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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



FORM 10-Q



(Mark One)



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



For the quarterly period ended October 27, 2005



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



For the transition period from
 to



Commission file number 1-8978



LONGS DRUG STORES CORPORATION

(Exact name of registrant as specified in its charter)



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



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 x   No ̈



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

Yes x  No ̈



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ̈No x



There were 37,463,000 shares of common stock outstanding as of November 24, 2005.



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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS



This quarterly report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such statements relate to, among other things, pharmacy and front-end sales and gross profits; operating and administrative
expenses; depreciation and amortization expense; cost reductions; changes in supply chain practices; workers compensation costs; liquidity and cash requirements; working capital reductions; the number of store openings, closures and remodels;
the level of capital expenditures; contractual commitments; third-party sales as a percentage of total pharmacy sales; front-end merchandise assortments; gasoline prices; utilization of generic drugs; continuing reductions in third-party
reimbursement levels; and development of our pharmacy benefit management segment and mail-order services and are indicated by words or phrases such as continuing, expects, estimates, believes,
plans, anticipates, will and other similar words or phrases.



These forward-looking statements are based on our current plans and expectations and involve risks and uncertainties that could cause actual events and
results to vary materially from those included in or contemplated by forward-looking statements we make. These risks and uncertainties include, but are not limited to, those set forth below:



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



| |  |  | The effect of the scheduled addition of a prescription drug benefit to Medicare on our drug store and pharmacy benefit management revenues and profitability;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



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



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



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



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



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



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



In addition, because we lack a perpetual inventory system, our ability to
accurately forecast and track our gross profits and inventory levels during periods between our quarterly physical inventories is limited. Therefore, our actual gross profits and inventory levels may vary materially from the gross profits and
inventory levels included in or contemplated by forward-looking statements we make.



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



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TABLE OF CONTENTS



|           |  |                                                                                       |  |     
|---------- |  | ------------------------------------------------------------------------------------- |  | ----
|           |  |                                                                                       |  | Page
|PART I     |  | FINANCIAL INFORMATION                                                                 |  |     
|Item 1     |  | Condensed Consolidated Financial Statements                                           |  | 1   
|Item 2     |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 11  
|Item 3     |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 18  
|Item 4     |  | Controls and Procedures                                                               |  | 18  
|           |  |                                                                                      
|PART II    |  | OTHER INFORMATION                                                                     |  |     
|Item 1     |  | Legal Proceedings                                                                     |  | 19  
|Item 2     |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 19  
|Item 6     |  | Exhibits and Reports on Form 8-K                                                      |  | 20  
|           | 
|Signatures |  | 21                                                                                   



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PART I - FINANCIAL INFORMATION



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



LONGS DRUG STORES CORPORATION



CONDENSED STATEMENTS OF CONSOLIDATED INCOME (unaudited)



|                                               |  |                                    |           |   |                        |   |           |                 |  |   |                 |   |  |   |           |  
|---------------------------------------------- |  | ---------------------------------- | --------- | - | ---------------------- | - | --------- | --------------- |  | - | --------------- | - |  | - | --------- | -
|                                               |  | For the 13 weeks ended             |           |   | For the 39 weeks ended |  
|                                               |  | October 27,2005                    |           |   | October 28,2004        |   |           | October 27,2005 |  |   | October 28,2004 |  
|                                               |  | Thousands Except Per Share Amounts |          
|Sales                                          |  | $                                  | 1,120,384 |   |                        | $ | 1,100,897 |                 |  | $ | 3,428,283       |   |  | $ | 3,411,075 |  
|Cost of sales                                  |  |                                    | 831,647   |   |                        |   | 813,185   |                 |  |   | 2,527,677       |   |  |   | 2,535,011 |  
|                                               |  |                                    |           |   |                        |   |           |                 |  |   |                 |   |  |   |           |  
|Gross profit                                   |  |                                    | 288,737   |   |                        |   | 287,712   |                 |  |   | 900,606         |   |  |   | 876,064   |  
|Operating and administrative expenses          |  |                                    | 252,623   |   |                        |   | 254,487   |                 |  |   | 769,701         |   |  |   | 760,903   |  
|Depreciation and amortization                  |  |                                    | 20,713    |   |                        |   | 20,748    |                 |  |   | 63,557          |   |  |   | 64,518    |  
|Legal settlements and other disputes, net      |  |                                    |          |   |                        |   |          |                 |  |   |                |   |  |   | 10,773    |  
|                                               |  |                                    |           |   |                        |   |           |                 |  |   |                 |   |  |   |           |  
|Operating income                               |  |                                    | 15,401    |   |                        |   | 12,477    |                 |  |   | 67,348          |   |  |   | 39,870    |  
|Interest expense                               |  |                                    | 2,071     |   |                        |   | 3,589     |                 |  |   | 6,820           |   |  |   | 11,031    |  
|Interest income                                |  |                                    | (223      | ) |                        |   | (126      | )               |  |   | (798            | ) |  |   | (406      | )
|                                               |  |                                    |           |   |                        |   |           |                 |  |   |                 |   |  |   |           |  
|Income before income taxes                     |  |                                    | 13,553    |   |                        |   | 9,014     |                 |  |   | 61,326          |   |  |   | 29,245    |  
|Income taxes                                   |  |                                    | 4,608     |   |                        |   | 2,785     |                 |  |   | 22,742          |   |  |   | 10,391    |  
|                                               |  |                                    |           |   |                        |   |           |                 |  |   |                 |   |  |   |           |  
|Net income                                     |  | $                                  | 8,945     |   |                        | $ | 6,229     |                 |  | $ | 38,584          |   |  | $ | 18,854    |  
|                                               |  |                                    |           |   |                        |   |           |                 |  |   |                 |   |  |   |           |  
|Earnings per common share:                     |  |                                    |           |   |                        |   |           |                 |  |   |                 |   |  |   |           |  
|Basic                                          |  | $                                  | 0.24      |   |                        | $ | 0.17      |                 |  | $ | 1.03            |   |  | $ | 0.51      |  
|Diluted                                        |  |                                    | 0.23      |   |                        |   | 0.17      |                 |  |   | 1.01            |   |  |   | 0.50      |  
|Dividends per common share                     |  | $                                  | 0.14      |   |                        | $ | 0.14      |                 |  | $ | 0.42            |   |  | $ | 0.42      |  
|Weighted average number of shares outstanding: |  |                                    |           |   |                        |   |           |                 |  |   |                 |   |  |   |           |  
|Basic                                          |  |                                    | 37,382    |   |                        |   | 37,252    |                 |  |   | 37,351          |   |  |   | 37,193    |  
|Diluted                                        |  |                                    | 38,393    |   |                        |   | 37,577    |                 |  |   | 38,280          |   |  |   | 37,457    |  



See notes to condensed
consolidated financial statements.



1



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LONGS DRUG STORES CORPORATION



CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)



