---

---

SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-Q

---

|(Mark One)                                      |                                                                                          
|----------------------------------------------- | -----------------------------------------------------------------------------------------
|ý                                               | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. 
|For the quarterly period ended October 31, 2002
|o                                               | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

Commission file number 1-8978

---

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

|Maryland(State or other jurisdiction of incorporation or organization)                 |  | 68-0048627(I.R.S. Employer Identification No.)
|-------------------------------------------------------------------------------------- |  | ----------------------------------------------
|141 North Civic Drive
Walnut Creek, California(Address of principal executive offices) |  | 94596(Zip Code)                               
|Registrant's telephone number, including area code:(925) 937-1170                     

---

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

Yes
ý        No o

There
were 38,449,733 shares of common stock outstanding as of November 28, 2002.

---

---

---

Table of Contents

|PART IFINANCIAL INFORMATION |                                                                       | 
|---------------------------- | --------------------------------------------------------------------- | 
|                             | Item 1                                                                | 
|                             | Item 2                                                                | 
|                             | Item 3                                                                | 
|                             | Item 4                                                                | 
|PART IIOTHER INFORMATION    |                                                                       | 
|                             | Item 6                                                                | 
|                             | Signature Page                                                        | 
|                             | Certifications of Chief Executive Officer and Chief Financial Officer | 

---



PART IFINANCIAL INFORMATION

Item 1.Condensed Consolidated Financial Statements

Condensed Consolidated Statements of Income (unaudited)

|                                                                       |                                                                       | For the 13 weeks ended |           | For the 39 weeks ended |  
|---------------------------------------------------------------------- | --------------------------------------------------------------------- | ---------------------- | --------- | ---------------------- | -
|
|
|Sales                                                                  |                                                                       | $                      | 1,064,470 |                        | $
|Cost of merchandise sold                                               |                                                                       |                        | 782,474   |                        |  
|                                                                       |                                                                       |                        |           |                        |  
|                                                                       | Gross profit                                                          |                        |           | 281,996                |  
|Operating and administrative expenses                                  |                                                                       |                        | 255,050   |                        |  
|Depreciation and amortization                                          |                                                                       |                        | 19,595    |                        |  
|Provision (benefit) for store closures and asset impairment, net       |                                                                       |                        |          |                        |  
|Legal settlements and other disputes                                   |                                                                       |                        |          |                        |  
|                                                                       |                                                                       |                        |           |                        |  
|                                                                       | Operating income                                                      |                        |           | 7,351                  |  
|Interest expense                                                       |                                                                       |                        | 3,515     |                        |  
|Interest income                                                        |                                                                       |                        | (228      | )                      |  
|                                                                       |                                                                       |                        |           |                        |  
|                                                                       | Income before income taxes and cumulative effect of accounting change |                        |           | 4,064                  |  
|Income taxes                                                           |                                                                       |                        | 1,076     |                        |  
|                                                                       |                                                                       |                        |           |                        |  
|Income before cumulative effect of accounting change                   |                                                                       |                        | 2,988     |                        |  
|Cumulative effect of accounting change (net of tax benefit of $16,410) |                                                                       |                        |          |                        |  
|                                                                       |                                                                       |                        |           |                        |  
|Net income                                                             |                                                                       | $                      | 2,988     |                        | $
|                                                                       |                                                                       |                        |           |                        |  
|Basic earnings per common share:                                       |                                                                       |                        |           |                        |  
|                                                                       | Income before cumulative effect of accounting change                  |                        | $         | 0.08                   |  
|                                                                       | Cumulative effect of accounting change (net of tax benefit of $0.43)  |                        |           |                       |  
|                                                                       |                                                                       |                        |           |                        |  
|                                                                       | Net income                                                            |                        | $         | 0.08                   |  
|                                                                       |                                                                       |                        |           |                        |  
|Diluted earnings per common share:                                     |                                                                       |                        |           |                        |  
|                                                                       | Income before cumulative effect of accounting change                  |                        | $         | 0.08                   |  
|                                                                       | Cumulative effect of accounting change (net of tax benefit of $0.43)  |                        |           |                       |  
|                                                                       |                                                                       |                        |           |                        |  
|                                                                       | Net income                                                            |                        | $         | 0.08                   |  
|                                                                       |                                                                       |                        |           |                        |  
|Dividends per common share                                             |                                                                       | $                      | 0.14      |                        | $
|Weighted average number of shares outstanding:                         |                                                                       |                        |           |                        |  
|                                                                       | Basic                                                                 |                        |           | 37,998                 |  
|                                                                       | Diluted                                                               |                        |           | 38,274                 |  

See notes to condensed consolidated financial statements.

