UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                           WASHINGTON, D.C. 20549
                                 FORM 10-K

          [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      SECURITIES EXCHANGE ACT OF 1934 

                   FOR THE FISCAL YEAR ENDED SEPTEMBER 29, 1996
                                        OR
          [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      SECURITIES EXCHANGE ACT OF 1934 

For the transition period from _________________ to ________________

                    Commission File Number 33-73592-01


                     THRIFTY PAYLESS, INC.
         (Exact Name of Registrant as Specified in its Charter)

           California                         95-4391249
   (State of Incorporation)        (I.R.S. Employer Identification No.)

                                30 Hunter Lane 
                        Camp Hill, Pennsylvania 17011
          (Address and Zip Code of Principal Executive Offices)
      Registrant's Telephone Number Including Area Code: (717) 761-2633

SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT:

                                       Name on Each Exchange
             Title of Each Class        on which Registered

                      N/A                        N/A

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE

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
the filing requirements for the past 90 days.  
Yes   [ X ]      No    [     ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.   [ X ]

       Shares of common stock outstanding at December 24, 1996 - 1,000
<PAGE>
                        THRIFTY PAYLESS, INC.

                     ANNUAL REPORT ON FORM 10-K

                 Fiscal Year Ended September 29, 1996

Item                                                             Page
                                PART I


1.    Business                                                     1

2.    Properties                                                  11

3.    Legal Proceedings                                           13

4.    Submission of Matters to a Vote of Security Holders         13

                                PART II

5.    Market for the Registrant's Common Stock, 
      Debt Securities and Related Stockholder Matters             13

6.    Selected Financial Data                                     14

7.    Management's Discussion and Analysis of Financial           
      Condition and Results of Operations                         16

8.    Financial Statements and Supplementary Data                 22

9.    Changes in and Disagreements with Accountants on  
      Accounting and Financial Disclosure                         22       
 

                                 PART III

10.    Directors, Executive Officers, Promoters and Control      
       Persons of the Registrant                                  23
                                                              
11.    Executive Compensation                                     28

12.    Security Ownership of Certain Beneficial Owners and 
       Management                                                 33

13.    Certain Relationships and Related Transactions             34

                                  PART IV

14.    Exhibits, Financial Statement Schedule and Reports 
       on Form 8-K                                                39


                                     i
<PAGE>
                                    PART I
                                    ------
    
    ITEM 1.     BUSINESS
    
    GENERAL
    
         Thrifty PayLess, Inc. ("Thrifty PayLess" or the "Company"),
    formerly a wholly owned subsidiary of Thrifty PayLess Holdings,
    Inc. ("T P Holdings"), and effective December 12, 1996, a wholly
    owned subsidiary of Rite Aid Corporation ("Rite Aid") as a result
    of the merger of TP Holdings into Rite Aid (the "Merger"), is the
    largest drug store chain on the West Coast and one of the largest
    in the United States, with annual revenues of approximately $4.8
    billion.  On September 29, 1996, the Company operated a total of
    1,004 Thrifty Drug and PayLess Drug stores, and its subsidiary Bi-
    Mart Corporation ("Bi-Mart") operated 45 membership discount
    stores.  The Company's stores are located throughout the Western
    United States with 677 stores in California, 155 in Washington, 113
    in Oregon and an additional 104 in Alaska, Arizona, Colorado,
    Hawaii, Idaho, Nevada, Utah and Wyoming. 
    
         The Company's drug stores offer a wide variety of affordable,
    high quality products, including prescription drugs,
    over-the-counter drugs, health and beauty aids, greeting cards,
    cosmetics, photo finishing, general merchandise and consumable
    products such as snack food, candy, ice cream and beverages,
    including liquor.  In addition to national name brand products, the
    Company offers private label merchandise  including
    over-the-counter drugs, health and beauty aids, household products
    and other items. Bi-Mart stores offer a broad range of health and
    beauty aids and general merchandise, including housewares,
    automotive products, hardware, electronics, sporting goods, toys
    and photographic products, as well as full-service pharmacies.  Bi-
    Mart uses a "no frills" shopping format that enables it to provide
    its approximately 1.2 million members with substantial discounts
    from suggested retail prices.  It is anticipated that the Company
    will dispose of Bi-Mart promptly following the Merger.
    