|                                                                                                                                 |  |                                    |           |   |                 |   |           |                 |  |   |           |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------- | --------- | - | --------------- | - | --------- | --------------- |  | - | --------- | -
|                                                                                                                                 |  | October 27,2005                    |           |   | October 28,2004 |   |           | January 27,2005 | 
|                                                                                                                                 |  | Thousands Except Share Information |          
|Assets                                                                                                                           |  |                                    |           |   |                 |   |           |                 |  |   |           |  
|Current Assets:                                                                                                                  |  |                                    |           |   |                 |   |           |                 |  |   |           |  
|Cash and cash equivalents                                                                                                        |  | $                                  | 39,987    |   |                 | $ | 67,093    |                 |  | $ | 53,890    |  
|Pharmacy and other receivables, net                                                                                              |  |                                    | 168,459   |   |                 |   | 160,373   |                 |  |   | 158,345   |  
|Merchandise inventories, net                                                                                                     |  |                                    | 499,958   |   |                 |   | 476,979   |                 |  |   | 433,280   |  
|Deferred income taxes                                                                                                            |  |                                    | 41,883    |   |                 |   | 38,798    |                 |  |   | 43,074    |  
|Prepaid expenses and other current assets                                                                                        |  |                                    | 11,688    |   |                 |   | 13,253    |                 |  |   | 11,990    |  
|                                                                                                                                 |  |                                    |           |   |                 |   |           |                 |  |   |           |  
|Total current assets                                                                                                             |  |                                    | 761,975   |   |                 |   | 756,496   |                 |  |   | 700,579   |  
|                                                                                                                                 |  |                                    |           |   |                 |   |           |                 |  |   |           |  
|Property:                                                                                                                        |  |                                    |           |   |                 |   |           |                 |  |   |           |  
|Land                                                                                                                             |  |                                    | 111,096   |   |                 |   | 108,074   |                 |  |   | 108,198   |  
|Buildings and leasehold improvements                                                                                             |  |                                    | 583,300   |   |                 |   | 573,041   |                 |  |   | 577,773   |  
|Equipment and fixtures                                                                                                           |  |                                    | 592,604   |   |                 |   | 559,165   |                 |  |   | 565,161   |  
|                                                                                                                                 |  |                                    |           |   |                 |   |           |                 |  |   |           |  
|Total                                                                                                                            |  |                                    | 1,287,000 |   |                 |   | 1,240,280 |                 |  |   | 1,251,132 |  
|Less accumulated depreciation                                                                                                    |  |                                    | 667,374   |   |                 |   | 621,357   |                 |  |   | 632,778   |  
|                                                                                                                                 |  |                                    |           |   |                 |   |           |                 |  |   |           |  
|Property, net                                                                                                                    |  |                                    | 619,626   |   |                 |   | 618,923   |                 |  |   | 618,354   |  
|                                                                                                                                 |  |                                    |           |   |                 |   |           |                 |  |   |           |  
|Goodwill                                                                                                                         |  |                                    | 82,085    |   |                 |   | 82,085    |                 |  |   | 82,085    |  
|Intangible assets, net                                                                                                           |  |                                    | 5,953     |   |                 |   | 6,378     |                 |  |   | 6,354     |  
|Other non-current assets                                                                                                         |  |                                    | 13,560    |   |                 |   | 4,069     |                 |  |   | 3,791     |  
|                                                                                                                                 |  |                                    |           |   |                 |   |           |                 |  |   |           |  
|Total                                                                                                                            |  | $                                  | 1,483,199 |   |                 | $ | 1,467,951 |                 |  | $ | 1,411,163 |  
|                                                                                                                                 |  |                                    |           |   |                 |   |           |                 |  |   |           |  
|Liabilities and Stockholders Equity                                                                                             |  |                                    |           |   |                 |   |           |                 |  |   |           |  
|Current Liabilities:                                                                                                             |  |                                    |           |   |                 |   |           |                 |  |   |           |  
|Accounts payable and accrued expenses                                                                                            |  | $                                  | 370,357   |   |                 | $ | 320,419   |                 |  | $ | 273,957   |  
|Employee compensation and benefits                                                                                               |  |                                    | 121,415   |   |                 |   | 115,970   |                 |  |   | 129,214   |  
|Taxes payable                                                                                                                    |  |                                    | 57,194    |   |                 |   | 36,248    |                 |  |   | 52,999    |  
|Current maturities of debt                                                                                                       |  |                                    | 8,870     |   |                 |   | 41,870    |                 |  |   | 8,870     |  
|                                                                                                                                 |  |                                    |           |   |                 |   |           |                 |  |   |           |  
|Total current liabilities                                                                                                        |  |                                    | 557,836   |   |                 |   | 514,507   |                 |  |   | 465,040   |  
|                                                                                                                                 |  |                                    |           |   |                 |   |           |                 |  |   |           |  
|Long-term debt                                                                                                                   |  |                                    | 116,818   |   |                 |   | 175,688   |                 |  |   | 145,688   |  
|Deferred income taxes and other long-term liabilities                                                                            |  |                                    | 63,828    |   |                 |   | 57,961    |                 |  |   | 73,298    |  
|Commitments and Contingencies                                                                                                    |  |                                    |           |   |                 |   |           |                 |  |   |           |  
|Stockholders Equity:                                                                                                            |  |                                    |           |   |                 |   |           |                 |  |   |           |  
|Common stock: par value $0.50 per share, 120,000,000 shares authorized, 37,428,000, 37,600,000 and 37,418,000 shares
outstanding |  |                                    | 18,714    |   |                 |   | 18,800    |                 |  |   | 18,709    |  
|Additional capital                                                                                                               |  |                                    | 209,391   |   |                 |   | 177,614   |                 |  |   | 180,072   |  
|Unearned compensation                                                                                                            |  |                                    | (1,214    | ) |                 |   | (1,846    | )               |  |   | (1,528    | )
|Retained earnings                                                                                                                |  |                                    | 517,826   |   |                 |   | 525,227   |                 |  |   | 529,884   |  
|                                                                                                                                 |  |                                    |           |   |                 |   |           |                 |  |   |           |  
|Total stockholders equity                                                                                                       |  |                                    | 744,717   |   |                 |   | 719,795   |                 |  |   | 727,137   |  
|                                                                                                                                 |  |                                    |           |   |                 |   |           |                 |  |   |           |  
|Total                                                                                                                            |  | $                                  | 1,483,199 |   |                 | $ | 1,467,951 |                 |  | $ | 1,411,163 |  
|                                                                                                                                 |  |                                    |           |   |                 |   |           |                 |  |   |           |  



See notes to condensed
consolidated financial statements.



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LONGS DRUG STORES CORPORATION



CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (unaudited)



|                                                                                  |  |                        |         |   |                 |   |         |  
|--------------------------------------------------------------------------------- |  | ---------------------- | ------- | - | --------------- | - | ------- | -
|                                                                                  |  | For the 39 weeks ended |        
|                                                                                  |  | October 27,2005        |         |   | October 28,2004 |  
|                                                                                  |  | Thousands              |        
|Operating Activities:                                                             |  |                        |         |   |                 |   |         |  
|Net income                                                                        |  | $                      | 38,584  |   |                 | $ | 18,854  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                        |         |   |                 |   |         |  
|Depreciation and amortization                                                     |  |                        | 63,557  |   |                 |   | 64,518  |  
|Deferred income taxes and other                                                   |  |                        | (9,169  | ) |                 |   | 9,143   |  
|Stock awards and options, net                                                     |  |                        | 9,948   |   |                 |   | 566     |  
|Common stock contribution to benefit plan                                         |  |                        | 8,105   |   |                 |   | 6,554   |  
|Changes in assets and liabilities:                                                |  |                        |         |   |                 |   |         |  
|Pharmacy and other receivables                                                    |  |                        | (10,114 | ) |                 |   | 3,577   |  
|Merchandise inventories                                                           |  |                        | (66,678 | ) |                 |   | 143     |  
|Other assets                                                                      |  |                        | 949     |   |                 |   | (285    | )
|Current liabilities and other                                                     |  |                        | 90,628  |   |                 |   | 1,662   |  
|                                                                                  |  |                        |         |   |                 |   |         |  
|Net cash provided by operating activities                                         |  |                        | 125,810 |   |                 |   | 104,732 |  
|                                                                                  |  |                        |         |   |                 |   |         |  
|Investing Activities:                                                             |  |                        |         |   |                 |   |         |  
|Capital expenditures and acquisitions                                             |  |                        | (78,037 | ) |                 |   | (75,058 | )
|Proceeds from property dispositions                                               |  |                        | 6,251   |   |                 |   | 6,167   |  
|                                                                                  |  |                        |         |   |                 |   |         |  
|Net cash used in investing activities                                             |  |                        | (71,786 | ) |                 |   | (68,891 | )
|                                                                                  |  |                        |         |   |                 |   |         |  
|Financing Activities:                                                             |  |                        |         |   |                 |   |         |  
|Proceeds from (repayments of) line of credit borrowings, net                      |  |                        | (20,000 | ) |                 |   | 20,000  |  
|Repayments of private placement and other borrowings                              |  |                        | (8,870  | ) |                 |   | (8,870  | )
|Repurchase of common stock                                                        |  |                        | (40,655 | ) |                 |   | (7,236  | )
|Proceeds from exercise of stock options                                           |  |                        | 17,356  |   |                 |   | 2,807   |  
|Dividend payments                                                                 |  |                        | (15,758 | ) |                 |   | (15,671 | )
|                                                                                  |  |                        |         |   |                 |   |         |  
|Net cash used in financing activities                                             |  |                        | (67,927 | ) |                 |   | (8,970  | )
|                                                                                  |  |                        |         |   |                 |   |         |  
|Increase (decrease) in cash and cash equivalents                                  |  |                        | (13,903 | ) |                 |   | 26,871  |  
|Cash and cash equivalents at beginning of period                                  |  |                        | 53,890  |   |                 |   | 40,222  |  
|                                                                                  |  |                        |         |   |                 |   |         |  
|Cash and cash equivalents at end of period                                        |  | $                      | 39,987  |   |                 | $ | 67,093  |  
|                                                                                  |  |                        |         |   |                 |   |         |  
|Supplemental disclosure of cash flow information:                                 |  |                        |         |   |                 |   |         |  
|Cash paid for interest, net of amounts capitalized                                |  | $                      | 7,002   |   |                 | $ | 10,667  |  
|Cash paid for income taxes                                                        |  |                        | 18,233  |   |                 |   | 21,613  |  



See notes to condensed
consolidated financial statements.