1

---

Condensed Consolidated Balance Sheets

|                                                                        |                            | October 31,
2002 |                           | October 25,
2001 |           | January 31,
2002 |          
|----------------------------------------------------------------------- | -------------------------- | ---------------- | ------------------------- | ---------------- | --------- | ---------------- | ---------
|
|ASSETS                                                                  |                            |                  |                           |                  |           |                  |          
|Current Assets:                                                         |                            |                  | -------(Unaudited)------- |                  |           |                  |          
|Cash and equivalents                                                    |                            | $                | 59,576                    |                  | $         | 78,380           |          
|Pharmacy and other receivables, net                                     |                            |                  | 122,806                   |                  |           | 123,108          |          
|Merchandise inventories                                                 |                            |                  | 490,262                   |                  |           | 432,898          |          
|Deferred income taxes                                                   |                            |                  | 24,229                    |                  |           | 20,581           |          
|Other                                                                   |                            |                  | 10,098                    |                  |           | 6,807            |          
|                                                                        |                            |                  |                           |                  |           |                  |          
|                                                                        | Total current assets       |                  |                           | 706,971          |           |                  | 661,774  
|                                                                        |                            |                  |                           |                  |           |                  |          
|Property:                                                               |                            |                  |                           |                  |           |                  |          
|Land                                                                    |                            |                  | 105,787                   |                  |           | 110,621          |          
|Buildings and leasehold improvements                                    |                            |                  | 517,855                   |                  |           | 489,214          |          
|Equipment and fixtures                                                  |                            |                  | 498,523                   |                  |           | 460,562          |          
|                                                                        |                            |                  |                           |                  |           |                  |          
|                                                                        | Total property at cost     |                  |                           | 1,122,165        |           |                  | 1,060,397
|Less accumulated depreciation                                           |                            |                  | 521,130                   |                  |           | 458,254          |          
|                                                                        |                            |                  |                           |                  |           |                  |          
|                                                                        |                            | Property, net    |                           |                  | 601,035   |                  |          
|                                                                        |                            |                  |                           |                  |           |                  |          
|Goodwill                                                                |                            |                  | 82,236                    |                  |           | 124,495          |          
|Intangible assets, net                                                  |                            |                  | 5,702                     |                  |           | 5,681            |          
|Other assets                                                            |                            |                  | 6,139                     |                  |           | 4,359            |          
|                                                                        |                            |                  |                           |                  |           |                  |          
|                                                                        |                            | Total            |                           | $                | 1,402,083 |                  | $        
|                                                                        |                            |                  |                           |                  |           |                  |          
|LIABILITIES AND STOCKHOLDERS' EQUITY                                    |                            |                  |                           |                  |           |                  |          
|Current Liabilities:                                                    |                            |                  |                           |                  |           |                  |          
|Accounts payable                                                        |                            | $                | 281,983                   |                  | $         | 286,674          |          
|Employee compensation and benefits                                      |                            |                  | 84,010                    |                  |           | 77,759           |          
|Taxes payable                                                           |                            |                  | 42,297                    |                  |           | 41,663           |          
|Current portion of long-term debt                                       |                            |                  | 2,345                     |                  |           | 2,718            |          
|Other                                                                   |                            |                  | 33,302                    |                  |           | 30,635           |          
|                                                                        |                            |                  |                           |                  |           |                  |          
|                                                                        | Total current liabilities  |                  |                           | 443,937          |           |                  | 439,449  
|                                                                        |                            |                  |                           |                  |           |                  |          
|Long-term debt                                                          |                            |                  | 211,481                   |                  |           | 228,742          |          
|Deferred income taxes and other long-term liabilities                   |                            |                  | 32,524                    |                  |           | 30,118           |          
|Commitments and Contingencies                                           |                            |                  |                           |                  |           |                  |          
|Stockholders' Equity:                                                   |                            |                  |                           |                  |           |                  |          
|Common stock (38,475,000, 37,909,000 and 37,977,000
shares outstanding) |                            |                  | 19,237                    |                  |           | 18,954           |          
|Additional capital                                                      |                            |                  | 169,362                   |                  |           | 155,465          |          
|Common stock contribution to Profit Sharing Plan                        |                            |                  |                          |                  |           |                 |          
|Unearned compensation                                                   |                            |                  | (5,342                    | )                |           | (4,485           | )        
|Retained earnings                                                       |                            |                  | 530,884                   |                  |           | 530,209          |          
|                                                                        |                            |                  |                           |                  |           |                  |          
|                                                                        | Total stockholders' equity |                  |                           | 714,141          |           |                  | 700,143  
|                                                                        |                            |                  |                           |                  |           |                  |          
|                                                                        |                            |                  | Total                     |                  | $         | 1,402,083        |          
|                                                                        |                            |                  |                           |                  |           |                  |          

See notes to condensed consolidated financial statements.

2

---

Condensed Consolidated Statements of Cash Flows (unaudited)

|                                                  |                                                                                   | For the 39 weeks ended |                                                    
|------------------------------------------------- | --------------------------------------------------------------------------------- | ---------------------- | ---------------------------------------------------
|
|
|Operating Activities:                             |                                                                                   |                        |                                                    
|                                                  | Net income                                                                        |                        | $                                                  
|                                                  | Adjustments to reconcile net income to net cash provided by operating activities: |                        |                                                    
|                                                  |                                                                                   |                        | Cumulative effect of accounting change             
|                                                  |                                                                                   |                        | Depreciation and amortization                      
|                                                  |                                                                                   |                        | Deferred income taxes and other                    
|                                                  |                                                                                   |                        | Stock awards, net                                  
|                                                  |                                                                                   |                        | Common stock contribution to benefit plans         
|                                                  |                                                                                   |                        | Tax benefits related to stock awards               
|                                                  |                                                                                   |                        | Changes in assets and liabilities:                 
|                                                  |                                                                                   |                        |                                                    
|                                                  |                                                                                   |                        |                                                    
|                                                  |                                                                                   |                        |                                                    
|                                                  |                                                                                   |                        |                                                    
|                                                  |                                                                                   |                        |                                                    
|                                                  |                                                                                   |                        | Net cash provided by operating activities          
|                                                  |                                                                                   |                        |                                                    
|Investing Activities:                             |                                                                                   |                        |                                                    
|                                                  | Payments for property additions, store acquisitions and other assets              |                        |                                                    
|                                                  | Receipts from property dispositions and sale-leasebacks                           |                        |                                                    
|                                                  | Acquisition of RxAmerica assets, net of cash                                      |                        |                                                    
|                                                  |                                                                                   |                        |                                                    
|                                                  |                                                                                   |                        | Net cash used in investing activities              
|                                                  |                                                                                   |                        |                                                    
|Financing Activities:                             |                                                                                   |                        |                                                    
|                                                  | Proceeds from long-term borrowings                                                |                        |                                                    
|                                                  | Repayments of long-term borrowings                                                |                        |                                                    
|                                                  | Repayments of short-term borrowings                                               |                        |                                                    
|                                                  | Dividend payments                                                                 |                        |                                                    
|                                                  |                                                                                   |                        |                                                    
|                                                  |                                                                                   |                        | Net cash (used in) provided by financing activities
|                                                  |                                                                                   |                        |                                                    
|Increase (decrease) in cash and equivalents       |                                                                                   |                        | (63,611                                            
|Cash and equivalents at beginning of period       |                                                                                   |                        | 123,187                                            
|                                                  |                                                                                   |                        |                                                    
|Cash and equivalents at end of period             |                                                                                   | $                      | 59,576                                             
|                                                  |                                                                                   |                        |                                                    
|Supplemental disclosure of cash flow information: |                                                                                   |                        |                                                    
|                                                  | Cash paid for interest                                                            |                        | $                                                  
|                                                  | Cash paid for income taxes                                                        |                        |                                                    

See notes to condensed consolidated financial statements.

