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SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended May 2, 2002

or

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

Commission file number 1-8978

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

Maryland(State or other jurisdiction of
incorporation or organization)

68-0048627(I.R.S. Employer
Identification No.)141 North Civic Drive
Walnut Creek, California(Address of principal executive offices)

94596(Zip Code)


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

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

There
were 38,301,357 shares of common stock outstanding as of May 30, 2002.

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Table of Contents

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

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PART IFINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

Condensed Consolidated Statements of Income (unaudited)

|                                                                       |                                                                       | For the 13 weeks ended |          
|---------------------------------------------------------------------- | --------------------------------------------------------------------- | ---------------------- | ---------
|
|
|Sales                                                                  |                                                                       | $                      | 1,089,829
|Cost of merchandise sold                                               |                                                                       |                        | 808,064  
|                                                                       |                                                                       |                        |          
|                                                                       | Gross profit                                                          |                        |          
|Operating and administrative expenses                                  |                                                                       |                        | 242,349  
|Depreciation and amortization                                          |                                                                       |                        | 18,866   
|Provision (benefit) for store closures and asset impairment, net       |                                                                       |                        |         
|                                                                       |                                                                       |                        |          
|                                                                       | Operating income                                                      |                        |          
|Interest expense                                                       |                                                                       |                        | 3,331    
|Interest income                                                        |                                                                       |                        | (370     
|                                                                       |                                                                       |                        |          
|                                                                       | Income before income taxes and cumulative effect of
accounting change |                        |          
|Income taxes                                                           |                                                                       |                        | 6,619    
|                                                                       |                                                                       |                        |          
|Income before cumulative effect of accounting change                   |                                                                       |                        | 10,970   
|Cumulative effect of accounting change (net of tax benefit
of $16,410) |                                                                       |                        | (24,625  
|                                                                       |                                                                       |                        |          
|Net (loss) income                                                      |                                                                       | $                      | (13,655  
|                                                                       |                                                                       |                        |          
|Basic earnings (loss) per common share:                                |                                                                       |                        |          
|                                                                       | Income before cumulative effect of accounting change                  |                        | $        
|                                                                       | Cumulative effect of accounting change (net of tax benefit of $0.43)  |                        |          
|                                                                       |                                                                       |                        |          
|                                                                       | Net (loss) income                                                     |                        | $        
|                                                                       |                                                                       |                        |          
|Diluted earnings (loss) per common share:                              |                                                                       |                        |          
|                                                                       | Income before cumulative effect of accounting change                  |                        | $        
|                                                                       | Cumulative effect of accounting change (net of tax benefit of $0.43)  |                        |          
|                                                                       |                                                                       |                        |          
|                                                                       | Net (loss) income                                                     |                        | $        
|                                                                       |                                                                       |                        |          
|Dividends per common share                                             |                                                                       | $                      | 0.14     
|Weighted average number of shares outstanding:                         |                                                                       |                        |          
|                                                                       | Basic                                                                 |                        |          
|                                                                       | Diluted                                                               |                        |          

See notes to condensed consolidated financial statements.

1

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Condensed Consolidated Balance Sheets