3



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LONGS DRUG STORES CORPORATION



CONDENSED STATEMENTS OF CONSOLIDATED STOCKHOLDERS EQUITY (unaudited)



For the 52 weeks ended January 27, 2005 and the 39 weeks ended
October 27, 2005



|                                                                |  |              |   |  |                    |        |   |                       |   |         |                   |  |   |                           |   |  |   |         |   |  |   |         |  
|--------------------------------------------------------------- |  | ------------ | - |  | ------------------ | ------ | - | --------------------- | - | ------- | ----------------- |  | - | ------------------------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                |  | Common Stock |   |  | Additional Capital |        |   | Unearned Compensation |   |         | Retained Earnings |  |   | TotalStockholders Equity |  
|                                                                |  | Shares       |   |  | Amount             |        |   |                       |   |        
|                                                                |  | Thousands    |  
|Balance at January 29, 2004                                     |  | 37,544       |   |  | $                  | 18,772 |   |                       | $ | 170,321 |                   |  | $ | (2,525                    | ) |  | $ | 527,353 |   |  | $ | 713,921 |  
|Net income                                                      |  |              |   |  |                    |        |   |                       |   |         |                   |  |   |                           |   |  |   | 36,560  |   |  |   | 36,560  |  
|Dividends ($0.56 per share)                                     |  |              |   |  |                    |        |   |                       |   |         |                   |  |   |                           |   |  |   | (20,948 | ) |  |   | (20,948 | )
|Stock contributions to Employee Savings and Profit Sharing Plan |  | 320          |   |  |                    | 160    |   |                       |   | 6,917   |                   |  |   |                           |   |  |   |         |   |  |   | 7,077   |  
|Stock awards, net of forfeitures                                |  | 2            |   |  |                    | 1      |   |                       |   | (400    | )                 |  |   | (267                      | ) |  |   |         |   |  |   | (666    | )
|Stock-based compensation expense                                |  |              |   |  |                    |        |   |                       |   |         |                   |  |   | 1,264                     |   |  |   |         |   |  |   | 1,264   |  
|Stock options exercised                                         |  | 288          |   |  |                    | 144    |   |                       |   | 6,067   |                   |  |   |                           |   |  |   |         |   |  |   | 6,211   |  
|Tax benefit related to stock awards and stock options, net      |  |              |   |  |                    |        |   |                       |   | 573     |                   |  |   |                           |   |  |   |         |   |  |   | 573     |  
|Repurchase of common stock                                      |  | (736         | ) |  |                    | (368   | ) |                       |   | (3,406  | )                 |  |   |                           |   |  |   | (13,081 | ) |  |   | (16,855 | )
|                                                                |  |              |   |  |                    |        |   |                       |   |         |                   |  |   |                           |   |  |   |         |   |  |   |         |  
|Balance at January 27, 2005                                     |  | 37,418       |   |  |                    | 18,709 |   |                       |   | 180,072 |                   |  |   | (1,528                    | ) |  |   | 529,884 |   |  |   | 727,137 |  
|                                                                |  |              |   |  |                    |        |   |                       |   |         |                   |  |   |                           |   |  |   |         |   |  |   |         |  
|Net income                                                      |  |              |   |  |                    |        |   |                       |   |         |                   |  |   |                           |   |  |   | 38,584  |   |  |   | 38,584  |  
|Dividends ($0.42 per share)                                     |  |              |   |  |                    |        |   |                       |   |         |                   |  |   |                           |   |  |   | (15,758 | ) |  |   | (15,758 | )
|Stock contributions to Employee Savings and Profit Sharing Plan |  | 228          |   |  |                    | 114    |   |                       |   | 7,991   |                   |  |   |                           |   |  |   |         |   |  |   | 8,105   |  
|Stock awards, net of forfeitures                                |  | 41           |   |  |                    | 20     |   |                       |   | 1,617   |                   |  |   | (2,544                    | ) |  |   |         |   |  |   | (907    | )
|Stock-based compensation expense                                |  |              |   |  |                    |        |   |                       |   | 2,292   |                   |  |   | 2,858                     |   |  |   |         |   |  |   | 5,150   |  
|Stock options exercised                                         |  | 783          |   |  |                    | 392    |   |                       |   | 16,964  |                   |  |   |                           |   |  |   |         |   |  |   | 17,356  |  
|Tax benefit related to stock awards and stock options, net      |  |              |   |  |                    |        |   |                       |   | 5,705   |                   |  |   |                           |   |  |   |         |   |  |   | 5,705   |  
|Repurchase of common stock                                      |  | (1,042       | ) |  |                    | (521   | ) |                       |   | (5,250  | )                 |  |   |                           |   |  |   | (34,884 | ) |  |   | (40,655 | )
|                                                                |  |              |   |  |                    |        |   |                       |   |         |                   |  |   |                           |   |  |   |         |   |  |   |         |  
|Balance at October 27, 2005                                     |  | 37,428       |   |  | $                  | 18,714 |   |                       | $ | 209,391 |                   |  | $ | (1,214                    | ) |  | $ | 517,826 |   |  | $ | 744,717 |  
|                                                                |  |              |   |  |                    |        |   |                       |   |         |                   |  |   |                           |   |  |   |         |   |  |   |         |  



See notes to condensed
consolidated financial statements.



4



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##### Table of Contents

LONGS DRUG STORES CORPORATION



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



1. Basis of Presentation



The accompanying interim condensed consolidated financial statements include the financial statements of Longs Drug Stores Corporation
(Longs or the Company) and its wholly-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated. The interim condensed consolidated financial statements have been prepared on a basis
consistent in all material respects with the accounting policies described and applied in the Annual Report of the Company on Form 10-K for the fiscal year ended January 27, 2005, and reflect all adjustments that are, in managements
opinion, necessary for a fair presentation of the results for the periods presented. The condensed consolidated financial statements as of and for the periods ended October 27, 2005 and October 28, 2004 are unaudited. The condensed
consolidated balance sheet as of January 27, 2005, and condensed consolidated statement of stockholders equity for the year then ended, presented herein, have been derived from the audited consolidated financial statements of the Company
included in the Form 10-K for the fiscal year ended January 27, 2005. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the
United States of America have been omitted. The interim condensed consolidated financial statements should be read in connection with the financial statements in the Companys Annual Report on Form 10-K for the fiscal year ended
January 27, 2005.



2. New Accounting Pronouncements



In December 2004, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment, which revises SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion
No. 25, Accounting for Stock Issued to Employees. SFAS No. 123R requires that the fair value of stock-based employee compensation, including stock options and stock awards, be recognized as expense as the related services are
performed. SFAS No. 123R is effective as of the beginning of the first annual reporting period that begins after June 15, 2005 (the Companys fiscal year ending January 25, 2007). The Company currently uses the intrinsic value
method of accounting for stock-based employee compensation, in accordance with the provisions of APB No. 25 (see Note 3). Adoption of SFAS No. 123R will therefore result in an increase in reported operating and administrative expenses,
primarily for employee stock options, and thus a decrease in net income and earnings per share. The magnitude of the effect will depend on the nature and extent of the Companys stock-based compensation programs.