    History
    
         The Company was formed in 1992 by Green Equity Investors, L.P.
    ("GEI"), an investor group led by Leonard Green & Associates, L.P.
    ("LGA") for the purpose of acquiring Thrifty Corporation, the
    operator of the Thrifty Drug chain ("Thrifty Drug") from Pacific
    Enterprises ("PE") (the "1992 Acquisition").
    
    
    
    
                                    1
    <PAGE>
    
    
        Thrifty Drug was  founded in 1929 and grew  to a 593 drug store
    chain with  locations  throughout the Western United States with
    a  history of consistent and increasing profits. In 1986 PE 
    purchased Thrifty Drug and changed its focus, resulting in
    aggressive diversification and expansion campaigns. From 1986
    through 1992, Thrifty Drug's profitability declined to significant
    losses, the outcome of  unsuccessful marketing campaigns and the
    lack of management depth and infrastructure.  When Thrifty Drug was
    sold to the Company, Thrifty Drug sold or closed its stores in
    states other than California and operated 494 drug stores. Bi-Mart
    was acquired by Thrifty Drug in 1988.
    
         PayLess Drug Stores Northwest, Inc. ("PayLess Drug") was
    founded in 1939. In 1985, Kmart Corporation ("Kmart") acquired
    PayLess Drug when it had 162 stores. PayLess Drug has grown
    primarily through opening new stores and by acquisitions of stores
    to complement its market penetration. Such acquisitions include 60
    PayLess Drug Stores (a previously unaffiliated publicly traded
    California corporation) in 1980; 24 Osco stores in 1987 and an
    additional 51 Osco stores in 1991 from American Stores; and 124
    Pay'n Save Stores in 1992 from Thrifty Drug.  The Company acquired 
    PayLess Drug from Kmart on April 20, 1994 (the "Acquisition") and
    merged it into Thrifty PayLess effective September 28, 1995.
    
    BUSINESS STRATEGY
    
         Management's strategic goal is for the Company to capitalize
    on its position as the leading drug store retailer on the West
    Coast.  As third-party prescription drug payment plans
    ("Third-Party Plans") seek to offer convenient health care options
    to their members, management believes that the Company, with its
    extensive network of locations, will have a competitive advantage
    in attracting additional business.  Management also believes that
    attracting business from Third-Party Plans is crucial to remain
    competitive in the drug store industry as more people move to
    managed care health coverage.  As part of this strategic plan, the
    Company will use its position as a provider of health and wellness
    products to sell related traditional drug store merchandise and
    services, particularly over-the-counter drugs (OTC), health and
    beauty aids, photo finishing services and supplies, greeting cards
    and consumable products.  
    
    
    
    
    
    
    
    
    
                                 2
    <PAGE>
    MERCHANDISING
    
         All of the Company's stores offer a wide variety of name brand
    and private label merchandise, including prescription and
    over-the-counter drugs, health and beauty aids, cosmetics, photo
    finishing, consumable products such as candy, snacks, beverages
    (and tobacco and liquor in many locations), and seasonal
    merchandise such as Christmas, Easter and Halloween items, holiday
    greeting cards and back-to-school and beach supplies.
    
