution center.



Financing Cash Flows



Net cash used in financing activities was $69.6 million in the first half of
fiscal 2006, compared to $17.3 million in the first half of fiscal 2005. Our financing activities primarily consist of long-term borrowings and repayments, repurchases of common stock, dividend payments and proceeds from the exercise of stock
options.



Net repayments on our revolving line of credit were
$40 million in the first half of fiscal 2006, compared to borrowings of $5.0 million in the same period last year. We use our revolving line of credit borrowings, together with cash flows from operations, to finance capital expenditures, stock
repurchases and dividend payments. We also made regularly scheduled principal payments of $4.9 million on our private placement notes in the first half of both fiscal 2006 and fiscal 2005.



In the first half of fiscal 2006, we repurchased 737,500 shares of our
outstanding common stock at a total cost of $27.9 million. In the first quarter of fiscal 2005, we repurchased 382,600 shares of our common stock at a total cost of $7.2 million. These shares were repurchased under two separate programs authorized
by our Board of Directors, in May 2005 and March 2003. Under the May 2005 program, we are authorized to repurchase additional shares of our outstanding common stock for a maximum additional expenditure of $147.4 million. We have completed the March
2003 share repurchase program. Any future repurchase of our common stock will depend on existing market conditions, our financial position, and other capital requirements.



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 dividends of $0.28 per share, or $10.5 million in the first half of fiscal 2006 and $10.4 million in the first half of fiscal 2005.



RISK FACTORS



You should carefully read the following risk factors.



We are currently undertaking significant organizational changes, including
new supply chain systems and processes and increased self-distribution. If we are unable to successfully implement these changes, they may adversely impact our future productivity and profitability.



We are currently undertaking a series of initiatives designed to help us
respond to the changing needs of our customers while improving our productivity and profitability. These initiatives include a program to upgrade our supply chain through technology systems changes and construction of a new 800,000 square foot
distribution facility for front-end merchandise. For example, in the second quarter of fiscal 2006, we implemented a new procurement and allocation system that is integrated with our distribution management and retail merchandise systems. Such
organizational changes are complex and could cause disruptions that would adversely affect our sales, gross profit and operating and administrative expenses. Our ability to successfully implement these changes, which are significant to our
operations and business, is critical to our future profitability. We may not be able to execute these changes successfully and without significant disruption to our business. If we are not successful, we may not achieve the expected benefits from
these initiatives, despite having expended significant capital and human effort. Furthermore, we may encounter difficulties implementing this amount of change in our organization that could have a negative impact on our implementation plans and
project budgets. We may also determine that additional investment is required to bring our supply chain and related systems to their desired state; this could result in a significant additional investment of time and money and increased
implementation risk.



Changes in economic conditions could
adversely affect consumer buying practices and reduce our sales and profitability.



Over the past year, the U.S. economic growth has improved and unemployment has declined. However, the recovery in California, our primary market, has been slower, and the states unemployment rate remains above
the national average. Higher gasoline prices have also had a significant impact on consumer spending in our markets. Deterioration in economic conditions, particularly in California, could adversely affect our sales and profitability. For example,
an increase in unemployment could cause consumers to lose their health insurance, which could in turn adversely affect our pharmacy sales, or a significant increase in prescription co-payments could cause consumers not to buy medications. Further, a
decrease in overall consumer spending as a result of changes in economic conditions could adversely affect our front-end sales. Our profit margins are higher



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on our front-end sales than our pharmacy sales and therefore any decrease in our sales of front-end products would have a disproportionate negative impact on
our profitability.



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



We face intense competition with local, regional and national companies, including other drug store chains, independent drug stores, on-line retailers,
supermarket chains and mass merchandisers, many of whom are aggressively expanding in markets we serve. In addition, competition from mail order pharmacies is rapidly intensifying, and some third-party health plans require mail-order fulfillment of
certain medications. In the PBM industry, our competitors include large national and regional PBMs and insurance companies and managed care providers, some of which are owned by or have affiliations with our retail drug store competitors. Many of
our competitors have substantially greater resources, including name recognition and capital resources, than we do. As competition increases in the markets in which we operate, a significant increase in general pricing pressures could occur, which
could require us to reduce prices, purchase more effectively and increase customer service to remain competitive. We may not be able to continue to compete effectively in our markets or increase our sales volume or margins in response to further
increased competition.