In October 2005, the Financial Accounting Standards Board issued FASB Staff
Position (FSP) No. FAS 13-1, Accounting for Rental Costs Incurred during a Construction Period. FSP No. FAS 13-1 requires rental costs associated with ground or building operating leases that are incurred during a construction
period to be recognized as expense. FSP No. FAS 13-1 is effective as of the first reporting period beginning after December 15, 2005 (the first quarter of the Companys fiscal year ending January 25, 2007), and may also be applied to
previous periods retrospectively upon adoption. The Company currently capitalizes rent incurred during initial construction of store properties or related improvements and includes these costs in buildings and leasehold improvements. Adoption of FSP
No. FAS 13-1 will therefore result in an increase in reported operating and administrative expenses for rental costs incurred during the construction period, offset by a decrease in reported expenses for the remainder of the lease term. The
magnitude of the effect will depend on the number and timing of new store openings. At this time, management expects that the adoption of FSP No. FAS 13-1 will not have a material impact on the Companys consolidated financial statements.



3. Stock-Based Compensation



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



5



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##### Table of Contents

LONGS DRUG STORES CORPORATION



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



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



|                                                                                                                                            |  |                             |        |   |                        |   |       |                 |  |   |                 |   |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---------------------- | - | ----- | --------------- |  | - | --------------- | - |  | - | ------ | -
|                                                                                                                                            |  | For the 13 weeks ended      |        |   | For the 39 weeks ended |  
|                                                                                                                                            |  | October 27,2005             |        |   | October 28,2004        |   |       | October 27,2005 |  |   | October 28,2004 |  
|                                                                                                                                            |  | Thousands, except per share |       
|Net income, as reported                                                                                                                     |  | $                           | 8,945  |   |                        | $ | 6,229 |                 |  | $ | 38,584          |   |  | $ | 18,854 |  
|Add: Stock-based employee compensation expense included in reported net income, net of related tax effects                                  |  |                             | 596    |   |                        |   | 122   |                 |  |   | 2,735           |   |  |   | 487    |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                             | (1,954 | ) |                        |   | (980  | )               |  |   | (4,699          | ) |  |   | (3,011 | )
|                                                                                                                                            |  |                             |        |   |                        |   |       |                 |  |   |                 |   |  |   |        |  
|Pro forma net income                                                                                                                        |  | $                           | 7,587  |   |                        | $ | 5,371 |                 |  | $ | 36,620          |   |  | $ | 16,330 |  
|                                                                                                                                            |  |                             |        |   |                        |   |       |                 |  |   |                 |   |  |   |        |  
|Basic earnings per common share:                                                                                                            |  |                             |        |   |                        |   |       |                 |  |   |                 |   |  |   |        |  
|As reported                                                                                                                                 |  | $                           | 0.24   |   |                        | $ | 0.17  |                 |  | $ | 1.03            |   |  | $ | 0.51   |  
|Pro forma                                                                                                                                   |  | $                           | 0.20   |   |                        | $ | 0.14  |                 |  | $ | 0.98            |   |  | $ | 0.44   |  
|Diluted earnings per common share:                                                                                                          |  |                             |        |   |                        |   |       |                 |  |   |                 |   |  |   |        |  
|As reported                                                                                                                                 |  | $                           | 0.23   |   |                        | $ | 0.17  |                 |  | $ | 1.01            |   |  | $ | 0.50   |  
|Pro forma                                                                                                                                   |  | $                           | 0.20   |   |                        | $ | 0.14  |                 |  | $ | 0.96            |   |  | $ | 0.44   |  



4. Earnings Per Share



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



|                                                      |  |                 |  |                 |  |                 |  |                
|----------------------------------------------------- |  | --------------- |  | --------------- |  | --------------- |  | ---------------
|                                                      |  | 13 weeks ended  |  | 39 weeks ended 
|                                                      |  | October 27,2005 |  | October 28,2004 |  | October 27,2005 |  | October 28,2004
|                                                      |  | Thousands      
|Basic weighted average number of shares outstanding   |  | 37,382          |  | 37,252          |  | 37,351          |  | 37,193         
|Effect of dilution from:                              |  |                 |  |                 |  |                 |  |                
|Restricted stock awards                               |  | 91              |  | 142             |  | 98              |  | 146            
|Stock options                                         |  | 920             |  | 183             |  | 831             |  | 118            
|                                                      |  |                 |  |                 |  |                 |  |                
|Diluted weighted average number of shares outstanding |  | 38,393          |  | 37,577          |  | 38,280          |  | 37,457         
|                                                      |  |                 |  |                 |  |                 |  |                



The computations of
diluted earnings per share excluded 0.5 million stock options for the 13-week period ended October 28, 2004 and 2.2 million stock options for the 39-week period ended October 28, 2004 because the exercise prices of the stock
options were greater than or equal to the average share price for the respective periods, and therefore their inclusion would have been anti-dilutive.



5. Merchandise Inventories



Merchandise inventories are stated at the lower of cost or market value. Cost is determined using the last-in, first-out (LIFO) method. The excess of
current cost over LIFO values was $182.8 million as of October 27, 2005, $177.8 million as of October 28, 2004, and $178.3 million as of January 27, 2005. LIFO costs for interim financial statements are estimated based on projected
annual inflation rates, inventory levels, and merchandise mix. Actual LIFO costs are calculated during the fourth quarter of the fiscal year when final inflation rates, inventory levels and merchandise mix are determined.



6



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##### Table of Contents

LONGS DRUG STORES CORPORATION



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



6. Goodwill, Intangible Assets and Other Non-Current Assets



All of the Companys goodwill and other intangible assets are included
in the retail drug store segment. Goodwill and other intangible assets with indefinite useful lives are not amortized, but are subject to impairment testing annually or more frequently if events or changes in circumstances warrant. The
Companys intangible assets other than goodwill include the following:



|                                               |  |                       |  |                    |       |                         |   |        |                  |  |   |      
|---------------------------------------------- |  | --------------------- |  | ------------------ | ----- | ----------------------- | - | ------ | ---------------- |  | - | -----
|                                               |  | EstimatedUseful Lives |  | GrossCarryingValue |       | AccumulatedAmortization |   |        | NetCarryingValue
|                                               |  |                       |  | Thousands         
|As of October 27, 2005:                        |  |                       |  |                    |       |                         |   |        |                  |  |   |      
|Intangible assets subject to amortization:     |  |                       |  |                    |       |                         |   |        |                  |  |   |      
|Pharmacy customer lists                        |  | 1-5 years             |  | $                  | 2,979 |                         | $ | (1,950 | )                |  | $ | 1,029
|Non-compete agreements and other               |  | 2-5 years             |  |                    | 50    |                         |   | (41    | )                |  |   | 9    
|                                               |  |                       |  |                    |       |                         |   |        |                  |  |   |      
|Total                                          |  |                       |  |                    | 3,029 |                         |   | (1,991 | )                |  |   | 1,038
|Intangible assets not subject to amortization: |  |                       |  |                    |       |                         |   |        |                  |  |   |      
|Beverage licenses                              |  | N/A                   |  |                    | 4,915 |                         |   |       |                  |  |   | 4,915
|                                               |  |                       |  |                    |       |                         |   |        |                  |  |   |      
|Total                                          |  |                       |  | $                  | 7,944 |                         | $ | (1,991 | )                |  | $ | 5,953
|                                               |  |                       |  |                    |       |                         |   |        |                  |  |   |      
|As of January 27, 2005:                        |  |                       |  |                    |       |                         |   |        |                  |  |   |      
|Intangible assets subject to amortization:     |  |                       |  |                    |       |                         |   |        |                  |  |   |      
|Pharmacy customer lists                        |  | 1-5 years             |  | $                  | 3,020 |                         | $ | (1,502 | )                |  | $ | 1,518
|Non-compete agreements and other               |  | 2-5 years             |  |                    | 50    |                         |   | (32    | )                |  |   | 18   
|                                               |  |                       |  |                    |       |                         |   |        |                  |  |   |      
|Total                                          |  |                       |  |                    | 3,070 |                         |   | (1,534 | )                |  |   | 1,536
|Intangible assets not subject to amortization: |  |                       |  |                    |       |                         |   |        |                  |  |   |      
|Beverage licenses                              |  | N/A                   |  |                    | 4,818 |                         |   |       |                  |  |   | 4,818
|                                               |  |                       |  |                    |       |                         |   |        |                  |  |   |      
|Total                                          |  |                       |  | $                  | 7,888 |                         | $ | (1,534 | )                |  | $ | 6,354
|                                               |  |                       |  |                    |       |                         |   |        |                  |  |   |      