        The following chart sets forth the percentage of total retail
    sales attributable to each major product category for the Company
    for fiscal 1996: 
    
         Prescription Drugs                       33.3%
    
         OTC Drugs/Health and Beauty Aids         19.9%
    
         Candy/Tobacco/Food & Beverage            12.6%
    
         Cards/Stationery/Magazines                5.6%
    
         Photo finishing/Camera                    3.5%  
    
         General Merchandise                      25.1%
                                               --------
                                                 100.0%
                                               ========
    
        In addition to the many name brand products offered in its
    stores, the Company intends to actively promote its private label
    products.  As of September 29, 1996, the Company offered
    approximately 1,300 private label stock keeping units ("SKUs"),
    including over-the-counter drugs, health and beauty aids, household
    products and, at Thrifty Drug and certain PayLess Drug stores,
    hand-dipped and packaged ice cream.  These private label products
    are produced to the Company's specifications by outside
    manufacturers (with the exception of ice cream products, which the
    Company manufactures itself) and are packaged in a manner designed
    to create brand awareness for the Thrifty or PayLess private label. 
    The Company rolled out dual logo (Thrifty PayLess) private label
    packaging designs in 1996, replacing PayLess Drug and Thrifty Drug
    labeled products.  This eliminated the need for two separate
    designs and related  manufacturing. These private label products
    provide consumers with high-quality, lower-priced alternatives to
    name brand products while generating higher gross profit margins
    than brand name products.  The Company's sales of private label
    products in fiscal 1996 as a percentage of total non-pharmacy sales
    was 8.6%, compared to 6.5% in fiscal 1995.  
    
    
                                 3
    <PAGE>
         To enhance its reputation for convenience and reliability, the
    Company will continue to emphasize maintenance of a consistent
    in-stock position in its merchandise, especially for advertised
    items.  To appeal to cost-conscious consumers, drug store
    merchandise is generally priced to be competitive with other retail
    drug store chains.
    
         PayLess Drug and Thrifty Drug stores seek to meet consumer
    requirements within particular neighborhoods and communities by
    permitting individual stores flexibility in tailoring their product
    assortments to suit local demographics, tastes and trends.  For
    example, individual stores may emphasize convenience foods,
    sporting goods, homeopathic products, souvenirs or certain health
    and beauty products to meet community needs.  PayLess Drug and
    Thrifty Drug also develop micro-marketing programs targeting
    particular segments of their customer base, such as senior
    citizens, new residents, new mothers and multi-cultural consumers.
    
    
    PHARMACY
    
         Pharmacy and over-the-counter drug sales will continue to be
    a primary focus of the Company's business.  Each of the Company's
    stores operates a full-service pharmacy staffed with registered
    pharmacists.  The Company filled approximately 57.4 million
    prescriptions in fiscal 1996, representing approximately 33.3% of
    total sales, compared to 51.0 million prescriptions or
    approximately 30.7% of total sales in fiscal 1995.  The Company
    plans to focus on improving pharmacy operations to capitalize on
    its convenient locations and strong presence on the West Coast, to
    build customer loyalty, to increase customer traffic in its stores
    and thereby increase sales of other products. 
    
         The Company believes that its prescription drug business will
    represent an increasingly significant portion of its sales and
    profits due to the demographic trend towards an aging population,
    the continued development of new pharmaceutical products and
    changing trends in the delivery of health care.  
    
         The Company emphasizes the role of pharmacies and pharmacy
    personnel as providers of high quality health care and "wellness"
    services.  Free blood pressure testing machines are in operation
    in all pharmacies.  In addition, all stores have installed a
    "Health Information Center" offering a variety of health care
    booklets and consultation information.  The Company employs a
    series of classroom and video programs to train its pharmacists and
    pharmacy technicians in customer service techniques and company
    policies and practices.  Health Screenings have been instituted at
    certain store locations and 
    various education and outreach programs have been designed to
    
                                 4
    <PAGE>
    increase customer loyalty and trust and to enhance the relationship
    between customers and pharmacy personnel. 
    