3

---

Condensed Consolidated Statements of Stockholders' Equity
For the 53 weeks ended January 31, 2002 and the 39 weeks ended October 31, 2002

|                                          |                                                        |        |     |   |        |     |   | Common
Stock
Contributions
to Profit
Sharing Plan |       |   |       |        |   |        |  
|----------------------------------------- | ------------------------------------------------------ | ------ | --- | - | ------ | --- | - | ------------------------------------------------- | ----- | - | ----- | ------ | - | ------ | -
|
|
|
|
|Balance at January 25, 2001               |                                                        | 37,367 |     | $ | 18,683 |     | $ | 141,200                                           |       | $ | 7,695 |        | $ | (4,466 | )
|Net income                                |                                                        |        |     |   |        |     |   |                                                   |       |   |       |        |   |        |  
|Dividends ($.56 per share)                |                                                        |        |     |   |        |     |   |                                                   |       |   |       |        |   |        |  
|Employee Savings and Profit Sharing Plan: |                                                        |        |     |   |        |     |   |                                                   |       |   |       |        |   |        |  
|                                          | Issuance of stock for FY01 profit sharing contribution |        | 287 |   |        | 144 |   |                                                   | 7,551 |   |       | (7,695 | ) |        |  
|                                          | Stock portion of FY02 profit sharing contribution      |        |     |   |        |     |   |                                                   |       |   |       | 2,939  |   |        |  
|                                          | Issuance of stock for 401(k) matching contributions    |        | 285 |   |        | 143 |   |                                                   | 6,776 |   |       |        |   |        |  
|Stock awards, net of forfeitures          |                                                        | 38     |     |   | 18     |     |   | 1,309                                             |       |   |       |        |   | (1,426 | )
|Amortization of restricted stock awards   |                                                        |        |     |   |        |     |   |                                                   |       |   |       |        |   | 1,885  |  
|Tax benefits related to stock awards      |                                                        |        |     |   |        |     |   | 141                                               |       |   |       |        |   |        |  
|                                          |                                                        |        |     |   |        |     |   |                                                   |       |   |       |        |   |        |  
|Balance at January 31, 2002               |                                                        | 37,977 |     |   | 18,988 |     |   | 156,977                                           |       |   | 2,939 |        |   | (4,007 | )
|                                          |                                                        |        |     |   |        |     |   |                                                   |       |   |       |        |   |        |  
|Unaudited:                                |                                                        |        |     |   |        |     |   |                                                   |       |   |       |        |   |        |  
|Net income                                |                                                        |        |     |   |        |     |   |                                                   |       |   |       |        |   |        |  
|Dividends ($.42 per share)                |                                                        |        |     |   |        |     |   |                                                   |       |   |       |        |   |        |  
|Employee Savings and Profit Sharing Plan: |                                                        |        |     |   |        |     |   |                                                   |       |   |       |        |   |        |  
|                                          | Issuance of stock for FY02 profit sharing contribution |        | 120 |   |        | 60  |   |                                                   | 2,879 |   |       | (2,939 | ) |        |  
|                                          | Issuance of stock for 401(k) matching contributions    |        | 267 |   |        | 133 |   |                                                   | 6,661 |   |       |        |   |        |  
|Stock awards, net of forfeitures          |                                                        | 111    |     |   | 56     |     |   | 2,777                                             |       |   |       |        |   | (2,965 | )
|Amortization of restricted stock awards   |                                                        |        |     |   |        |     |   |                                                   |       |   |       |        |   | 1,630  |  
|Tax benefits related to stock awards      |                                                        |        |     |   |        |     |   | 68                                                |       |   |       |        |   |        |  
|                                          |                                                        |        |     |   |        |     |   |                                                   |       |   |       |        |   |        |  
|Balance at October 31, 2002               |                                                        | 38,475 |     | $ | 19,237 |     | $ | 169,362                                           |       | $ |      |        | $ | (5,342 | )
|                                          |                                                        |        |     |   |        |     |   |                                                   |       |   |       |        |   |        |  

See notes to condensed consolidated financial statements.

4

---



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.    Basis of Presentation

The accompanying condensed consolidated financial statements include Longs Drug Stores Corporation ("Longs" or the "Company") and its wholly owned subsidiaries.
All significant inter-company accounts and transactions have been eliminated. The condensed consolidated financial statements reflect all adjustments that are, in management's opinion, necessary for a
fair statement of the results for the periods presented. These financial statements should be read in conjunction with the Annual Report of the Company on Form 10-K for the fiscal
year ended January 31, 2002. The condensed consolidated financial statements as of and for the periods ended October 31, 2002 and October 25, 2001 are unaudited. The condensed
consolidated balance sheet as of January 31, 2002, 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 31, 2002. Certain reclassifications have been made to prior year
financial statements to conform to the current presentation.

2.    Significant Accounting Policies

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

Pharmacy and other receivablesprimarily include amounts due from third party providers (e.g., pharmacy benefit managers, insurance
companies, governmental agencies and vendors) on the sale of prescription drugs. Receivables are stated net of an allowance for uncollectible accounts.

Merchandise inventoriesare stated at the lower of cost or market value. Cost is determined using the last-in,
first-out (LIFO) method. The excess of specific cost over LIFO values was $169.7 million at
October 31, 2002, $160.4 million at October 25, 2001 and $165.3 million at January 31, 2002. LIFO costs for interim financial statements are estimated based on
projected annual inflation rates. Actual LIFO costs are calculated during the fourth quarter of the fiscal year when final inflation rates and inventory levels are determined.

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

Buildings
and leasehold improvements include assets under capital leases of $7.6 million at October 31, 2002 and $4.4 million as of January 31, 2002. The
corresponding capital lease obligation is included in long-term liabilities. The amount capitalized for assets under capital leases is the present value at the beginning of the lease term
of the aggregate future minimum lease payments. The amortization of such assets is included in depreciation expense. Accumulated amortization on assets under capital leases was not significant as of
October 31, 2002 or January 31, 2002.

Repairs
and maintenance costs are expensed as incurred. Costs for improvements that enhance the usefulness or extend the useful life of an asset are capitalized and depreciated over the
asset's estimated useful life.

Goodwillrepresents the excess of acquisition cost over the fair value of the net assets of acquired entities. Effective with the first
quarter of fiscal 2003, goodwill is not amortized, but is subject to annual impairment testing (see "New Accounting Pronouncements").

5

---

Intangible assetsconsist primarily of purchased pharmacy customer lists, non-compete agreements and beverage licenses.
Effective with the first quarter of fiscal 2003, intangible assets with indefinite useful lives are not amortized, but are subject to annual impairment testing (see "New Accounting Pronouncements").
Intangible assets with finite useful lives are amortized using the straight-line method over those useful lives.

Other assetsinclude joint venture investments accounted for under the equity method.

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

Store Closure ReservesThe Company records the estimated costs associated with closing a store in accordance with Emerging
Issues Task Force Issue No. 94-3 ("Issue 94-3"). Issue 94-3 requires that such store closing costs be recorded in the period in which the store is identified
and approved by management under a plan of termination, which includes the method of disposition and the expected date of completion. These costs include direct costs to terminate a lease or
sub-lease a property, net of expected sublease income, and the difference between the carrying values and estimated recoverable values of long-lived tangible and intangible
assets. Severance and other employee-related costs are recorded in the period in which the closure and related severance packages are communicated to the affected employees. Losses on the liquidation
of inventories are recorded in cost of merchandise sold when the inventories are sold or otherwise disposed of.