Amortization expense
for intangible assets with finite useful lives was $159 thousand for the 13-week period ended October 27, 2005 and $498 thousand for the 39-week period ended October 27, 2005 and $168 thousand for the 13-week period ended October 28,
2004 and $667 thousand for the 39-week period ended October 28, 2004. Estimated annual amortization expense on these intangibles for their remaining estimated useful lives is as follows (in thousands):



|                         |  |   |      
|------------------------ |  | - | -----
|Fiscal year ending:      |  |   |      
|2006 (remainder of year) |  | $ | 152  
|2007                     |  |   | 537  
|2008                     |  |   | 261  
|2009                     |  |   | 88   
|                         |  |   |      
|Total                    |  | $ | 1,038
|                         |  |   |      



As of October 27,
2005, other non-current assets included assets held for sale (primarily land, buildings and related improvements) with a net carrying value of $10.4 million related to the Companys front-end distribution center in Lathrop, California. The
Company is currently constructing a new front-end distribution center in Patterson, California, scheduled for completion in the summer of fiscal 2007, and plans to vacate its Lathrop distribution center when the Patterson distribution center is
fully operational. Management expects to sell the Lathrop distribution center assets within the next 12 months, and such sale will likely include a leaseback provision to allow for the Companys continued operation of the Lathrop
distribution center for a reasonable period until such time as the Patterson distribution center is fully operational. Management further expects to fully recover the net carrying value of the assets held for sale.



7



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##### Table of Contents

LONGS DRUG STORES CORPORATION



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



7. Debt



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



|                                                                                                                                 |  |                 |         |                 |   |        
|-------------------------------------------------------------------------------------------------------------------------------- |  | --------------- | ------- | --------------- | - | -------
|                                                                                                                                 |  | October 27,2005 |         | January 27,2005
|                                                                                                                                 |  | Thousands      
|Secured revolving line of credit, variable interest (weighted average rate of 5.24% as of October 27, 2005), expires August
2009 |  | $               | 20,000  |                 | $ | 40,000 
|Secured private placement notes, fixed interest rates ranging from 5.85% to 7.85%, mature at various dates through 2014          |  |                 | 105,688 |                 |   | 114,558
|                                                                                                                                 |  |                 |         |                 |   |        
|Total debt                                                                                                                       |  |                 | 125,688 |                 |   | 154,558
|Less current maturities                                                                                                          |  |                 | 8,870   |                 |   | 8,870  
|                                                                                                                                 |  |                 |         |                 |   |        
|Long-term portion                                                                                                                |  | $               | 116,818 |                 | $ | 145,688
|                                                                                                                                 |  |                 |         |                 |   |        



The Companys
debt agreements contain customary restrictions, and the private placement notes also include various customary financial covenants. As of October 27, 2005, the Company was in compliance with the restrictions and limitations included in these
provisions.



8. Store Closure Reserves



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



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



|                                                              |  |                        |        |   |                 |   |        |  
|------------------------------------------------------------- |  | ---------------------- | ------ | - | --------------- | - | ------ | -
|                                                              |  | For the 39 weeks ended |       
|                                                              |  | October 27,2005        |        |   | October 28,2004 |  
|                                                              |  | Thousands              |       
|Reserve balance - beginning of period                         |  | $                      | 7,011  |   |                 | $ | 9,544  |  
|Provision for store closures                                  |  |                        |       |   |                 |   |       |  
|Reserve accretion                                             |  |                        | 18     |   |                 |   | 59     |  
|Cash payments for lease related costs, net of sublease income |  |                        | (2,040 | ) |                 |   | (2,158 | )
|                                                              |  |                        |        |   |                 |   |        |  
|Reserve balance - end of period                               |  | $                      | 4,989  |   |                 | $ | 7,445  |  
|                                                              |  |                        |        |   |                 |   |        |  



9. Commitments and Contingencies



Rankin v. Longs Drug Stores California, Inc., as amended
on January 19, 2005, was originally filed in the Superior Court of California, San Diego County on October 13, 2004. The lawsuit was certified as a class action on July 19, 2005 and alleges that the Companys employment
application violates California Labor Code Section 432.8 by inquiring about criminal convictions within the last seven years, without providing an exception for misdemeanor marijuana convictions more than two years old. The plaintiff seeks to
recover statutory damages and attorneys fees for him and all similarly situated individuals who applied for employment with the Company during the class period. The Company is vigorously investigating and defending this litigation. The
financial impact to the Company, if any, cannot be predicted at this time.



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



8



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##### Table of Contents

LONGS DRUG STORES CORPORATION



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



10. Stockholders Equity



In the first nine months of fiscal 2006, the Company repurchased 1,042,000 shares of its outstanding common stock at a total
cost of $40.7 million. In the first nine months of fiscal 2005, the Company repurchased 382,600 shares at a total cost of $7.2 million. These shares were repurchased under two separate programs authorized by the Companys Board of Directors, in
May 2005 and March 2003. Under the May 2005 share repurchase program, the Company is authorized to repurchase additional shares of its outstanding common stock for a maximum additional expenditure of $134.6 million. The Company has completed the
March 2003 share repurchase program.



11. Segment Information



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



Pharmacy is the cornerstone of the retail drug store segment, complemented by
such core front-end categories as cosmetics, over-the-counter medications, photo and photo processing, food and beverage items and health and beauty products. As of October 27, 2005, the retail drug store segment operated 476 retail stores in
six western states under the names Longs, Longs Drugs, Longs Drug Stores and Longs Pharmacy; and one mail order pharmacy under the name American Diversified Pharmacies.



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



The following tables summarize significant financial information by segment:



|                            |  |                        |           |                 |                        |           |                 |  |   |                 |   |  |   |           |  
|--------------------------- |  | ---------------------- | --------- | --------------- | ---------------------- | --------- | --------------- |  | - | --------------- | - |  | - | --------- | -
|                            |  | For the 13 weeks ended |           |                 | For the 39 weeks ended |          
|                            |  | October 27,2005        |           | October 28,2004 |                        |           | October 27,2005 |  |   | October 28,2004 |  
|                            |  | Thousands              |          
|Sales:                      |  |                        |           |                 |                        |           |                 |  |   |                 |   |  |   |           |  
|Retail Drug Stores          |  | $                      | 1,111,533 |                 | $                      | 1,092,825 |                 |  | $ | 3,400,248       |   |  | $ | 3,386,708 |  
|Pharmacy Benefit Management |  |                        | 8,851     |                 |                        | 8,072     |                 |  |   | 28,035          |   |  |   | 24,367    |  
|                            |  |                        |           |                 |                        |           |                 |  |   |                 |   |  |   |           |  
|Consolidated Totals         |  | $                      | 1,120,384 |                 | $                      | 1,100,897 |                 |  | $ | 3,428,283       |   |  | $ | 3,411,075 |  
|                            |  |                        |           |                 |                        |           |                 |  |   |                 |   |  |   |           |  
|Operating Income:           |  |                        |           |                 |                        |           |                 |  |   |                 |   |  |   |           |  
|Retail Drug Stores          |  | $                      | 13,626    |                 | $                      | 9,310     |                 |  | $ | 59,815          |   |  | $ | 30,224    |  
|Pharmacy Benefit Management |  |                        | 1,775     |                 |                        | 3,167     |                 |  |   | 7,533           |   |  |   | 9,646     |  
|                            |  |                        |           |                 |                        |           |                 |  |   |                 |   |  |   |           |  
|Consolidated Totals         |  | $                      | 15,401    |                 | $                      | 12,477    |                 |  | $ | 67,348          |   |  | $ | 39,870    |  
|                            |  |                        |           |                 |                        |           |                 |  |   |                 |   |  |   |           |  
|                            |  |                        |           |                
|                            |  |                        |           | October 27,2005 |                        |           | October 28,2004 |  |   | January 27,2005 |  
|                            |  |                        |           | Thousands       |                       
|Total Assets:               |  |                        |           |                 |                        |           |                 |  |   |                 |   |  |   |           |  
|Retail Drug Stores          |  |                        |           |                 | $                      | 1,381,456 |                 |  | $ | 1,383,605       |   |  | $ | 1,325,307 |  
|Pharmacy Benefit Management |  |                        |           |                 |                        | 103,357   |                 |  |   | 85,543          |   |  |   | 87,259    |  
|Inter-segment Eliminations  |  |                        |           |                 |                        | (1,614    | )               |  |   | (1,197          | ) |  |   | (1,403    | )
|                            |  |                        |           |                 |                        |           |                 |  |   |                 |   |  |   |           |  
|Consolidated Totals         |  |                        |           |                 | $                      | 1,483,199 |                 |  | $ | 1,467,951       |   |  | $ | 1,411,163 |  
|                            |  |                        |           |                 |                        |           |                 |  |   |                 |   |  |   |           |  