|                                                                        |                            | May 2,
2002   |                           | April 26,
2001 |           | January 31,
2002 |          
|----------------------------------------------------------------------- | -------------------------- | ------------- | ------------------------- | -------------- | --------- | ---------------- | ---------
|
|ASSETS                                                                  |                            |               |                           |                |           |                  |          
|Current Assets:                                                         |                            |               | -------(Unaudited)------- |                |           |                  |          
|Cash and equivalents                                                    |                            | $             | 60,392                    |                | $         | 59,014           |          
|Pharmacy and other receivables, net                                     |                            |               | 128,691                   |                |           | 105,697          |          
|Merchandise inventories                                                 |                            |               | 416,272                   |                |           | 415,502          |          
|Deferred income taxes                                                   |                            |               | 24,231                    |                |           | 26,192           |          
|Other                                                                   |                            |               | 5,252                     |                |           | 5,821            |          
|                                                                        |                            |               |                           |                |           |                  |          
|                                                                        | Total current assets       |               |                           | 634,838        |           |                  | 612,226  
|                                                                        |                            |               |                           |                |           |                  |          
|Property:                                                               |                            |               |                           |                |           |                  |          
|Land                                                                    |                            |               | 107,563                   |                |           | 108,355          |          
|Buildings and leasehold improvements                                    |                            |               | 494,027                   |                |           | 473,357          |          
|Equipment and fixtures                                                  |                            |               | 478,298                   |                |           | 432,219          |          
|                                                                        |                            |               |                           |                |           |                  |          
|                                                                        | Total property at cost     |               |                           | 1,079,888      |           |                  | 1,013,931
|Less accumulated depreciation                                           |                            |               | 490,559                   |                |           | 429,085          |          
|                                                                        |                            |               |                           |                |           |                  |          
|                                                                        |                            | Property, net |                           |                | 589,329   |                  |          
|                                                                        |                            |               |                           |                |           |                  |          
|Goodwill                                                                |                            |               | 82,276                    |                |           | 127,415          |          
|Intangible assets, net                                                  |                            |               | 5,632                     |                |           | 5,930            |          
|Other assets                                                            |                            |               | 6,396                     |                |           | 23,551           |          
|                                                                        |                            |               |                           |                |           |                  |          
|                                                                        |                            | Total         |                           | $              | 1,318,471 |                  | $        
|                                                                        |                            |               |                           |                |           |                  |          
|LIABILITIES AND STOCKHOLDERS' EQUITY                                    |                            |               |                           |                |           |                  |          
|Current Liabilities:                                                    |                            |               |                           |                |           |                  |          
|Accounts payable                                                        |                            | $             | 246,188                   |                | $         | 262,938          |          
|Short-term borrowings                                                   |                            |               |                          |                |           | 10,000           |          
|Employee compensation and benefits                                      |                            |               | 80,426                    |                |           | 77,545           |          
|Taxes payable                                                           |                            |               | 26,012                    |                |           | 43,724           |          
|Current portion of long-term debt                                       |                            |               | 2,536                     |                |           | 3,141            |          
|Other                                                                   |                            |               | 40,260                    |                |           | 30,098           |          
|                                                                        |                            |               |                           |                |           |                  |          
|                                                                        | Total current liabilities  |               |                           | 395,422        |           |                  | 427,446  
|                                                                        |                            |               |                           |                |           |                  |          
|Long-term debt                                                          |                            |               | 191,584                   |                |           | 210,626          |          
|Deferred income taxes and other long-term liabilities                   |                            |               | 26,659                    |                |           | 23,041           |          
|Commitments and Contingencies                                           |                            |               |                           |                |           |                  |          
|Stockholders' Equity:                                                   |                            |               |                           |                |           |                  |          
|Common stock (38,250,000, 37,783,000 and 37,977,000
shares outstanding) |                            |               | 19,125                    |                |           | 18,892           |          
|Additional capital                                                      |                            |               | 163,848                   |                |           | 152,614          |          
|Common stock contribution to Profit Sharing Plan                        |                            |               |                          |                |           |                 |          
|Unearned compensation                                                   |                            |               | (5,853                    | )              |           | (5,659           | )        
|Retained earnings                                                       |                            |               | 527,686                   |                |           | 527,008          |          
|                                                                        |                            |               |                           |                |           |                  |          
|                                                                        | Total stockholders' equity |               |                           | 704,806        |           |                  | 692,855  
|                                                                        |                            |               |                           |                |           |                  |          
|                                                                        |                            |               | Total                     |                | $         | 1,318,471        |          
|                                                                        |                            |               |                           |                |           |                  |          

See notes to condensed consolidated financial statements.