         The Company engages in aggressive marketing campaigns to
    attract Third-Party Plans under which third-party payors, such as
    insurance companies, health maintenance organizations, preferred
    provider organizations and private employers, agree to pay for all
    or part of a customer's eligible prescription purchases.  The
    percentage of the Company's total prescription drug sales
    attributable to sales to Third-Party Plan customers was 74.9% for
    fiscal 1996, compared to 70.0% for fiscal 1995.  Although gross
    margins on sales to third-party payors are generally lower than
    other prescription drug sales due to the highly competitive nature
    of pricing for this business and the purchasing power of
    third-party payors, management believes the lower margins are more
    than offset by the high volume of pharmacy sales to Third-Party
    Plan customers.  In addition, the Company believes that Third-Party
    Plans result in additional general merchandise sales by increasing
    customer count in the stores.  As of September 29, 1996, the
    Company had contracts with 1,736 Third-Party Plans.  Generally, the
    terms of such contracts relate to the third-party payor's
    reimbursement of the costs of pharmacy products sold by the
    Company.  Management plans to pursue additional Third-Party Plan
    contracts through a group of sales associates, all of whom have
    insurance and/or pharmacy backgrounds.  Management believes that
    the Company will continue to compete effectively for Third-Party
    Plans because of its large number of store locations, pricing
    policies, advanced technology systems, good service and convenience
    to customers and third-party payors.
    
         The Company's pharmacies employ state-of-the-industry PDX
    pharmacy computer systems that link the pharmacies in each chain
    and enable them to provide customers with a broad range of
    services.  Through the computer network, prescriptions may be
    transferred electronically between stores, thus permitting
    customers to refill their prescriptions at any location at any
    time, regardless of where their prescriptions were originally
    filled.  In addition, the computer network maintains customer
    profiles with medical and other information and assists pharmacists
    in detecting customers' potential allergic reactions and potential
    adverse drug reactions and in monitoring compliance with doctors'
    instructions regarding drug orders and refills.  The computer
    network also supplies information concerning drug purchases to
    customers for income tax and insurance purposes and prepares
    prescription labels and receipts. 
    
         In addition to improving customer service, the computer
    network expedites transactions with many Third-Party Plans by
    electronically transmitting prescription information directly to
    the third-party payor while the prescription is being filled.  
                                 5
    <PAGE>
    Prior to sale, the third-party payor is able to determine customer
    eligibility, coverage of the prescription and pricing 
    and co-payment requirements, if any.  These computerized
    transactions help reduce losses from rejected claims, accelerate
    the payment process and lower billing and collection costs. 
    
    HEALTH AND BEAUTY AIDS
    
         The Company's stores offer a wide selection of brand name and
    private label health and beauty aids, including cosmetics and
    fragrances and products in the categories of dental care, skin
    care, baby care, feminine hygiene and family planning.  In
    addition, the Company's stores emphasize various "wellness"
    products, such as  vitamins and food supplements and homeopathic
    medicines, in order to appeal to consumer demand for products that
    contribute to a healthy lifestyle.   
    
    PHOTO FINISHING
    
         The Company offers overnight photo finishing services in all
    of its stores, as well as one-hour photo finishing services through
    special photo finishing centers installed in 269 stores. 
    Management believes that photo finishing services also contribute
    significantly to sales of other merchandise categories by
    generating customer traffic since customers are generally required
    to visit a store twice in order to drop off and pick up film. 
    PayLess Drug and Thrifty Drug have each entered into photo
    finishing services agreements with nationally recognized leaders
    in photo finishing services that are capable of providing high
    quality, low cost photo finishing services. 
    
         Photo finishing services are designed for customer
    convenience, with drop boxes for film developing packages and
    accessible film displays.  Management intends to seek to increase
    consumer awareness of its photo finishing services by emphasizing
    its various trade names for such services.  In addition to photo
    finishing services, the Company's photo finishing departments offer
    camera and photo accessories, small electronics, batteries and
    audio and video tape.
    
    
    MARKETING AND ADVERTISING
    
         The marketing and advertising strategy for PayLess Drug and
    Thrifty Drug is designed to promote the  common merchandise mix
    offered by both chains.  This strategy has allowed the Company to
    provide combined logo advertising throughout the state of
    California.  PayLess Drug and Thrifty Drug stores are promoted as
    convenient, local drug stores serving the public's health care
    needs by offering high quality pharmacy services and a large
    selection of core drug store merchandise.
    