9



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##### Table of Contents

LONGS DRUG STORES CORPORATION



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Consolidated total sales include the following product and service types:



|                                     |  |                        |           |                        |   |                 |  |                 |           |  |   |          
|------------------------------------ |  | ---------------------- | --------- | ---------------------- | - | --------------- |  | --------------- | --------- |  | - | ---------
|                                     |  | For the 13 weeks ended |           | For the 39 weeks ended
|                                     |  | October 27,2005        |           | October 28,2004        |   | October 27,2005 |  | October 28,2004
|                                     |  | Thousands             
|Pharmacy sales                       |  | $                      | 552,943   |                        | $ | 534,534         |  | $               | 1,672,172 |  | $ | 1,625,252
|Front-end sales                      |  |                        | 558,590   |                        |   | 558,291         |  |                 | 1,728,076 |  |   | 1,761,456
|Pharmacy benefit management revenues |  |                        | 8,851     |                        |   | 8,072           |  |                 | 28,035    |  |   | 24,367   
|                                     |  |                        |           |                        |   |                 |  |                 |           |  |   |          
|Consolidated total sales             |  | $                      | 1,120,384 |                        | $ | 1,100,897       |  | $               | 3,428,283 |  | $ | 3,411,075
|                                     |  |                        |           |                        |   |                 |  |                 |           |  |   |          



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



The following Managements Discussion and Analysis of Financial
Condition and Results of Operations should be read in conjunction with our unaudited consolidated financial statements and the related notes. This discussion contains forward-looking statements based upon our current expectations that involve risks
and uncertainties, such as our plans, objectives, expectations and intentions, as set forth under Cautionary Statement Regarding Forward-Looking Statements. Our actual results and the timing of events could differ materially from those
anticipated in these forward-looking statements as a result of many factors, including, but not limited to, those set forth in the following discussion and under Risk Factors and elsewhere in this Form 10-Q.



RESULTS OF OPERATIONS



Sales



|                                                        |  |                        |           |   |                        |   |           |                 |  |   |                 |    |  |   |           |  
|------------------------------------------------------- |  | ---------------------- | --------- | - | ---------------------- | - | --------- | --------------- |  | - | --------------- | -- |  | - | --------- | -
|                                                        |  | For the 13 weeks ended |           |   | For the 39 weeks ended |  
|                                                        |  | October 27,2005        |           |   | October 28,2004        |   |           | October 27,2005 |  |   | October 28,2004 |   
|Sales (Thousands)                                       |  | $                      | 1,120,384 |   |                        | $ | 1,100,897 |                 |  | $ | 3,428,283       |    |  | $ | 3,411,075 |  
|Sales Growth over Same Period in Previous Year          |  |                        | 1.8       | % |                        |   | 1.3       | %               |  |   | 0.5             | %  |  |   | 3.4       | %
|Same-Store Sales Growth                                 |  |                        | 1.2       | % |                        |   | 0.4       | %               |  |   | 0.1             | %  |  |   | 1.8       | %
|Pharmacy Sales Growth                                   |  |                        | 3.4       | % |                        |   | 3.5       | %               |  |   | 2.9             | %  |  |   | 5.1       | %
|Same-Store Pharmacy Sales Growth                        |  |                        | 2.5       | % |                        |   | 2.9       | %               |  |   | 2.5             | %  |  |   | 3.3       | %
|Pharmacy as a % of Total Retail Drug Store Sales        |  |                        | 49.7      | % |                        |   | 48.9      | %               |  |   | 49.2            | %  |  |   | 48.0      | %
|% of Pharmacy Sales Covered by Third Party Health Plans |  |                        | 92.4      | % |                        |   | 92.0      | %               |  |   | 92.5            | %  |  |   | 91.9      | %
|Front-End Sales Growth (Decline)                        |  |                        | 0.1       | % |                        |   | (0.9      | )%              |  |   | (1.9            | )% |  |   | 1.6       | %
|Same-Store Front-End Sales Growth (Decline)             |  |                        | 0.0       | % |                        |   | (1.9      | )%              |  |   | (2.1            | )% |  |   | 0.5       | %
|Front-End as a % of Total Retail Drug Store Sales       |  |                        | 50.3      | % |                        |   | 51.1      | %               |  |   | 50.8            | %  |  |   | 52.0      | %



Thirteen Weeks Ended
October 27, 2005 versus Thirteen Weeks Ended October 28, 2004



Sales increased 1.8% in the third quarter of fiscal 2006 from the same quarter of fiscal 2005, and same-store sales increased 1.2%. Higher mail-order sales, growth in the number of stores and higher pharmacy benefit
management (PBM) revenues also contributed to total sales growth.



Pharmacy sales increased 3.4% in the third quarter of fiscal 2006 over the same quarter last year, with same-store pharmacy sales increasing 2.5%. The average retail price per prescription increased, although this
increase was mitigated in part by the increased utilization of lower-priced, high-volume generic drugs. We estimate that generic utilization negatively impacted our same-store pharmacy sales by approximately 2.5 percentage points. We expect that our
pharmacy sales will continue to increase as a result of several industry trends, including an aging U.S. population consuming a greater number of prescription drugs, the growing use of prescription drugs as preventive therapy by healthcare providers
and the introduction of newer and more expensive drugs. Factors that could offset these trends include continuing increases in utilization of generic drugs, increasing competition and rising prescription drug costs, which could cause consumers to
reduce their purchases of prescription drugs or third-party health plans to reduce their coverage of prescription drug costs for their members.



Pharmacy sales were 49.7% of total drug store sales in the third quarter of fiscal 2006, compared to 48.9% in the third quarter of fiscal 2005. We expect
pharmacy sales to continue to increase as a percentage of total drug store sales as pharmacy sales continue to increase faster than front-end sales.



Third-party health plans covered 92.4% of our pharmacy sales in the third quarter of fiscal 2006, compared to 92.0% in the same quarter last year. We
expect third-party sales to remain over 90% of our total pharmacy sales for the foreseeable future due to significant consumer participation in managed care and other third-party plans. The scheduled addition of a prescription drug benefit to
Medicare in January 2006 could further increase third-party sales as a percentage of total pharmacy sales.



Front-end sales increased 0.1% in the third quarter of fiscal 2006 from the same quarter last year, with same-store front-end sales flat with last year.
In an ongoing effort to improve the profitability of our front-end sales, we are shifting our



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front-end merchandise mix toward our core categories of health, wellness, beauty and convenience. We will continue to make adjustments to our front-end
merchandise assortments in an effort to further improve our competitive position and profitability.



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



Thirty-Nine Weeks Ended October 27, 2005 versus Thirty-Nine Weeks Ended October 28, 2004



Sales increased 0.5% in the first nine months of fiscal 2006 from the same period of fiscal 2005, with same-store sales increasing 0.1%. Growth in the
number of stores, higher mail order sales and PBM revenues also contributed to the total sales growth.



Pharmacy sales increased 2.9% in the first nine months of fiscal 2006 over the same period last year, with same-store pharmacy sales increasing 2.5%. The
increase in same-store pharmacy sales was driven by an increase in both the average retail price per prescription and prescription volumes.



Pharmacy sales were 49.2% of total drug store sales in the first nine months of fiscal 2006, compared to 48.0% in the same period of fiscal 2005.
Third-party health plans covered 92.5% of our pharmacy sales in the first nine months of fiscal 2006, compared to 91.9% in the same period last year.



Front-end sales decreased 1.9% in the first nine months of fiscal 2006 from the same period last year, with same-store front-end sales decreasing 2.1%.
The decline in same-store front-end sales was primarily due to lower sales in non-core categories as a result of adjustments to our front-end merchandise mix, in addition to a strike against three major grocery chains in Southern California that
ended in the first quarter of fiscal 2005, which favorably affected last years front-end sales. Higher gasoline prices also had a significant impact on consumer spending in our markets.