Beginning
January 1, 2003, the Company will recognize the costs associated with closing a store when the liability is incurred, in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities(see "New Accounting Pronouncements").

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

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

The
Company's pharmacy benefit management ("PBM") segment, operated through the Company's RxAmerica subsidiary, contracts with drug manufacturers, third-party health plans and retail
pharmacies to provide a range of services to third-party health plan members, including pharmacy benefit plan design and implementation, formulary management, claims processing and generic
substitution. Revenue from the PBM segment is recognized when RxAmerica has completed its service obligations under its contracts, including the approval or denial of the authorization request to the
participating pharmacy. The Company does not recognize or otherwise reflect in its financial statements co-payments made to participating pharmacies by health plan members. RxAmerica does
not take title to the prescription drug inventories or assume substantial risks and rewards of ownership. Therefore, revenues from third-party health plans are recognized net of the reimbursements due
to participating pharmacies.

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

6

---

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

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

AdvertisingNet advertising costs are expensed as incurred.

New store opening costs, primarily labor, advertising and store supplies, are expensed as incurred.

Deferred RentRent expense is recorded on a straight-line basis over the lease term. When a lease provides for
fixed escalations of the minimum rental payments, the difference between the straight-line rent charged to expense and the actual cash payments under the lease is recognized as deferred
rent, which is included in other long-term liabilities.

Income taxesThe Company accounts for its taxes in accordance with Statement of Financial Accounting Standards (SFAS)
No. 109, which requires the use of the asset and liability method of accounting for deferred income taxes. Deferred income taxes are recorded based upon the differences between the financial
statement and tax basis of assets and liabilities.

Stock-based compensationThe Company accounts for employee stock-based compensation using the intrinsic value method in
accordance with the provisions of APB Opinion No. 25,Accounting for Stock Issued to Employees, as allowed by SFAS No. 123, Accounting for Stock-Based
Compensation.

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

|                                                      |                         | 13 weeks ended |     | 39 weeks ended
|----------------------------------------------------- | ----------------------- | -------------- | --- | --------------
|
|
|Basic weighted average number of shares outstanding   |                         | 37,998         |     | 37,510        
|Effect of dilution from:                              |                         |                |     |               
|                                                      | Restricted stock awards |                | 202 |               
|                                                      | Stock options           |                | 74  |               
|                                                      |                         |                |     |               
|Diluted weighted average number of shares outstanding |                         | 38,274         |     | 37,788        
|                                                      |                         |                |     |               

The
Company excluded 209,900 stock options from the calculation of diluted earnings per share in the 13 weeks ended October 31, 2002, and 69,967 stock options from the calculation
of diluted earnings per share in the 39 weeks ended October 31, 2002, because their effect would have been anti-dilutive.

Comprehensive incomeequals net income for all periods presented.

New Accounting PronouncementsIn June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141,Business Combinations, and SFAS No. 142,Goodwill and Other

7

---

Intangible Assets. SFAS No. 141 requires that all business combinations be accounted for using the purchase method of accounting and addresses the initial recognition
and measurement of goodwill and other intangible assets acquired in a business combination. Under SFAS No. 142, goodwill and certain other intangible assets deemed to have indefinite lives will
no longer be amortized, but must be tested for impairment annually, or more frequently if events and circumstances indicate there may be an impairment. The Company adopted SFAS No. 141 and SFAS
No. 142 in the first quarter of fiscal 2003. The adoption of SFAS No. 141 did not have a material impact on the Company's financial position or results of operations. Upon adoption of
SFAS No. 142, the Company discontinued the amortization of goodwill with a carrying value of $123.3 million as of January 31, 2002, and of certain other intangible assets with
indefinite lives. Following is a reconciliation of reported earnings and earnings per share to the amounts adjusted for the exclusion of amortization of goodwill and other intangible assets with
indefinite lives, net of the related income tax effects:

|                                                                    |                                                                     | 13 weeks ended |       | 39 weeks ended
|------------------------------------------------------------------- | ------------------------------------------------------------------- | -------------- | ----- | --------------
|
|
|Reported income before cumulative effect of accounting change       |                                                                     | $              | 2,988 |               
|Amortization of goodwill, net of tax                                |                                                                     |                |      |               
|Amortization of other intangibles with indefinite lives, net of tax |                                                                     |                |      |               
|                                                                    |                                                                     |                |       |               
|Adjusted income before cumulative effect of accounting change       |                                                                     | $              | 2,988 |               
|                                                                    |                                                                     |                |       |               
|Basic earnings per share:                                           |                                                                     |                |       |               
|                                                                    | Reported income before cumulative effect of accounting change       |                | $     | 0.08          
|                                                                    | Amortization of goodwill, net of tax                                |                |       |              
|                                                                    | Amortization of other intangibles with indefinite lives, net of tax |                |       |              
|                                                                    |                                                                     |                |       |               
|                                                                    | Adjusted income before cumulative effect of accounting change       |                | $     | 0.08          
|                                                                    |                                                                     |                |       |               
|Diluted earnings per share:                                         |                                                                     |                |       |               
|                                                                    | Reported income before cumulative effect of accounting change       |                | $     | 0.08          
|                                                                    | Amortization of goodwill, net of tax                                |                |       |              
|                                                                    | Amortization of other intangibles with indefinite lives, net of tax |                |       |              
|                                                                    |                                                                     |                |       |               
|                                                                    | Adjusted income before cumulative effect of accounting change       |                | $     | 0.08          
|                                                                    |                                                                     |                |       |               

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

8

---

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

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

3.    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 "front-end" categories as over-the-counter medications, health care
products, photo and photo processing, cosmetics, greeting cards, food and beverage items, housewares, toiletries, mail centers and seasonal merchandise. As of October 31, 2002, the retail drug
store segment operated 447 stores in six western states under the names Longs, Longs Drugs, Longs Drug Stores and Longs Pharmacy.

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

Prior
to the Company's September 2001 acquisition of 100% ownership in RxAmerica, the Company operated in one business segment, retail drug stores. RxAmerica was a joint venture
between the Company and Albertson's Inc., and the Company accounted for its interest in the joint venture using the equity method of accounting. Therefore, PBM segment results for the
13-week and 39-week periods ended October 25, 2001 reflect RxAmerica's operations since the Company's acquisition of 100% ownership in the PBM in September 2001.