                                 6
    <PAGE>
         Advertisements are designed to focus on specially priced
    promotional items to attract customers to the Company's stores,
    highlight key products among the stores' broad assortment of
    merchandise and include institutional pharmacy messages.  The
    Company's advertising activities primarily employ print, including
    weekly color circulars distributed through local newspapers and
    direct mail packages and coupon/value books mailed to select zip
    codes within each store's designated trading area.  The Company
    also utilizes "micro-marketing" and broadcast advertising to
    provide a comprehensive advertising and marketing program.  In
    addition, consumer surveys and focus groups are conducted to assist
    in monitoring consumer requirements, attitudes and habits.
    
         The Company's net advertising cost was $41.0 million or 0.9%
    of sales for fiscal 1996.  Gross  advertising costs for the Company
    are substantially offset through cooperative advertising allowances
    received from vendors.
    
    STORE OPERATIONS
    
         All stores are open seven days a week for an average of 12 to
    14 hours each day.  The Company has 17 stores with a 24-hour
    schedule and is evaluating the success of these stores to determine
    if additional stores will adopt this schedule.  Stores are
    generally operated on a self-service basis (except for pharmacy,
    photo finishing and ice cream product sales), with personnel
    available for customer assistance when required.  Store layout and
    product displays are designed with the use of a computerized space
    management system that maximizes productivity per square foot of
    selling space, maintains consistency in merchandising and reduces
    inventory requirements.  The Company's stores share common design
    features and merchandise mix for the convenience of customers and
    to reinforce marketing and advertising efforts. 
    
         All store employees participate in training programs covering
    such matters as electronic checkout systems, employment policies
    and customer service techniques designed to create a friendly
    shopping environment.  Prior to assuming a management position,
    each store manager attends a comprehensive management training
    course that focuses on all elements of store operations, including
    inventory ordering, merchandising, pricing policies, employee
    relations and store maintenance, all with an emphasis on customer
    service.  In addition, assistant managers are trained for the
    possibility of assuming overall management of new stores as they
    are opened.  Various management meetings are also conducted at all
    levels of operations to ensure uniform implementation of corporate
    initiatives and policies. 
    
    
    
                                 7
    <PAGE>
         In order to reduce inventory shrinkage, the Company has 
    various incentive programs, including training and awareness
    programs, tailored audit programs for district managers, internal
    auditors and loss prevention specialists, and computerized
    exception reporting for, among other things, customer refunds,
    voids and cash overages and shortages from daily register
    check-outs.  In addition, the Company has installed Electronic
    Article Surveillance (EAS) equipment in approximately 450 stores
    located in high risk areas in order to reduce theft-related
    shrinkage and intends to install EAS units Company wide throughout
    fiscal 1997.
    
    PURCHASING AND DISTRIBUTION
    
         Approximately 75 percent of store merchandise, including
    prescription drugs, are centrally purchased directly from
    manufacturers to take advantage of promotional and volume discount
    programs offered to retailers.  The balance of store merchandise
    is shipped directly to the Company's stores from manufacturers and
    distributors at prices negotiated at the corporate level.  The
    Company utilizes electronic purchase orders via Electronic Data
    Interchange (EDI) by transmitting orders to more than 300 of its
    suppliers.  EDI allows for the paperless ordering of products with
    immediate confirmation from the vendor on price, delivery terms and
    amount of goods ordered.  In addition, the Company uses an
    automated replenishment system at its distribution centers.  For
    fiscal 1996, no single vendor accounted for more than 10.0% of
    total Company purchases.  The Company believes it has numerous
    alternative sources of supply for the merchandise sold in its
    stores. 
    