Gross Profit



|                           |  |                        |         |   |                        |   |         |                 |  |   |                 |   |  |   |         |  
|-------------------------- |  | ---------------------- | ------- | - | ---------------------- | - | ------- | --------------- |  | - | --------------- | - |  | - | ------- | -
|                           |  | For the 13 weeks ended |         |   | For the 39 weeks ended |  
|                           |  | October 27,2005        |         |   | October 28,2004        |   |         | October 27,2005 |  |   | October 28,2004 |  
|                           |  | Thousands              |        
|Gross Profit (Thousands)   |  | $                      | 288,737 |   |                        | $ | 287,712 |                 |  | $ | 900,606         |   |  | $ | 876,064 |  
|Gross Profit %             |  |                        | 25.8    | % |                        |   | 26.1    | %               |  |   | 26.3            | % |  |   | 25.7    | %
|LIFO Provision (Thousands) |  | $                      | 500     |   |                        | $ | 500     |                 |  | $ | 4,500           |   |  | $ | 5,000   |  



Thirteen Weeks Ended
October 27, 2005 versus Thirteen Weeks Ended October 28, 2004



Gross profit was 25.8% of sales in the third quarter of fiscal 2006, compared to 26.1% in the third quarter of fiscal 2005. The decrease in our gross profit percentage was primarily attributable to an increase in our
promotional sales over the same quarter last year combined with making less progress on improving our inventory management processes during the quarter than we have made in the past.



We will continue to make adjustments to our front-end merchandise assortments in an effort to improve the profitability of
our sales mix. Further, our supply chain initiative includes continuing efforts to improve our buying practices and inventory management and reduce our distribution costs. We also expect that the utilization of lower-priced, higher-margin generic
drugs will continue to increase. Continued efforts by third-party health plans to reduce prescription drug reimbursement rates, in addition to the scheduled addition of a prescription drug benefit to Medicare in January 2006 and possible federal
reforms of Medicaid, could wholly or partially offset these favorable effects on our gross profit percentage.



Our LIFO provision, which is included in cost of sales, was $0.5 million in the third quarter of fiscal 2006 and fiscal 2005. The LIFO provision
fluctuates with inflation rates, inventory levels and merchandise mix. We estimate LIFO costs for interim financial statements based on projected annual inflation rates, inventory levels and merchandise mix. We calculate actual LIFO costs during the
fourth quarter of the fiscal year when we determine final inflation rates, inventory levels and merchandise mix.



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Thirty-Nine Weeks Ended October 27, 2005 versus Thirty-Nine Weeks Ended October 28, 2004



Gross profit was 26.3% of sales in the first nine months of fiscal 2006,
compared to 25.7% in the same period of fiscal 2005. The increase was primarily due to a more profitable merchandise mix resulting from better buying practices, improved inventory management, lower distribution costs and increased utilization of
generic drugs.



Our LIFO provision, which is included in cost
of sales, was $4.5 million in the first nine months of fiscal 2006 and $5.0 million in the first nine months of fiscal 2005. The decrease, which positively affected our gross profit, was primarily due to lower net inflation compared to last year.



Operating and Administrative Expenses



Thirteen Weeks Ended October 27, 2005 versus Thirteen Weeks Ended October 28,
2004



Operating and administrative expenses were 22.5% of
sales in the third quarter of fiscal 2006, compared to 23.1% in the third quarter of fiscal 2005. The decreased expense rate related primarily to lower workers compensation expenses and improved labor productivity, partially offset by
increased expenses related to building the infrastructure to pursue continued growth at RxAmerica, our PBM segment. The decrease in our workers compensation expenses reflects a decline in claims and lower costs per claim. These improvements
are a result of our focus on a safe work environment, combined with recent changes in Californias workers compensation laws. We expect these trends to continue for the remainder of fiscal 2006.



Thirty-Nine Weeks Ended October 27, 2005 versus Thirty-Nine Weeks Ended
October 28, 2004



Operating and administrative
expenses were 22.5% of sales in the first nine months of fiscal 2006, compared to 22.3% in the same period of fiscal 2005. The increased expense rate related primarily to compensation, our supply chain improvement efforts and expanding the
capabilities of our PBM segment to support continued growth. These increases were partially offset by lower workers compensation expenses.



Depreciation and Amortization



Depreciation and amortization expenses were $20.7 million and $63.6 million in the third quarter and first nine months of fiscal 2006, compared to $20.7
million and $64.5 million in the same periods of fiscal 2005. Our depreciation and amortization expenses include accelerated depreciation for assets to be retired before the completion of their originally estimated useful lives, including assets to
be removed or replaced in our remodeled stores. The amount of accelerated depreciation expenses related to store remodels will vary based on the level and timing of our remodel activity. We expect depreciation and amortization expense for fiscal
2006 to be in the range of $85 to $90 million.



Legal Settlements and
Other Disputes



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



In the second
quarter of fiscal 2005, we also recorded a gain of $0.8 million from the favorable settlement of a separate, unrelated class action lawsuit, for which we had filed a claim as a member of the plaintiff class, which alleged unlawful price fixing and
market allocation by certain vitamin manufacturers. The combined net charge resulting from these two settlements was $10.8 million.



Net Interest Expense



Net interest expense was $1.8 million and $6.0 million in the third quarter and first nine months of fiscal 2006, compared to $3.5 million and $10.6
million in the same periods last year. The decrease was due primarily to lower average borrowings and increased interest capitalization on current construction and system projects, partially offset by higher average interest rates.



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Income Taxes



Our effective income tax rate was 34.0% and 37.1% in the third quarter and first nine months of fiscal 2006 and 30.9% and 35.5% in the same periods of
fiscal 2005. We recognized the benefits of certain tax credits in the third quarter of both years. The increase in our effective tax rate compared to last year reflects higher projected pre-tax income in fiscal 2006, and therefore a lower net rate
benefit from tax credits.



LIQUIDITY AND CAPITAL RESOURCES



General



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



We have a secured $280 million revolving line of credit with a syndication of
banks, which expires in August 2009 and accrues interest at LIBOR-based rates. Borrowings on this line of credit are secured by inventory, accounts receivable and certain intangible assets. As of October 27, 2005, borrowings of $20 million,
with a weighted average interest rate of 5.2%, were outstanding on our secured line of credit. The secured revolving line of credit agreement contains customary restrictions but no financial covenants and no limitations on capital expenditures or
share repurchases if availability of credit remains above a minimum level. The agreement also includes an option to increase the credit facilitys borrowing and letter-of-credit capacity from $280 million to $345 million, subject to certain
conditions. Borrowings on the line of credit do not require repayment until the expiration date but may be prepaid without penalty. We pay a monthly commitment fee of 0.25% per annum on the unused portion of the line of credit.



Additionally, as of October 27, 2005 we had $105.7 million in
outstanding privately placed promissory notes. These notes, which mature at various dates through 2014, bear interest at fixed rates ranging from 5.85% to 7.85%, and are secured on the same basis as the secured revolving line of credit. The notes
include penalties for repayment prior to their scheduled maturities. Current maturities of $8.9 million as of October 27, 2005 constitute regularly scheduled principal payments due in the next 12 months.



The privately placed promissory notes contain various customary financial
covenants and restrictions. Failure to comply with these covenants and restrictions, or with the restrictions included in our secured revolving line of credit, could adversely affect our ability to manage our cash requirements, and could result in
higher interest costs and potentially accelerated repayment requirements. As of October 27, 2005, we were in compliance with the restrictions and limitations included in these provisions.



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



Operating Cash Flows



Net cash provided by operating activities was $125.8 million in the first nine months of fiscal 2006, compared to $104.7 million in the first nine months
of fiscal 2005. The increase in our operating cash flows was primarily due to higher net income and improved management of working capital, primarily the ratio of accounts payable to inventory.



Investing Cash Flows



Net cash used in investing activities was $71.8 million in the first nine
months of fiscal 2006, compared to $68.9 million in the same period last year. We expect net capital expenditures in fiscal 2006 to be between $135 million and $145 million, compared to $84.2 million last year. We plan to open six new stores and
remodel 41 stores this fiscal year, compared to four new stores and 40 remodeled stores last year.