Reductions in third-party, including
government, reimbursement levels for prescription drugs continue to reduce our margins on pharmacy sales and could have a significant effect on our sales and gross profits.



We are wholly or partially reimbursed by third-party health plans for more than 90% of all the prescription drugs that we
sell. Pharmacy sales reimbursed by third parties have lower gross margins than non third-party pharmacy sales, and third-party health plans continue to reduce the levels at which they reimburse us for the prescription drugs that we provide to their
members. Furthermore, government-sponsored health plans such as Medicare and Medicaid are making continuing efforts to reduce their costs, including prescription drug reimbursements. For example, last year the State of California adopted a budget
that reduced Medi-Cal reimbursements to health care providers, including pharmacies. If third-party health plans, including government-sponsored plans, continue to reduce their reimbursement levels, our sales and gross profits could be significantly
adversely affected. In addition, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 included new prescription drug benefits and discounts for Medicare participants that will become effective January 1, 2006. These changes are
expected to result in lower reimbursement levels for services provided to Medicare and Medicaid participants. If our business strategy relative to these Medicare reforms is not successful, we may be unable to mitigate the resulting negative impact
on our sales and gross profits.



Structural changes in the
retail pharmacy and related industries could adversely affect our sales and profitability.



The pharmacy industry is undergoing significant structural changes, including declining third-party reimbursement levels, significant changes to
government-sponsored health plans such as Medicare and Medicaid, legislative and other initiatives to permit re-importation of prescription drugs from foreign countries, and mandatory mail-order fulfillment of prescriptions by certain health plans.
These changes could adversely affect our sales and profitability by reducing prescription drug reimbursement levels or by causing consumers to purchase their prescription drugs from other sources.



The significant investments we are making in our stores may not increase
our sales and profitability, which could adversely affect our results of operations, financial condition and cash flows.



We have recently made and are continuing to make significant investments in our stores in an effort to increase our sales and profitability. These
investments include the installation of new digital photo equipment, pharmacy and other technology, and remodels and other improvements to some existing stores. These investments require significant capital expenditures and human effort and are
largely unprecedented at our company. We are uncertain about consumer reaction to these changes and therefore these investments may not result in increased sales and profitability. A failure to increase our sales and profitability would adversely
affect our results of operations, financial condition and cash flows.



If our insurance-related costs increase significantly, or if we are unable to obtain adequate levels of insurance, our financial position and results of operations could be adversely affected.



The costs of many types of insurance and self-insurance, especially
workers compensation, employee medical and others have been highly volatile in recent years. These conditions have been exacerbated by rising health care costs, legislative changes, economic conditions, terrorism and heightened scrutiny of
insurance brokers and insurance providers. If our insurance-related costs increase significantly, or if we are unable to obtain adequate levels of insurance, our financial position and results of operations could be adversely affected.



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



We obtain approximately half of our total merchandise, including over 90% of our pharmaceuticals, from a single supplier, AmerisourceBergen, with whom we
have a long-term supply contract that is scheduled to expire in fiscal 2007. Any significant disruptions in our relationship with AmerisourceBergen, deterioration in AmerisourceBergens financial condition, or industry-wide changes in
wholesaler business practices, including those of AmerisourceBergen, could have a material adverse effect on us. Failure to renew or replace our supply contract with AmerisourceBergen or another supplier upon its expiration under similar terms and
conditions, or to increase our self-distribution capabilities relative to the products we currently purchase under this contract, could significantly disrupt our operations and adversely affect our sales and profitability.



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



Our industry is continuing to experience a shortage of licensed pharmacists in the markets in which we operate. If we are unable to attract and retain pharmacists, our business could be adversely affected. In order to
mitigate this risk we have established centralized prescription fill centers, including one that we operate under a joint venture with AmerisourceBergen, and have also installed robotic prescription fill equipment in many of our pharmacies. The
success of these efforts, which at this time is uncertain, is important to our ability to address the shortage of pharmacists, but additional efforts may be necessary to address this business issue. Other options may be costly, and could adversely
affect our results of operations, financial condition and cash flows.



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



Our pharmacy and PBM businesses are subject to numerous federal, state and
local regulations, many of which are new and developing. These include, but are not limited to, local registrations and regulatory agencies of pharmacies in the states where our pharmacies are located and applicable Medicare and Medicaid
regulations. In addition, the Health Insurance Portability and Accountability Act, or HIPAA, imposes certain requirements regarding the protection of confidential patient medical records and other information. Compliance with these regulations,
particularly HIPAA, requires that we implement complex changes to our systems and processes. Failure to adhere to these and other applicable regulations could result in the imposition of civil and criminal penalties. Furthermore, any new federal or
state regulations or reforms, including healthcare reform initiatives or pharmacy benefit management regulation, could adversely affect us.