    TECHNOLOGY AND MANAGEMENT INFORMATION SYSTEMS
    
         The Company's management information systems consist of
    computer networks designed to improve customer service, refine
    merchandising information, reduce operating costs and inventory
    levels and support management's decision-making process.  All
    stores are equipped with point-of-sale scanning devices that record
    the sale of every product, enabling stores to generate daily sales
    data with respect to each item and category of merchandise as well
    as every department in each store.  In addition, hand-held
    terminals are used for inventory ordering and auditing, which tend
    to improve store productivity and the accuracy of data generated. 
    
         The Company utilizes satellite communications and a video
    networking system linking together all of its stores.  The 
    communication network enables the Company to disseminate
    information quickly and efficiently and maintain close contact
    between corporate headquarters and each store.
    
    
                                 8
    <PAGE>
    REGULATION
    
         The Company's pharmacists and pharmacy technicians are
    required to be licensed by the appropriate state board of pharmacy.
    All stores with pharmacies and certain distribution centers are
    also registered with the Federal Drug Enforcement Administration. 
    The majority of stores sell alcoholic beverages and are subject to
    various state and local licensing requirements as a result.  In
    addition, some stores sell firearms and ammunition and as a result
    are subject to additional regulatory requirements.  By virtue of
    these license and registration requirements, the Company will be
    obligated to observe certain rules and regulations, and a violation
    of such rules and regulations could result in a suspension or
    revocation of one or more licenses or registrations. 
    
         In 1990, the United States Congress enacted the Omnibus Budget
    Reconciliation Act of 1990 ("OBRA"), which requires states to
    implement pharmaceutical drug use review programs for Medicaid
    beneficiaries by January 1, 1993.  Under OBRA, pharmacists are
    required to offer counseling, without additional charge, to
    customers covered by Medicaid about their medication, dosage,
    delivery system, common side effects and other information deemed
    significant by the pharmacists.  The states in which the Company
    operates have enacted broader regulations that require pharmacists
    to provide such counseling to all customers, regardless of whether
    they are covered by Medicaid.  As a result, the Company's
    pharmacists must provide counseling to customers and have a duty
    to warn customers regarding any potential adverse effects of a
    prescription drug if the warning could reduce or negate such
    effects.  The Company believes its series of training programs for
    pharmacy personnel and state-of-the-industry pharmacy computer
    network are well designed to ensure that these requirements are
    satisfied, but violations of these regulations could have an
    adverse impact on the Company. 
    
         In recent years, prescription drug sales have represented a
    growing portion of the Company's revenues.  These revenues may be
    affected by changes within the health care industry, including
    changes in programs providing for reimbursement of the cost of
    prescription drugs by third-party payors and regulatory changes
    relating to the approval process for prescription drugs.  Although
    no health care reform legislation was adopted in the most recent
    session of Congress, it is likely that Congress will revisit the
    issue in the future.  The Company cannot predict whether or in what
    form health care reform legislation may be adopted in the future,
    at the federal or state level, or the impact of any such
    legislation on the Company's financial position or results of
    operations.  However, to the extent health care reform expands the
    number of persons receiving health care benefits covering the
    purchase of prescription 
                                 9
    <PAGE>
    drugs, it could result in increased purchases of such drugs and
    could thereby have a favorable impact on both the Company and the
    retail drug industry in general.  Nevertheless, there can be no
    assurance that any such legislation will be enacted or, if enacted,
    that such legislation will have a favorable effect on the Company. 
    
         The Company has contracts with numerous Third-Party Plans
    under which its stores provide pharmacy services.  Several of the
    states where these stores are located have enacted "freedom of
    choice" statutes that entitle any pharmacy to provide pharmacy
    services under these contracts.  Such statutes tend to increase
    competition for Third-Party Plan contracts and therefore could
    negatively impact the Company.  Management believes, however, that
    the Company will be well positioned to compete for Third-Party Plan
    contracts based on its large number of store locations, pricing
    policies, advanced technology systems, reputation for good service
    and convenience to customers and third-party payors.   
    
         The Company is subject to laws governing its relationship with
    employees, including minimum wage requirements, overtime and
    working conditions.  An increase in the minimum wage rate, employee
    benefit costs or other costs associated with employees could
    adversely affect the Company.   
    