2

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Condensed Consolidated Statements of Cash Flows (unaudited)

|                                                  |                                                                                          | For the 13 weeks ended |                                                    
|------------------------------------------------- | ---------------------------------------------------------------------------------------- | ---------------------- | ---------------------------------------------------
|
|
|Operating Activities:                             |                                                                                          |                        |                                                    
|                                                  | Net (loss) income                                                                        |                        | $                                                  
|                                                  | Adjustments to reconcile net (loss) income to net cash provided by operating activities: |                        |                                                    
|                                                  |                                                                                          |                        | Cumulative effect of accounting change             
|                                                  |                                                                                          |                        | Depreciation and amortization                      
|                                                  |                                                                                          |                        | Deferred income taxes and other                    
|                                                  |                                                                                          |                        | Stock awards, net                                  
|                                                  |                                                                                          |                        | Common stock contribution to benefit plans         
|                                                  |                                                                                          |                        | Tax benefits related to stock awards               
|                                                  |                                                                                          |                        | Changes in assets and liabilities:                 
|                                                  |                                                                                          |                        |                                                    
|                                                  |                                                                                          |                        |                                                    
|                                                  |                                                                                          |                        |                                                    
|                                                  |                                                                                          |                        |                                                    
|                                                  |                                                                                          |                        |                                                    
|                                                  |                                                                                          |                        | Net cash (used in) provided by operating activities
|                                                  |                                                                                          |                        |                                                    
|Investing Activities:                             |                                                                                          |                        |                                                    
|                                                  | Payments for property additions, store acquisitions and other assets                     |                        |                                                    
|                                                  | Receipts from property dispositions and sale-leasebacks                                  |                        |                                                    
|                                                  |                                                                                          |                        |                                                    
|                                                  |                                                                                          |                        | Net cash used in investing activities              
|                                                  |                                                                                          |                        |                                                    
|Financing Activities:                             |                                                                                          |                        |                                                    
|                                                  | Proceeds from long-term borrowings                                                       |                        |                                                    
|                                                  | Repayments of long-term borrowings                                                       |                        |                                                    
|                                                  | Repayments of short-term borrowings                                                      |                        |                                                    
|                                                  | Dividend payments                                                                        |                        |                                                    
|                                                  |                                                                                          |                        |                                                    
|                                                  |                                                                                          |                        | Net cash used in financing activities              
|                                                  |                                                                                          |                        |                                                    
|Increase (decrease) in cash and equivalents       |                                                                                          |                        | (62,795                                            
|Cash and equivalents at beginning of period       |                                                                                          |                        | 123,187                                            
|                                                  |                                                                                          |                        |                                                    
|Cash and equivalents at end of period             |                                                                                          | $                      | 60,392                                             
|                                                  |                                                                                          |                        |                                                    
|Supplemental disclosure of cash flow information: |                                                                                          |                        |                                                    
|                                                  | Cash paid for interest                                                                   |                        |                                                    
|                                                  | Cash paid for income taxes                                                               |                        |                                                    

See notes to condensed consolidated financial statements.

3

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Condensed Consolidated Statements of Stockholders' Equity
For the 53 weeks ended January 31, 2002 and the 13 weeks ended May 2, 2002