Should a product liability issue arise, inadequate insurance coverage against such risks or inability to maintain such insurance may result in a
material adverse effect on our business.



Pharmacies are
exposed to risks inherent in the packaging and distribution of pharmaceuticals and other healthcare products and are significantly dependent upon suppliers to provide safe, government-approved and non-counterfeit products. Should a product liability
issue arise, the coverage limits under our insurance programs may not be adequate to protect us against future claims. In addition, we may not be able to maintain this insurance on acceptable terms in the future and damage to our reputation in the
event of a product liability issue may have a material adverse effect on our business.



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



Our stores, distribution centers and corporate offices are located in the western United States. Risks prevalent in this region include, but are not
limited to, major earthquakes, periodic energy shortages and rising energy costs, and shipping and other transportation-related disruptions. Because of our geographic concentration, these risks could result in significant disruptions to our business
or increased operating expenses.



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|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 no borrowings were outstanding as of July 28, 2005, bears interest
at LIBOR-based rates, and therefore an increase in interest rates could increase our interest expense. We do not currently undertake any specific actions to cover our exposure to interest rate risk and we are not currently a party to any interest
rate risk management transactions. We have not purchased and do not currently hold any derivative financial instruments. Depending on the interest rate environment and subject to approval by our Board of Directors, we may make use of derivative
financial instruments or other interest rate management vehicles in the future.



A 10% change in interest rates (10 basis points on our floating-rate debt as of July 28, 2005) would have an immaterial effect on our earnings and cash flows and on the fair value of our fixed rate debt.



|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 July 28, 2005, 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 our company would be made known to them on a timely basis.



In the second quarter of fiscal 2006, as part of an initiative to upgrade our supply chain systems and processes, we
implemented a new procurement and allocation system that is integrated with our distribution management and retail merchandise systems. We have designed internal controls to prevent and detect material financial statement errors resulting from the
implementation process and subsequent application of the new system. We conducted pre-implementation testing and continue to perform post-implementation reviews to ensure that such controls were properly designed and are operating effectively.



There have been no other changes in our internal controls 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 controls over financial reporting.



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PART II



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



Rankin v. Longs Drug Stores California, Inc., as amended on January 19, 2005, was originally filed in the Superior Court of California, San Diego
County on October 13, 2004. The lawsuit was certified as a class action on July 19, 2005 and alleges that our employment application violates 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 seeks to recover statutory damages and attorneys fees for him and all similarly situated individuals who applied for employment with us
during the class period. We are vigorously investigating and defending this litigation. Because the case is in the very early stages, the financial impact to us, if any, cannot be predicted.



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



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



We made the following repurchases of our common stock during the quarter ended July 28, 2005:



|                              |  |                                 |  |                             |       |                                                                                  |         |                                                                                       |               
|----------------------------- |  | ------------------------------- |  | --------------------------- | ----- | -------------------------------------------------------------------------------- | ------- | ------------------------------------------------------------------------------------- | --------------
|Period                        |  | Total Number ofShares Purchased |  | Average PricePaid per Share |       | Total Number ofShares Purchased asPart of PubliclyAnnounced Plans orPrograms (1) |         | Approximate DollarValue of Shares that MayYet be Purchased Underthe Plans or Programs
|Month #1                      |  |                                 |  |                             |       |                                                                                  |         |                                                                                       |               
|April 29, 2005 - May 26, 2005 |  |                                |  |                             |      |                                                                                  |        |                                                                                       | $154.0 million
|Month #2                      |  |                                 |  |                             |       |                                                                                  |         |                                                                                       |               
|May 27, 2005 - June 30, 2005  |  | 55,000                          |  | $                           | 43.17 |                                                                                  | 55,000  |                                                                                       | $151.6 million
|Month #3                      |  |                                 |  |                             |       |                                                                                  |         |                                                                                       |               
|July 1, 2005 - July 28, 2005  |  | 95,000                          |  | $                           | 44.29 |                                                                                  | 95,000  |                                                                                       | $147.4 million
|                              |  |                                 |  |                             |       |                                                                                  |         |                                                                                       |               
|Total                         |  | 150,000                         |  | $                           | 43.88 |                                                                                  | 150,000 |                                                                                       |               