We expect net capital expenditures in fiscal 2007 to be between $200 million and $220 million. We plan to open or relocate approximately 20 to 25 stores
and remodel up to 40 stores in fiscal 2007. We are also constructing a new front-end distribution center in Patterson, California, scheduled for completion in the summer of fiscal 2007. In addition, in the ordinary course of business we may acquire
stores, store-related assets including pharmacy customer lists, or other complementary businesses.



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Financing Cash Flows



Net cash used in financing activities was $67.9 million in the first nine months of fiscal 2006, compared to $9.0 million in
the first nine months of fiscal 2005. Our financing activities primarily consist of long-term borrowings and repayments, repurchases of common stock, dividend payments and proceeds from the exercise of stock options.



Net repayments on our revolving line of credit were $20 million in the first
nine months of fiscal 2006, compared to borrowings of $20 million in the same period last year. We use our revolving line of credit borrowings, together with cash flows from operations, to finance capital expenditures, stock repurchases and dividend
payments. We also made regularly scheduled principal payments of $8.9 million on our private placement notes in the first nine months of both fiscal 2006 and fiscal 2005.



In the first nine months of fiscal 2006, we repurchased 1,042,000 shares of our outstanding common stock at a total cost of
$40.7 million. In the first nine months of fiscal 2005, we repurchased 382,600 shares of our common stock at a total cost of $7.2 million. We repurchased these shares under two separate programs authorized by our Board of Directors, in May 2005 and
March 2003. Under the May 2005 program, we are authorized to repurchase additional shares of our outstanding common stock for a maximum additional expenditure of $134.6 million. We have completed the March 2003 share repurchase program. Any future
repurchase of our common stock will depend on existing market conditions, our financial position, capital requirements and other considerations.



Our Board of Directors makes decisions about the declaration of quarterly dividends based on, among other things, our results of operations and financial
position. We paid dividends of $0.42 per share, or $15.8 million in the first nine months of fiscal 2006 and $15.7 million in the first nine months of fiscal 2005.



RISK FACTORS



You should carefully read the following risk factors.



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



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



The new Medicare prescription drug benefit could have an adverse effect on our pharmacy sales and profitability.



The Medicare Prescription Drug, Improvement and Modernization Act of 2003
included new prescription drug benefits for Medicare participants that will become effective January 1, 2006. These changes are expected to result in lower reimbursement levels for prescription drugs provided to Medicare participants, and
therefore could adversely affect our pharmacy sales and gross profits. In addition, as part of our business strategy relative to these reforms and to mitigate pharmacy sales and gross profit losses, we plan to offer Medicare prescription drug
benefits through our PBM subsidiary in certain states. If the revenues we generate from providing these benefits are not sufficient to cover the related prescription drug costs, our profitability will be adversely affected.



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



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



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



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



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



We are wholly or partially reimbursed by third-party health plans for more than 90% of all the prescription drugs that we
sell. Pharmacy sales reimbursed by third parties have lower gross margins than non third-party pharmacy sales, and third-party health plans continue to reduce the levels at which they reimburse us for the prescription drugs that we provide to their
members. Furthermore, government-sponsored health plans such as Medicare and Medicaid are making continuing efforts to reduce their costs, including prescription drug reimbursements. For example, last year the State of California adopted a budget
that reduced Medi-Cal reimbursements to health care providers, including pharmacies, and Congress is currently considering further reforms to Medicaid in an effort to reduce costs. If third-party health plans, including government-sponsored plans,
continue to reduce their reimbursement levels, our sales and gross profits could be significantly adversely affected.



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------



Our major market risk exposure is changing interest rates. We use debt financing in combination with operating cash flows to
support capital expenditures, acquisitions, working capital needs, dividend payments, share repurchases and other general corporate purposes. Borrowings on our revolving line of credit ($20 million as of October 27, 2005) bear interest at
LIBOR-based rates, and therefore an increase in interest rates could increase our interest expense. We do not currently undertake any specific actions to cover our exposure to interest rate risk and we are not currently a party to any interest rate
risk management transactions. We have not purchased and do not currently hold any derivative financial instruments. Depending on the interest rate environment and subject to approval by our Board of Directors, we may make use of derivative financial
instruments or other interest rate management vehicles in the future.



A 10% change in interest rates (52 basis points on our floating-rate debt as of October 27, 2005) would have an immaterial effect on our earnings and cash flows and on the fair value of our fixed rate debt.



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



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



As of October 27, 2005, the end of the period covered by this quarterly report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive
Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective and adequate to provide reasonable assurance that material information relating to our company would be made known to them on a timely basis.



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



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PART II



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



Rankin v. Longs Drug Stores California, Inc., as amended on January 19, 2005, was originally filed in the Superior Court of California, San Diego
County on October 13, 2004. The lawsuit was certified as a class action on July 19, 2005 and alleges that our employment application violates California Labor Code Section 432.8 by inquiring about criminal convictions within the last
seven years, without providing an exception for misdemeanor marijuana convictions more than two years old. The plaintiff seeks to recover statutory damages and attorneys fees for him and all similarly situated individuals who applied for
employment with us during the class period. We are vigorously investigating and defending this litigation. The financial impact to us, if any, cannot be predicted at this time.



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



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



We made the following repurchases of our common stock during the quarter ended October 27, 2005:



|                                      |  |                                 |  |                             |       |                                                                                  |         |                                                                                       |   |              
|------------------------------------- |  | ------------------------------- |  | --------------------------- | ----- | -------------------------------------------------------------------------------- | ------- | ------------------------------------------------------------------------------------- | - | -------------
|Period                                |  | Total Number ofShares Purchased |  | Average PricePaid per Share |       | Total Number ofShares Purchased asPart of PubliclyAnnounced Plans orPrograms (1) |         | Approximate DollarValue of Shares that MayYet be Purchased Underthe Plans or Programs
|Month #1                              |  |                                 |  |                             |       |                                                                                  |         |                                                                                       |   |              
|July 29, 2005 - August 25, 2005       |  |                                |  |                             |      |                                                                                  |        |                                                                                       | $ | 147.4 million
|Month #2                              |  |                                 |  |                             |       |                                                                                  |         |                                                                                       |   |              
|August 26, 2005 - September 29, 2005  |  | 174,500                         |  | $                           | 42.04 |                                                                                  | 174,500 |                                                                                       | $ | 140.1 million
|Month #3                              |  |                                 |  |                             |       |                                                                                  |         |                                                                                       |   |              
|September 30, 2005 - October 27, 2005 |  | 130,000                         |  | $                           | 41.87 |                                                                                  | 130,000 |                                                                                       | $ | 134.6 million
|                                      |  |                                 |  |                             |       |                                                                                  |         |                                                                                       |   |              
|Total                                 |  | 304,500                         |  | $                           | 41.97 |                                                                                  | 304,500 |                                                                                       |   |              



|(1) | In May 2005, our Board of Directors authorized the repurchase of shares of our common stock for total consideration up to $150.0 million through May 2008. Under this share repurchase program, we are authorized to repurchase
additional shares of our common stock for a maximum additional expenditure of $134.6 million.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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

---

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



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



On August 4, 2005, we filed a Current Report on Form 8-K related to a news release regarding our July 2005 sales results.



On August 17, 2005, we filed a Current Report on
Form 8-K related to a news release regarding our second quarter of fiscal 2006 financial results and third quarter and full year fiscal 2006 financial projections.



On September 1, 2005, we filed a Current Report on Form 8-K related to a news release regarding our
August 2005 sales results.



On October 6,
2005, we filed a Current Report on Form 8-K related to a news release regarding our September 2005 sales results.



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##### Table of Contents

SIGNATURES



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



|                       |  |  |  |                                                                                                         
|---------------------- |  |  |  | --------------------------------------------------------------------------------------------------------
|                       |  |  |  | LONGS DRUG STORES CORPORATION (Registrant)                                                              
|                       |  | 
|Date: December 1, 2005 |  |  |  | /s/    S. F. MCCANN                                                                                     
|                       |  |  |  | (S. F. McCann) Executive Vice President,Chief Financial Officer and Treasurer                           
|                       |  | 
|Date: December 1, 2005 |  |  |  | /s/    R. L. CHELEMEDOS                                                                                 
|                       |  |  |  | (R. L. Chelemedos) Group Vice PresidentController and Assistant Secretary(Principal Accounting Officer)



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