|                                          |                                                        |        |     |   |        |     |   | Common
Stock
Contributions
to Profit
Sharing Plan |       |   |       |        |   |        |  
|----------------------------------------- | ------------------------------------------------------ | ------ | --- | - | ------ | --- | - | ------------------------------------------------- | ----- | - | ----- | ------ | - | ------ | -
|
|
|
|
|Balance at January 25, 2001               |                                                        | 37,367 |     | $ | 18,683 |     | $ | 141,200                                           |       | $ | 7,695 |        | $ | (4,466 | )
|Net income                                |                                                        |        |     |   |        |     |   |                                                   |       |   |       |        |   |        |  
|Dividends ($.56 per share)                |                                                        |        |     |   |        |     |   |                                                   |       |   |       |        |   |        |  
|Employee Savings and Profit
Sharing Plan: |                                                        |        |     |   |        |     |   |                                                   |       |   |       |        |   |        |  
|                                          | Issuance of stock for FY01 profit sharing contribution |        | 287 |   |        | 144 |   |                                                   | 7,551 |   |       | (7,695 | ) |        |  
|                                          | Stock portion of FY02 profit sharing contribution      |        |     |   |        |     |   |                                                   |       |   |       | 2,939  |   |        |  
|                                          | Issuance of stock for 401(k) matching contributions    |        | 285 |   |        | 143 |   |                                                   | 6,776 |   |       |        |   |        |  
|Stock awards, net of forfeitures          |                                                        | 38     |     |   | 18     |     |   | 1,309                                             |       |   |       |        |   | (1,426 | )
|Amortization of restricted stock awards   |                                                        |        |     |   |        |     |   |                                                   |       |   |       |        |   | 1,885  |  
|Tax benefits related to stock awards      |                                                        |        |     |   |        |     |   | 141                                               |       |   |       |        |   |        |  
|                                          |                                                        |        |     |   |        |     |   |                                                   |       |   |       |        |   |        |  
|Balance at January 31, 2002               |                                                        | 37,977 |     |   | 18,988 |     |   | 156,977                                           |       |   | 2,939 |        |   | (4,007 | )
|                                          |                                                        |        |     |   |        |     |   |                                                   |       |   |       |        |   |        |  
|Unaudited:                                |                                                        |        |     |   |        |     |   |                                                   |       |   |       |        |   |        |  
|Net loss                                  |                                                        |        |     |   |        |     |   |                                                   |       |   |       |        |   |        |  
|Dividends ($.14 per share)                |                                                        |        |     |   |        |     |   |                                                   |       |   |       |        |   |        |  
|Employee Savings and Profit
Sharing Plan: |                                                        |        |     |   |        |     |   |                                                   |       |   |       |        |   |        |  
|                                          | Issuance of stock for FY02 profit sharing contribution |        | 120 |   |        | 60  |   |                                                   | 2,879 |   |       | (2,939 | ) |        |  
|                                          | Issuance of stock for 401(k) matching contributions    |        | 66  |   |        | 33  |   |                                                   | 1,744 |   |       |        |   |        |  
|Stock awards, net of forfeitures          |                                                        | 87     |     |   | 44     |     |   | 2,180                                             |       |   |       |        |   | (2,379 | )
|Amortization of restricted stock awards   |                                                        |        |     |   |        |     |   |                                                   |       |   |       |        |   | 533    |  
|Tax benefits related to stock awards      |                                                        |        |     |   |        |     |   | 68                                                |       |   |       |        |   |        |  
|                                          |                                                        |        |     |   |        |     |   |                                                   |       |   |       |        |   |        |  
|Balance at May 2, 2002                    |                                                        | 38,250 |     | $ | 19,125 |     | $ | 163,848                                           |       | $ |      |        | $ | (5,853 | )
|                                          |                                                        |        |     |   |        |     |   |                                                   |       |   |       |        |   |        |  

See notes to condensed consolidated financial statements.

4

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

5

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May 2, 2002

January 31, 2002Useful
Lives

Gross Carrying
Amount

Accumulated
Amortization

Gross Carrying
Amount

Accumulated
AmortizationThousandsGoodwill

N/A

$
82,276




$
123,306Amortized intangible assets:Pharmacy customer lists

1-5 years

$
1,860

$
(1,086
)
$
3,658

$
(2,864
)Non-compete agreements

2-5 years


774


(703
)

1,042


(964
)Other

10 years


12


(5
)

12


(5
)Total



$
2,646

$
(1,794
)
$
4,712

$
(3,833
)Unamortized intangible assets:Beverage licenses

N/A

$
4,780




$
4,695




6

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|Fiscal Year 2003 |  | $ | 281
|---------------- |  | - | ---
|Fiscal Year 2004 |  | $ | 248
|Fiscal Year 2005 |  | $ | 220
|Fiscal Year 2006 |  | $ | 151
|Fiscal Year 2007 |  | $ | 26 
|Fiscal Year 2008 |  | $ | 1  

|                                                                                                                                  |  | May 2,
2002 |         | January 31,
2002
|--------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ------- | ----------------
|
|Unsecured revolving line of credit, interest based on LIBOR (weighted average rate of 3.11% at May 2, 2002), expires October 2004 |  | $           | 35,000  |                 
|Private placement notes, fixed interest rates ranging from 5.85% to 7.85%, mature at various dates through 2014                   |  |             | 158,571 |                 
|Equipment notes and other                                                                                                         |  |             | 549     |                 
|                                                                                                                                  |  |             |         |                 
|Total long-term debt                                                                                                              |  |             | 194,120 |                 
|Less current portion                                                                                                              |  |             | 2,536   |                 
|                                                                                                                                  |  |             |         |                 
|Long-term portion                                                                                                                 |  | $           | 191,584 |                 
|                                                                                                                                  |  |             |         |                 



|                                                      |                         | 13 weeks ended
|----------------------------------------------------- | ----------------------- | --------------
|
|
|Basic weighted average number of shares outstanding   |                         | 37,770        
|Effect of dilution from:                              |                         |               
|                                                      | Restricted stock awards |               
|                                                      | Stock options           |               
|                                                      |                         |               
|Diluted weighted average number of shares outstanding |                         | 38,085        
|                                                      |                         |               