9

---

The
following table summarizes significant financial information by segment as of and for the 13-week and 39-week periods ended October 31, 2002 and
October 25, 2001:

|                |                      | Retail Drug
Stores |   | Pharmacy Benefit
Management |           | Inter-Segment
Eliminations |        | Consolidated Totals
|--------------- | -------------------- | ------------------ | - | --------------------------- | --------- | -------------------------- | ------ | -------------------
|
|13 weeks ended: |                      |                    |   |                             |           |                            |        |                    
|                | October 31, 2002:    |                    |   |                             |           |                            |        |                    
|                |                      | Sales              |   | $                           | 1,058,496 |                            | $      | 5,974              
|                |                      | Operating income   |   |                             | 4,721     |                            |        | 2,630              
|                | October 25, 2001(1): |                    |   |                             |           |                            |        |                    
|                |                      | Sales              |   | $                           | 1,015,750 |                            | $      | 1,631              
|                |                      | Operating income   |   |                             | 7,228     |                            |        | 431                
|39 weeks ended: |                      |                    |   |                             |           |                            |        |                    
|                | October 31, 2002:    |                    |   |                             |           |                            |        |                    
|                |                      | Sales              |   | $                           | 3,239,546 |                            | $      | 16,383             
|                |                      | Operating income   |   |                             | 41,948    |                            |        | 6,722              
|                | October 25, 2001(1): |                    |   |                             |           |                            |        |                    
|                |                      | Sales              |   | $                           | 3,089,739 |                            | $      | 1,631              
|                |                      | Operating income   |   |                             | 52,481    |                            |        | 431                
|Total assets:   |                      |                    |   |                             |           |                            |        |                    
|                | October 31, 2002     |                    | $ | 1,355,187                   |           | $                          | 48,543 |                    
|                | October 25, 2001     |                    |   | 1,372,050                   |           |                            | 26,402 |                    
|                | January 31, 2002     |                    |   | 1,360,492                   |           |                            | 52,176 |                    

---

Consolidated
total sales include the following product and service types:

|                                     |                          | 13 weeks ended |         | 39 weeks ended
|------------------------------------ | ------------------------ | -------------- | ------- | --------------
|
|
|Pharmacy sales                       |                          | $              | 480,253 |               
|Front-end sales                      |                          |                | 578,243 |               
|Pharmacy benefit management revenues |                          |                | 5,974   |               
|                                     |                          |                |         |               
|                                     | Consolidated total sales |                | $       | 1,064,470     
|                                     |                          |                |         |               

4.    Goodwill and Other Intangible Assets

All of the Company's goodwill and other intangible assets are included in the retail drug store segment. As discussed in note 2, goodwill and other
intangible assets with indefinite useful lives are not amortized, but are subject to annual impairment testing. Intangible assets with finite useful lives are

10

---

amortized over those useful lives. The Company's intangible assets other than goodwill include the following:

|                                               |                                  |       |           | October 31, 2002 |   | January 31, 2002 |      
|---------------------------------------------- | -------------------------------- | ----- | --------- | ---------------- | - | ---------------- | -----
|
|
|Intangible assets subject to amortization:     |                                  |       |           |                  |   |                  |      
|                                               | Pharmacy customer lists          |       | 1-5 years |                  | $ | 1,834            |      
|                                               | Non-compete agreements and other |       | 2-5 years |                  |   | 772              |      
|                                               |                                  |       |           |                  |   |                  |      
|                                               |                                  | Total |           |                  |   | $                | 2,606
|                                               |                                  |       |           |                  |   |                  |      
|Intangible assets not subject to amortization: |                                  |       |           |                  |   |                  |      
|                                               | Beverage licenses                |       | N/A       |                  | $ | 4,939            |      
|                                               |                                  |       |           |                  |   |                  |      

The
net decreases in the gross carrying amounts and accumulated amortization of pharmacy customer lists and non-compete agreements were primarily due to the removal of fully
amortized assets. The increase in the carrying value of beverage licenses was due to the acquisition of additional licenses. Acquisitions of pharmacy customer lists and non-compete
agreements were not significant in the 39 weeks ended October 31, 2002.

The
changes in the carrying value of goodwill for the 39 weeks ended October 31, 2002 were as follows (in thousands):

|                                                                                 |  |   |        
|-------------------------------------------------------------------------------- |  | - | -------
|Balance as of January 31, 2002 (net of pre-SFAS No. 142 amortization of $18,971) |  | $ | 123,306
|Cumulative effect of accounting change (see note 2)                              |  |   | (41,035
|Other adjustments                                                                |  |   | (35    
|                                                                                 |  |   |        
|Balance as of October 31, 2002                                                   |  | $ | 82,236 
|                                                                                 |  |   |        

Amortization
expense for intangible assets with finite useful lives was $64,000 and $212,000 for the 13-week and 39-week periods ended October 31, 2002,
respectively. Estimated annual amortization expense on these intangibles for fiscal 2003 and each of the succeeding five fiscal years is as follows (in
thousands):

|Fiscal Year 2003 |       | $ | 291
|---------------- | ----- | - | ---
|Fiscal Year 2004 |       |   | 288
|Fiscal Year 2005 |       |   | 220
|Fiscal Year 2006 |       |   | 149
|Fiscal Year 2007 |       |   | 26 
|Fiscal Year 2008 |       |   |   
|                 |       |  
|                 | Total |   | $  
|                 |       |  

11

---

5.    Debt

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

|                                                                                                                                                    |  | October 31,
2002 |         | January 31,
2002
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | ----------------
|
|Unsecured $150 million revolving line of credit, interest based on LIBOR (weighted average rate of 3.05% at October 31, 2002), expires October 2004 |  | $                | 55,000  |                 
|Private placement notes, fixed interest rates ranging from 5.85% to 7.85%, mature at various dates through 2014                                     |  |                  | 158,571 |                 
|Equipment notes and other                                                                                                                           |  |                  | 255     |                 
|                                                                                                                                                    |  |                  |         |                 
|Total long-term debt                                                                                                                                |  |                  | 213,826 |                 
|Less current portion                                                                                                                                |  |                  | 2,345   |                 
|                                                                                                                                                    |  |                  |         |                 
|Long-term portion                                                                                                                                   |  | $                | 211,481 |                 
|                                                                                                                                                    |  |                  |         |                 

The
Company's debt agreements contain limits on borrowings, dividend payments and repurchases of Company stock, and various quarterly financial covenants that set maximum leverage ratios
and minimum fixed charge coverage ratios. As of October 31, 2002, the Company was in compliance with the restrictions and limitations included in these provisions.