|(1) | These shares were repurchased under two separate programs authorized by our Board of Directors, in May 2005 and March 2003. In May 2005, our Board of Directors
authorized the repurchase of shares of our common stock for total consideration up to $150.0 million through May 2008. In March 2003, our Board of Directors authorized the repurchase of up to 2,000,000 shares of our common stock through January
2009, for total consideration up to $50.0 million. Under the May 2005 share repurchase program, we are authorized to repurchase additional shares of our common stock for a maximum additional expenditure of $147.4 million. We have completed the March
2003 share repurchase program.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

|Item 4. | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------



The following matters were submitted to a vote of security holders at our annual meeting of stockholders, which was held on
May 24, 2005 in Walnut Creek, California.



|   |  |                            |  |            |  |          
|-- |  | -------------------------- |  | ---------- |  | ---------
|   |  |                            |  | For        |  | Withheld 
|1. |  | The election of directors: |  |            |  |          
|   |  | L. T. Barnes               |  | 30,506,023 |  | 4,563,147
|   |  | M. H. Dashe                |  | 29,666,295 |  | 5,402,875
|   |  | D. A Tanoue                |  | 29,763,620 |  | 5,300,550



Other directors whose
terms of office as directors continued after the annual meeting are:



|             |  |                |  |              |  | 
|------------ |  | -------------- |  | ------------ |  | 
|W. F. Bryant |  | M. M. Metz     |  | D. L. Sorby  |  | 
|R. M. Long   |  | H. R. Somerset |  | A. G. Wagner |  | 

|   |  |                                                                                                               |  |            |  |            |  |           |  |                
|-- |  | ------------------------------------------------------------------------------------------------------------- |  | ---------- |  | ---------- |  | --------- |  | ---------------
|   |  |                                                                                                               |  | For        |  | Against    |  | Abstained |  | BrokerNon-Votes
|2. |  | Approval of the amendment and restatement of the Longs Drug Stores Corporation 1995 Long-Term Incentive Plan: |  | 19,364,639 |  | 10,386,732 |  | 726,797   |  | 4,591,002      
|3. |  | Ratification of Deloitte & Touche LLP, our Independent Auditors, for fiscal year ending January 26, 2006:     |  | 33,297,285 |  | 1,625,681  |  | 146,203   |  |               
|4. |  | Stockholder proposal regarding annual election of directors                                                   |  | 20,182,280 |  | 8,572,064  |  | 1,723,824 |  | 4,591,002      



|Item 6. | Exhibits and Reports on Form 8-K
|------- | --------------------------------



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



|            |  |                                                                                                                                                                            
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |                                                                                                                                                                            
|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 annual 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 to any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) | REPORTS ON FORM 8-K
|--- | -------------------



On May 5, 2005, we filed a Current Report on Form 8-K related to a press release regarding our April 2005 sales results.



On May 18, 2005, we filed a Current Report on Form 8-K
related to a press release regarding our first quarter of fiscal 2006 financial results and second quarter and full year fiscal 2006 financial projections.



On May 24, 2005, we filed a Current Report on Form 8-K related to a press release announcing a new $150 million share repurchase program.



On May 24, 2005, we filed a Current Report on
Form 8-K related to a press release announcing a cash dividend, a new $150 million share repurchase program and preliminary proxy results from our 2005 Annual Meeting of Stockholders.



On June 2, 2005, we filed a Current Report on Form 8-K related to a press release regarding our May 2005
sales results.



On July 6, 2005, we filed a
Current Report on Form 8-K related to a press release announcing plans to construct a new distribution center in Patterson, California.



On July 7, 2005, we filed a Current Report on Form 8-K related to a press release regarding our June 2005 sales results.



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##### Table of Contents



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: September 1, 2005 |  |  |  | /s/    S. F. MCCANN                                                                 
|                        |  |  |  | (S. F. McCann)                                                                      
|                        |  |  |  | Executive Vice President,Chief Financial Officer and Treasurer                      
|                        |  | 
|Date: September 1, 2005 |  |  |  | /s/    R. L. CHELEMEDOS                                                             
|                        |  |  |  | (R. L. Chelemedos)                                                                  
|                        |  |  |  | Group Vice PresidentController and AssistantSecretary(Principal Accounting Officer)



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