7

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|                                                          |  | 13 weeks ended |       
|--------------------------------------------------------- |  | -------------- | ------
|
|
|Store closure reserve balance, beginning of period        |  | $              | 12,551
|Costs incurred for closed stores, charged against reserve |  |                | (2,202
|Increase (decrease) to reserve                            |  |                |      
|                                                          |  |                |       
|Store closure reserve balance, end of period              |  | $              | 10,349
|                                                          |  |                |       



|                                                                      |  | Retail Drug Stores |           | Pharmacy Benefit
Management |   | Consolidated Totals
|--------------------------------------------------------------------- |  | ------------------ | --------- | --------------------------- | - | -------------------
|
|Sales                                                                 |  | $                  | 1,084,714 |                             | $ | 5,115              
|Income before income taxes and cumulative effect of accounting change |  |                    | 15,562    |                             |   | 2,027              
|Total assets                                                          |  |                    | 1,279,876 |                             |   | 38,595             

8

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

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

RESULTS OF OPERATIONS

Sales

|                                                           |  | 13 weeks ended |          
|---------------------------------------------------------- |  | -------------- | ---------
|
|Sales(Thousands)                                           |  | $              | 1,089,829
|Sales Growth                                               |  |                | 5.6      
|Same Store Sales Growth                                    |  |                | 4.3      
|Impact of New Stores / Closed Stores on Sales Growth       |  |                | 0.8      
|Impact of RxAmerica on Sales Growth                        |  |                | 0.5      
|Pharmacy Sales Growth                                      |  |                | 9.2      
|Same Store Pharmacy Sales Growth                           |  |                | 8.4      
|Pharmacy as a % of Total Drug Store Sales                  |  |                | 45.9     
|% of Pharmacy Sales Reimbursed by Third Party Health Plans |  |                | 90.6     
|Front-End Sales Growth                                     |  |                | 1.9      
|Same Store Front-End Sales Growth                          |  |                | 1.0      
|Front-End as a % of Total Drug Store Sales                 |  |                | 54.1     

Sales
increased 5.6% in the first quarter of fiscal 2003 over the same quarter of fiscal 2002. Same-store sales increased 4.3%, and new stores accounted for an increase of 0.8%. RxAmerica's net sales,
which have been included in our consolidated total sales since our acquisition of full ownership of the PBM in September 2001, contributed the remaining 0.5% of total sales growth in the quarter. The
increased usage of newer and more costly prescription drugs and the aging U.S. population have continued to fuel sales growth.

9

---

Pharmacy
sales increased 9.2% over the same quarter last year, primarily due to an 8.6% increase in the average retail price per script. Same-store pharmacy sales increased 8.4%. Pharmacy sales were
45.9% of total drug store sales in the first quarter of fiscal 2003, compared to 44.6% in the first quarter of fiscal 2002. We expect these trends to continue due to the increased usage of newer and
more costly prescription drugs and the aging U.S. population.

Pharmacy
sales reimbursed by third-party health plans represented 90.6% of total pharmacy sales, compared to 89.1% in the same quarter last year. We expect this trend to continue due to the ongoing
shift to managed care.

Front-end
sales increased 1.9% over the same quarter last year. Same-store front-end sales increased 1.0%, primarily due to increased promotional sales resulting from a refocused and event-driven
advertising and marketing campaign. This increase reversed a trend of three quarters of negative same-store front-end sales that resulted primarily from increased competition; an economic slowdown,
exacerbated by the terrorist attacks of September 11, 2001; a weak holiday shopping season and a mild cold and flu season that resulted in lower over-the-counter drug sales.