6.    Provision for Store Closures

The Company closed 3 stores in the 39 weeks ended October 31, 2002 and 15 stores in the 39 weeks ended October 25, 2001. Costs incurred for closed
stores and adjustments to the related reserves are summarized as follows:

|                                                          |  | 39 weeks ended |       
|--------------------------------------------------------- |  | -------------- | ------
|
|
|Store closure reserve balance, beginning of period        |  | $              | 12,551
|Costs incurred for closed stores, charged against reserve |  |                | (4,170
|Increase (decrease) to reserve                            |  |                |      
|                                                          |  |                |       
|Store closure reserve balance, end of period              |  | $              | 8,381 
|                                                          |  |                |       

12

---



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

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

RESULTS OF OPERATIONS

Sales

|                                                           |  | 13 weeks ended |           | 39 weeks ended |  
|---------------------------------------------------------- |  | -------------- | --------- | -------------- | -
|
|Sales(Thousands)                                           |  | $              | 1,064,470 |                | $
|Sales Growth                                               |  |                | 4.6       | %              |  
|Same-Store Sales Growth                                    |  |                | 2.7       | %              |  
|Impact of New Stores / Closed Stores on Sales Growth       |  |                | 1.5       | %              |  
|Impact of RxAmerica on Sales Growth                        |  |                | 0.4       | %              |  
|Pharmacy Sales Growth                                      |  |                | 6.1       | %              |  
|Same-Store Pharmacy Sales Growth                           |  |                | 5.4       | %              |  
|Pharmacy as a % of Total Drug Store Sales                  |  |                | 45.4      | %              |  
|% of Pharmacy Sales Reimbursed by Third Party Health Plans |  |                | 90.9      | %              |  
|Front-End Sales Growth                                     |  |                | 2.7       | %              |  
|Same-Store Front-End Sales Growth (Decline)                |  |                | 0.5       | %              |  
|Front-End as a % of Total Drug Store Sales                 |  |                | 54.6      | %              |  

Sales
increased 4.6% and 5.3% in the third quarter and first nine months of fiscal 2003 over the same periods in fiscal 2002. Same-store sales increased 2.7% during the
quarter and 3.4% during the first nine months over the corresponding periods of fiscal 2002. The net increase in the number of stores accounted for 1.5% and 1.4% of total sales growth during the
respective periods. Additionally,

13

---

our September 2001 acquisition of full ownership of RxAmerica, our pharmacy benefit management (PBM) subsidiary, contributed 0.4% and 0.5% of total sales growth in the third quarter and first
nine months of fiscal 2003. Prior to the acquisition, RxAmerica was a joint venture between Longs and Albertson's, Inc., and we accounted for our interest in the joint venture using the equity
method of accounting.

Pharmacy
sales increased 6.1% and 7.4% in the third quarter and first nine months of fiscal 2003 over the same periods last year, with same-store pharmacy sales increasing
5.4% and 6.5%. Pharmacy sales were 45.4% and 45.2% of total drug store sales during the third quarter and first nine months of fiscal 2003, compared to 44.5% and 44.1% in the same periods of fiscal
2002. Our pharmacy sales continue to grow as a result of favorable industry trends, including an aging U.S. population and the increased usage of newer and more expensive prescription drugs. These
trends have been partially offset by the recent introduction of several lower-priced generic drugs, which negatively impacted same-store pharmacy sales by approximately 2.4% (240 basis
points) in the third quarter and 1.5% (150 basis points) in the first nine months of fiscal 2003. Despite the increased generic utilization rates, overall average pharmaceutical prices have continued
to rise. In the third quarter and first nine months of fiscal 2003, the average retail price per prescription increased 7.9% and 7.6% over the comparable periods in fiscal 2002. We expect these trends
to continue.

The
percentage of pharmacy sales wholly or partially reimbursed by third-party health plans continues to increase as a result of growing participation in managed care and other
third-party plans. Third-party
sales represented 90.9% of total pharmacy sales during the third quarter and first nine months of fiscal 2003, compared to 88.9% and 89.1% in the same periods last year. We expect this trend to
continue.

Front-end
sales increased 2.7% and 2.8% in the third quarter and first nine months of fiscal 2003 over the same periods last year, with same-store
front-end sales increasing 0.5% and 1.0%. These increases were primarily due to increased promotional sales resulting from a refocused and event-driven advertising and marketing campaign,
which partially offset the effects of sluggish economic growth in our primary markets. We expect that our promotional sales will continue to increase in the fourth quarter of fiscal 2003 in light of
continued softness in the economy and promotional activities by our competitors. We will continue to make decisions about our promotional activities based on competitive and economic conditions.

Gross Profit

|                          |  | 13 weeks ended |         | 39 weeks ended |  
|------------------------- |  | -------------- | ------- | -------------- | -
|
|Gross Profit(Thousands)   |  | $              | 281,996 |                | $
|Gross Margin %            |  |                | 26.5    | %              |  
|LIFO Provision(Thousands) |  | $              | 1,000   |                | $

The
increase in gross margin as a percent of sales was partially due to the inclusion of RxAmerica's gross profit in our consolidated total. We recognize RxAmerica's revenues from
third-party health plans net of the related reimbursements due to participating pharmacies. We do not record any of RxAmerica's expenses in cost of merchandise sold. Therefore, all of RxAmerica's
revenues ($6.0 million and $16.4 million in the third quarter and first nine months of fiscal 2003) are included in gross profit. Prior to our acquisition of 100% ownership in RxAmerica
in September 2001, it was a joint venture between Longs and Albertson's, Inc., and we recorded our share of its profits in operating and administrative expenses using the equity method
of accounting. Excluding RxAmerica, our gross margin percentage was 26.1% and 25.8% in the third quarter and first nine months of fiscal 2003, compared to 25.1% and 25.5% in the comparable periods of
fiscal 2002.

14

---

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

In
the first quarter of fiscal 2003, we commenced a series of initiatives to increase efficiency and enhance profitability. One of those initiatives is an upgrade of our supply chain
practices. Improvements in our supply chain, including more efficient distribution center operations and more favorable merchandise buying terms, combined with better category pricing, helped offset
the negative front-end margin impact of increased promotional sales.

The
LIFO provision, which is included in cost of merchandise sold, fluctuates with inflation rates and inventory levels and mix. We estimate LIFO costs for interim financial statements
based on projected annual inflation rates. We calculate actual LIFO costs during the fourth quarter of the fiscal year when we determine final inflation rates and inventory levels. The decreases in
the LIFO provision in the third quarter and first nine months of fiscal 2003 from the same periods of fiscal 2002 reflect lower projected inflation rates.