Gross Profit

|                          |  | 13 weeks ended |        
|------------------------- |  | -------------- | -------
|
|Gross Profit(Thousands)   |  | $              | 281,765
|LIFO Provision(Thousands) |  |                | 1,700  
|Gross Margin %            |  |                | 25.9   

Gross
margin as a percent of sales was 25.9% in the first quarter of fiscal 2003, compared to 25.5% in the same quarter last year. The increase was primarily due to the inclusion of RxAmerica's gross
profit in our consolidated total. We recognize RxAmerica's revenues from third-party health plans net of the related reimbursements due to participating pharmacies. We do not record any of RxAmerica's
expenses in cost of merchandise sold. Therefore, all of RxAmerica's revenues ($5.1 million in the first quarter of fiscal 2003) are included in gross profit. In the first quarter of fiscal
2002, RxAmerica was a joint venture between Longs and Albertson's, and we recorded our share of the PBM's profits in operating and administrative expenses using the equity method of accounting.

Gross
margins on pharmacy sales increased slightly over the first quarter of last year due to increased usage of generic drugs, which have higher margins than name-brand drugs. This helped offset a
multiyear trend of declining pharmacy margin percentages experienced throughout the retail drug store industry caused by the increasing percentage of pharmacy sales reimbursed by third-party health
plans, which have lower margins than non third-party sales. We anticipate that the percentage of pharmacy sales reimbursed by third-party health plans will continue to increase. Pharmacy sales also
have lower margins than front-end sales, and as pharmacy sales grow as a percent of total sales, overall margins will be adversely impacted. However, despite decreases in pharmacy margins, pharmacy
gross profit in dollars has continued to rise with the growth in sales.

Gross
margin percentages on front-end sales were relatively constant with the first quarter of last year. In the quarter ended May 2, 2002, we commenced a series of initiatives, approved by our
Board of Directors, to increase efficiency and enhance profitability. One of those initiatives is an upgrade of our supply chain practices. Improvements in our supply chain, including more efficient
distribution center operations and more favorable merchandise buying terms, offset the negative impact of increased promotional sales, which generally have lower margins than other front-end sales.

Our
gross profit included LIFO provisions of $1.7 million in the first quarter of fiscal 2003 and $2.0 million in the first quarter of fiscal 2002, included in cost of merchandise sold.
The LIFO provision
fluctuates with inflation rates and inventory levels and mix. We estimate LIFO costs for interim financial statements based on projected annual inflation rates. We calculate actual LIFO costs during
the fourth quarter of the fiscal year when we determine final inflation rates and inventory levels.

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Operating and Administrative Expenses

Operating
and administrative expenses were 22.2% of sales in the first quarter of fiscal 2003, compared to 21.5% in the same quarter last year. The increase reflected the inclusion of RxAmerica's
operating and administrative expenses of approximately $3.3 million, or 0.3% of sales, in our consolidated total. In the first quarter of fiscal 2002, RxAmerica was a joint venture between
Longs and Albertson's, and we recorded $0.7 million of income in operating and administrative expenses to reflect our share of the PBM's profits under the equity method of accounting. We also
incurred operating and administrative expenses of $2.9 million, or 0.3% of sales, related to the supply chain initiative discussed above. The remainder of the increase is primarily due to
higher employee health and worker compensation insurance costs.

Depreciation and Amortization

Depreciation
and amortization were $18.9 million, or 1.7% of sales, in the first quarter of fiscal 2003, compared to $18.6 million, or 1.8% of sales, in the first quarter of fiscal 2002.
Effective with the first quarter of fiscal 2003, we no longer record amortization expense for goodwill and certain other intangible assets with indefinite useful lives, in accordance with SFAS
No. 142,Goodwill and Other Intangible Assets. Amortization for such assets was $1.7 million in the first quarter of fiscal 2002.
Excluding discontinued amortization, depreciation and amortization increased by $2.0 million, primarily due to increased depreciation expense resulting from capital expenditures for new store
investments, improvements to existing stores, supply chain improvements and technology.

Provision for Store Closures and Asset Impairment

We
record the estimated costs associated with closing a store during the period in which the store is identified and approved by management under a plan of termination, which includes the method of
disposition and the expected date of completion. We regularly evaluate our store closure reserves and adjust them accordingly based on the estimated future costs to complete the store closures. In the
first quarter of fiscal 2002 we recorded a benefit of $1.0 million from the reduction of our store closure reserve. We closed one store in the first quarter of fiscal 2003 and 15 stores in the
first quarter of fiscal 2002.

Net Interest Expense

Net
interest expense was $3.0 million in the first quarter of fiscal 2003, compared to $3.7 million in the same quarter last year. The decrease was due to lower borrowings and lower
interest rates.

Income Taxes

Our
effective income tax rate was 37.6% in the first quarter of fiscal 2003, compared to 39.9% in the same quarter last year. The decrease was primarily due to a federal tax law change that allows us
to deduct dividends paid on 100% vested shares held in our employee stock ownership plan.

Cumulative Effect of Accounting Change

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

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LIQUIDITY AND CAPITAL RESOURCES

Cash and equivalents were $60.4 million at May 2, 2002, compared to $59.0 million at April 26, 2001 and $123.2 million at January 31, 2002. The decrease of $62.8
million from the January 31, 2002 balance was due to the use of $32.2 million of cash in operations, primarily due to timing (as discussed below), $18.0 million in net capital expenditures and $12.6
million in financing activities.

Operating Cash Flows

Net cash used in operating activities was $32.2 million in the first quarter of fiscal 2003. In the same quarter last year, net cash provided by operating
activities was $37.4 million. The decrease was primarily due to the timing of the respective quarter-end dates. The first quarter of fiscal 2003 ended on May 2nd, while the first quarter last year
ended on April 26th. As a result, certain calendar-based payments such as sales and income taxes, rent and some merchandise purchases were paid during the first quarter of fiscal 2003 versus the
second quarter of fiscal 2002. Therefore, current liabilities decreased by $52.3 million from January 31, 2002. Operating cash flows were also negatively impacted by increases in receivables and
inventories resulting from the increase in the number of stores. In the same quarter last year, inventories declined by $8.8 million due to the closure of 15 stores.

Investing Cash Flows

Net cash used in investing activities was $18.0 million in the first quarter of fiscal 2003, compared to $20.4 million in the same quarter last year. Investing
cash flows included capital expenditures for new stores and store improvements, technology and supply chain improvements.

We
opened four new stores and closed one store in the first quarter of fiscal 2003. In the first quarter of fiscal 2002, we opened four new stores and closed fifteen stores. We plan to
open between 21 and 26 additional new stores in the remainder of fiscal 2003, bringing the total number of new stores to between 25 and 30 for the fiscal year. We expect net capital expenditures for
the full year to be approximately $120 million, including amounts for new stores and store improvements, technology and supply chain improvements.

Financing Cash Flows

Net cash used in financing activities was $12.6 million in the first quarter of fiscal 2003, compared to $2.7 million in the first quarter of fiscal 2002. We
repaid $7.3 million of long-term borrowings, including regularly scheduled principal payments and a reduction of borrowings on our revolving line of credit, and paid dividends of $5.3 million during
the first quarter of fiscal 2003. In the same quarter last year, we repaid $12.4 million of debt, including short-term borrowings and regularly scheduled principal payments, and paid dividends of $5.3
million, offset by additional borrowings of $15.0 million on our revolving line of credit.

We
have a $150 million unsecured revolving line of credit, which expires in October 2004 and accrues interest at LIBOR-based rates. Borrowings on the line of credit do not require
repayment until the expiration date. As of May 2, 2002, $35.0 million was outstanding under this line of credit with a weighted average interest rate of 3.11%.

Additionally,
as of May 2, 2002, we had $158.6 million in privately placed promissory notes, which mature at various dates through 2014 and bear interest at fixed rates ranging from
5.85% to 7.85%.

Our
debt agreements contain limits on borrowings, dividend payments and repurchases of company stock, and various quarterly financial covenants that set maximum leverage ratios and
minimum fixed charge coverage ratios. As of May 2, 2002, we were in compliance with the restrictions and limitations included in these provisions.