Operating and Administrative Expenses

Operating and administrative expenses were 24.0% and 22.9% of sales in the third quarter and first nine months of fiscal 2003, compared to 22.6% and 22.0% in the
same periods of fiscal 2002. Several factors contributed to these increases. We included RxAmerica's operating and administrative expenses of approximately $3.2 million and $9.3 million,
or 0.3% of sales, in our consolidated totals for the third quarter and first nine months of fiscal 2003. Prior to our acquisition of 100% ownership of RxAmerica in September 2001, it was a
joint venture between Longs and Albertson's, Inc., and we recorded our share of its profits in operating and administrative expenses using the equity method of accounting. Such equity-method
profits were not material to us.

Workers
compensation expenses increased $3.7 million, or 0.3% of sales, and $6.4 million, or 0.2% of sales, in the third quarter and first nine months of fiscal 2003 over
the comparable periods of fiscal 2002. The increase was a result of a revaluation of our reserves for outstanding claims to reflect regulatory changes in our principal markets. We expect that rising
medical costs and changes in the regulatory environment will continue to drive workers compensation claim costs higher in the near future.

We
incurred operating and administrative expenses of $3.1 million and $8.7 million, or 0.3% of sales, in the third quarter and first nine months of fiscal 2003 related to
the supply chain initiative discussed above. We expect that we will continue to incur operating and administrative expenses related to the supply chain initiative for the next several fiscal years.
However, we believe that the initiative's benefits, including improved gross margins and greater operating efficiencies, will offset those expenses and result in higher operating profits.

Costs
for certain consulting projects, employee terminations and new hire activities caused operating and administrative expenses to increase by approximately 0.3% of sales in the third
quarter and 0.1% of sales in the first nine months of fiscal 2003 over fiscal 2002.

15

---

Finally,
as previously noted, the increased usage of lower-priced generic drugs had a negative impact on our sales. This in turn resulted in higher operating and administrative expenses
when measured as a percent of sales, but increased gross margins.

Depreciation and Amortization

Depreciation and amortization were $19.6 million and $57.7 million in the third quarter and first nine months of fiscal 2003, compared to
$18.7 million and $56.2 million in the same periods of fiscal 2002. Effective with the first quarter of fiscal 2003, we no longer record amortization expense for goodwill and certain
other intangible assets with indefinite useful lives, in accordance with SFAS No. 142,Goodwill and Other Intangible Assets. Amortization for
these assets was $1.6 million and $5.0 million in the third quarter and first nine months of fiscal 2002. Excluding discontinued amortization, depreciation and amortization increased by
$2.5 million and $6.5 million in the third quarter and first nine months of fiscal 2003, primarily due to increased depreciation expense resulting from capital expenditures for new store
investments, improvements to existing stores, supply chain improvements and technology.

Provision for Store Closures and Asset Impairment

We regularly evaluate our store closure reserves and adjust them accordingly based on the estimated future costs to complete the store closures. In the first
quarter of fiscal 2002 we recorded a benefit of $1.0 million from the reduction of our store closure reserve. We closed 3 stores in the first nine months of fiscal 2003 and 15 stores in the
first nine months of fiscal 2002.

Legal Settlements and Other Disputes

In the second quarter of fiscal 2003, we recorded a net charge of $0.5 million for the settlement of certain legal matters. These matters, a brand name
lawsuit and a class action lawsuit involving the employment classification of certain employees, were settled in fiscal 2001 and 2002. As final payments were made during the second quarter of fiscal
2003, we incurred additional costs over those previously estimated.

Net Interest Expense

Net interest expense was $3.3 million and $9.4 million in the 13-week and 39-week periods ended October 31, 2002,
compared to $3.4 million and $10.7 million in the comparable periods last year. The decrease was primarily due to lower interest rates.

Income Taxes

Our effective income tax rate was 26.5% and 36.6% in the 13-week and 39-week periods ended October 31, 2002, compared to 40.0% and
39.8% in the comparable periods last year. The decrease was primarily due to a federal tax law change enacted in fiscal 2002 that allows us to deduct dividends paid on 100% vested shares held in our
employee stock ownership plan, and the benefits of additional tax credits. We expect our effective income tax rate to be approximately 36.6% for the fiscal year ending January 30, 2003.

Cumulative Effect of Accounting Change

As a result of adopting SFAS No. 142,Goodwill and Other Intangible Assets, we recognized a goodwill
impairment charge of $41.0 million ($24.6 million or $0.65 per diluted share after tax) in the first quarter of fiscal 2003 as the cumulative effect of a change in accounting principle
(see "New Accounting Pronouncements" below).

16

---

LIQUIDITY AND CAPITAL RESOURCES

Cash and equivalents were $59.6 million at October 31, 2002, compared to $78.4 million at October 25, 2001 and $123.2 million
at January 31, 2002.

Operating Cash Flows

Net cash provided by operating activities was $5.0 million in the first nine months of fiscal 2003, compared to $111.8 million in the same period
last year. The decrease was primarily due to an $83.9 million increase in inventories. The higher inventory levels reflect accelerated purchases of certain seasonal merchandise due to the
uncertainty caused by the West Coast port labor dispute, as well as lower than anticipated sell-through of inventory during the third quarter. The timing of our quarter-end
dates also had a negative impact on operating cash flows in fiscal 2003. The third quarter of fiscal 2003 ended on October 31st, while the third quarter last year ended on
October 25th. As a result, certain calendar-based payments such as rent and some merchandise purchases were paid during the third quarter of fiscal 2003 versus the fourth quarter
of fiscal 2002. Therefore, other current assets increased by $5.7 million and current liabilities decreased by $3.5 million from January 31, 2002.

Investing Cash Flows

Net cash used in investing activities was $64.9 million in the first nine months of fiscal 2003, compared to $84.3 million in the same period last
year. Investing cash flows included capital expenditures for new stores and store improvements, technology and supply chain improvements.

We
opened 14 new stores, relocated 3 stores and closed 3 stores in the first nine months of fiscal 2003. In the first nine months of fiscal 2002, we opened 14 new stores, relocated 1
store and closed 15 stores. We plan to open 9 additional new stores in the fourth quarter of fiscal 2003, bringing the total number of stores to 456 by the end of the fiscal year. We expect net
capital expenditures for the full year to be between $90 million and $100 million, including amounts for new stores and store improvements, technology and supply chain improvements.

Financing Cash Flows

Net cash used in financing activities was $3.6 million in the first nine months of fiscal 2003. This net total included dividend payments of
$16.1 million, offset by net borrowings of $12.4 million. In the first nine months of fiscal 2002, we received $50 million from the issuance of additional privately placed
promissory notes, offset by the repayment of $28 million in short-term and long-term borrowings, and $15.9 million of dividend payments, for a net financing cash
inflow of $6.2 million.

We
have a $150 million unsecured revolving line of credit, which expires in October 2004 and accrues interest at LIBOR-based rates. Borrowings on the line of credit do not
require repayment until the expiration date. As of October 31, 2002, $55 million was outstanding under this line of credit with a weighted average interest rate of 3.05%.

Additionally,
as of October 31, 2002, we had $158.6 million in privately placed promissory notes, which mature at various dates through 2014 and bear interest at fixed
rates ranging from 5.85% to 7.85%.

Our
debt agreements contain limits on borrowings, dividend payments and repurchases of company stock, and various quarterly financial covenants that set maximum leverage ratios and
minimum fixed charge coverage ratios. As of October 31, 2002, we were in compliance with the restrictions and limitations included in these provisions.

In
November 1999, our board of directors authorized the repurchase of up to 2,000,000 shares of our common stock through November 2004, for a maximum total expenditure of
$80 million. To date,

17

---

we have purchased 1,146,868 shares under this authorization at a total cost of $22.5 million. We did not repurchase any of our common stock during the first nine months of fiscal 2003.

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

NEW ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141,Business
Combinations, and SFAS No. 142,Goodwill and Other Intangible Assets. SFAS No. 141 requires that all business
combinations be accounted for using the purchase method of accounting and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination.
Under SFAS No. 142, goodwill and certain other intangible assets deemed to have indefinite lives will no longer be amortized, but must be tested for impairment annually, or more frequently if
events and circumstances indicate there may be an impairment. We adopted SFAS No. 141 and SFAS No. 142 in the first quarter of fiscal 2003. The adoption of SFAS No. 141 did not
have a material impact on our financial position or results of operations. Upon adoption of SFAS No. 142, we discontinued the amortization of goodwill with a carrying value of
$123.3 million as of January 31, 2002 and annual amortization of approximately $6.3 million.

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

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

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

RISK FACTORS

You should carefully read the following risk factors.

The markets in which we operate are highly competitive, and further increases in competition could adversely affect us.

We face intense competition with local, regional and national companies, including other drug store chains, independent drug stores, on-line
retailers, supermarket chains and mass merchandisers. Many of our competitors have substantially greater resources, including name recognition and capital

18

---

resources, than we do. As competition increases in the markets in which we operate, a significant increase in general pricing pressures could occur, which would require us to increase our sales
volume and to sell higher-margin products and services at reduced prices to remain competitive. We cannot assure you that we will be able to continue to compete effectively in our markets or increase
our sales volume or margins in response to further increased competition.

Our ability to implement supply chain improvements and other strategic initiatives successfully is critical to the ongoing success of our business.

In February 2002, our board of directors approved a program to upgrade our supply chain practices in an effort to increase efficiency and enhance
profitability, along with initiatives to increase front-end sales and pharmacy margins, enhance customer service and improve operational efficiencies. Under this program, we expect to
spend approximately $60 million in capital expenditures for supply chain improvements over a four-year period, of which approximately $12 million had been spent as of
October 31, 2002. The success of these initiatives is important to our future profitability. We cannot assure you that we will be able to execute these initiatives successfully.

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

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

A continued economic slowdown could adversely affect consumer-buying practices and reduce our sales and profitability.

The economy began slowing in fiscal 2002. If the economy continues to slow and unemployment increases, our pharmacy sales could be adversely affected as
unemployed consumers lose their health insurance. Further, if economic conditions worry consumers, they may decrease their purchases, particularly of products other than pharmaceutical products that
they need for health reasons. We make a higher profit on our sales of front-end products than we do on sales of pharmaceutical products. Therefore, any decrease in our sales of
front-end products will decrease our profitability.

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

Our industry is experiencing a shortage of licensed pharmacists in the markets in which we operate. Our inability to attract and retain pharmacists and other key
personnel could adversely affect us. In order to mitigate this risk we entered into a joint venture agreement with AmerisourceBergen to operate a central prescription fill center. The success of this
fill center is important to our ability to address the shortage of pharmacists.

19

---

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

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

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

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

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

The markets for various types of insurance have been increasingly volatile. Increased insurance related expenses, or reductions or modifications in the insurance coverage we
are able to obtain, could have a material adverse affect on us.

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

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

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

Item 3.Quantitative and Qualitative Disclosures of Market Risk

Our major market risk exposure is changing interest rates. We use debt financing in combination with operating cash flows to support capital expenditures,
acquisitions, working capital needs and

20

---

general corporate purposes. A portion of our debt ($55 million at October 31, 2002) bears interest at LIBOR-based rates, and therefore an increase in interest rates could increase our
interest expense. We do not undertake any specific actions to cover our exposure to interest rate risk, and we are not a party to any interest rate risk management transactions. We have not purchased
and do not hold any derivative financial instruments.

A
10% change in interest rates (31 basis points on our floating-rate debt as of October 31, 2002) 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

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

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

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

21

---



PART IIOTHER INFORMATION

Item 6.Exhibits and Reports on Form 8-K





22

---





SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

|      |  |                   |  | LONGS DRUG STORES CORPORATION(Registrant)                                                               
|----- |  | ----------------- |  | --------------------------------------------------------------------------------------------------------
|Date: |  | December 16, 2002 |  | /s/STEVEN F. MCCANNSteven F. McCann
    Senior Vice President, Chief Financial Officer
    and Treasurer
|Date: |  | December 16, 2002 |  | /s/GROVER L. WHITEGrover L. White
    Principal Accounting Officer                                      

23

---



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

I, Warren F. Bryant, certify that:





| |                         |                                                                          
| | ----------------------- | -------------------------------------------------------------------------
| | Date: December 16, 2002 |                                                                          
| |                         | /s/WARREN F. BRYANTWarren F. Bryant President and Chief Executive
Officer

24

---

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

I, Steven F. McCann, certify that:





| |                         |                                                                                                 
| | ----------------------- | ------------------------------------------------------------------------------------------------
| | Date: December 16, 2002 |                                                                                                 
| |                         | /s/STEVEN F. MCCANNSteven F. McCann Senior Vice President, Chief
Financial Officer
and Treasurer

25

---



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

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



| |                          |                                                                          
| | ------------------------ | -------------------------------------------------------------------------
| | Dated: December 16, 2002 |                                                                          
| |                          | /s/WARREN F. BRYANTWarren F. Bryant President and Chief Executive
Officer

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

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



| |                          |                                                                                                 
| | ------------------------ | ------------------------------------------------------------------------------------------------
| | Dated: December 16, 2002 |                                                                                                 
| |                          | /s/STEVEN F. MCCANNSteven F. McCann Senior Vice President, Chief
Financial Officer
and Treasurer

26

---

QuickLinks