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In
November 1999, our board of directors authorized the repurchase of up to 2,000,000 shares of our common stock through November 2004, for a maximum total expenditure of $80 million. To
date, we have purchased 1,146,868 shares under this authorization at a total cost of $22.5 million. We did not repurchase any of our common stock during the first quarter of fiscal 2003.

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

NEW ACCOUNTING PRONOUNCEMENTS

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

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

In
June 2001, the FASB also issued SFAS No. 143,Accounting for Asset Retirement Obligations. SFAS No. 143 addresses the accounting and
reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs, and is effective for us beginning in fiscal 2004. We do not expect the
adoption of SFAS No. 143 to have a material impact on our financial position or results of operations.

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

RISK FACTORS

You should carefully read the following risk factors.

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

We
face intense competition with local, regional, and national companies, including other drug store chains, independent drug stores, on-line retailers, supermarket chains and mass
merchandisers. Many of our competitors have substantially greater resources, including name recognition and capital resources, than we do. As competition increases in the markets in which we operate,
a significant increase in general pricing pressures could occur, which would require us to increase our sales volume and to sell higher-margin products and services at reduced prices to remain
competitive. We cannot

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assure you that we will be able to continue to compete effectively in our markets or increase our sales volume or margins in response to further increased competition.

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

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

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

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

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

The
economy began showing signs of slowing in fiscal 2002. The terrorist attacks on September 11, 2001 adversely affected sales for that week and have had a continuing negative impact on
tourism. We
operate 32 stores in the state of Hawaii, which have been adversely impacted by the decline in tourism. If the economy continues to slow and unemployment increases or inflationary conditions worry
consumers, they may decrease their purchases, particularly of products other than pharmaceutical products that they need for health reasons. We make a higher profit on our sales of front-end products
than we do on sales of pharmaceutical products. Therefore, any decrease in our sales of front-end products will decrease our profitability.

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

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

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 54% of our total merchandise, including 95% of our pharmaceutical supplies, from a single supplier, AmerisourceBergen, pursuant to a long-term supply contract.
Any significant disruptions in our relationships with AmerisourceBergen could have a material adverse effect on us.

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We are subject to governmental regulations, procedures and requirements; our noncompliance or their significant change could have a material adverse effect on
us.

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

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

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

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

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

The energy crisis in the state of California may result in increased operating and administrative expenses in fiscal 2003.

As
of May 2, 2002, we operated 364 stores in the state of California, which has experienced energy shortages causing some power outages. California utility companies announced
significant increases in energy rates, which were reflected in utility bills received beginning in the third quarter of fiscal 2002. These shortages may expand to other markets in which we operate. We
have taken such steps as reducing store lighting, raising store temperatures and disconnecting unused electrical equipment to conserve energy, but the volatility of energy rates has resulted in
increased operating and administrative expenses, and our energy-related expenses may continue to increase in fiscal 2003.

Item 3. Quantitative and Qualitative Disclosures of Market Risk

Our major market risk exposure is changing interest rates. We use debt financing in combination with operating cash flows to support capital expenditures,
acquisitions, working capital needs and general corporate purposes. A portion of our debt bears interest at LIBOR-based rates, and therefore an increase in interest rates could increase our interest
expense. We do not undertake any specific actions to cover our exposure to interest rate risk, and we are not a party to any interest rate risk management transactions. We have not purchased and do
not hold any derivative financial instruments.

A
10% change in interest rates (31 basis points on our floating-rate debt as of May 2, 2002) would have an immaterial effect on our earnings and cash flows and on the fair value of our
fixed rate debt.

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PART IIOTHER INFORMATION

Item 6.    Exhibits and Reports on Form 8-K



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SIGNATURES

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

|      |  |               |  | LONGS DRUG STORES CORPORATION(Registrant)                                                               
|----- |  | ------------- |  | --------------------------------------------------------------------------------------------------------
|Date: |  | June 14, 2002 |  | /s/STEVEN F. MCCANNSteven F. McCann
    Senior Vice President, Chief Financial Officer
    and Treasurer
|Date: |  | June 14, 2002 |  | /s/GROVER L. WHITEGrover L. White
    Vice PresidentController and Assistant Secretary                 

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