    COMPETITION
    
         The Company competes in its markets with several national,
    regional and local drug store chains, large grocery stores and
    supermarkets, membership clubs, deep discount drug stores,
    combination food and drug stores, discount general merchandise
    stores, mass merchandisers, independent drug stores and local
    merchants.  In addition to competition with the foregoing, the
    Company's pharmacy departments also compete with hospitals, health
    maintenance organizations and mail order providers, which have
    experienced significant growth in their market share, and the
    Company's photo finishing centers also compete with a variety of
    mini-lab photo-processors and photo-specialty shops.  Many of the
    Company's competitors have substantially greater financial
    resources than the Company. 
    
         The Company believes that the primary elements of competition
    in its industries include pricing, store location and design,
    product selection and customer service.  The Company believes that
    it competes successfully because of its pricing policies,
    reputation for reliability, convenient store locations, superior
    pharmacy services, broad selection of merchandise and effective
    sales techniques.  However, the competitive environment is often
    affected by factors beyond a particular retailer's control, such
    as shifts in consumer preferences, economic conditions, and
    population and traffic 
                                 10
    <PAGE>
     patterns.  The Company believes that in the future, the ability
    to compete effectively will be increasingly dependent on superior
    merchandising and customer service, the effectiveness of cost
    containment measures, especially with respect to pharmacy services,
    and superior information systems for general management. 
    
    EMPLOYEES
    
         As of September 29, 1996, the Company had approximately 32,500
    employees, of which approximately 61% were full-time. 
    Approximately 13,300 employees were covered by collective
    bargaining agreements and represented by various union locals.  The
    collective bargaining agreements have express expiration dates and
    are therefore subject to review and renewal on a regular basis. 
    Most of the employees covered by such collective bargaining
    agreements work at Thrifty Drug stores in California and in PayLess
    Drug stores in Northern California and in the greater Seattle area
    in Washington.  The Company has not experienced any material
    business interruption as a result of labor disputes within the past
    five years, and considers its employee relations to be good.
    
    TRADE NAMES AND TRADEMARKS
    
         The Company uses various trade names and trademarks, including
    PayLess Drug, Thrifty Drug, Thrifty Jr., Rexall Square Drugs,
    Bi-Mart and RxMart, and has registered the trademarks PayLess Drug
    and Thrifty with the United States Patent and Trademark Office.
    
    ITEM 2.     PROPERTIES
    
    STORE LOCATIONS
    
         As of September 29, 1996, the Company's stores by type and
    location are as follows: 
    
                    PayLess Drug  Thrifty Drug   Bi-Mart     Total
                  -------------- ------------   -------     ------
    California         220          457             -         677
    Washington         147           -              8         155
    Oregon              76           -             37         113
    Colorado            30           -              -          30
    Utah                27           -              -          27
    Idaho               19           -              -          19
    Nevada              13           -              -          13
    Alaska              10           -              -          10
    All other stores     5           -              -           5  
                      -----        -----          ----     -------
    Total              547          457            45       1,049
    
    
    
                                 11
    <PAGE>
         The Company's stores average approximately 17,575 square feet
    of selling space and are located in neighborhood and community
    shopping centers or in freestanding buildings. 
    
         As of September 29, 1996, the Company owned 153 operating
    stores in fee.  The balance of the stores are leased with an
    average remaining lease term of 25 years, including all options. 
    Most of the store leases are "triple net", requiring the Company
    to pay all taxes, insurance and common area maintenance expenses
    associated with the properties, and provide for fixed minimum
    rentals together with a percentage  rental based upon sales.
    
         During fiscal 1996, the Company closed or sold 10 stores.  Of
    the total number of stores closed or sold, 9 were closed or sold
    due to their inability to achieve adequate returns.  One store was
    closed due to its close proximity to a nearby PayLess Drug. 
    Management  will consider closing certain other stores based on a
    case-by-case review of the performance and profitability of each
    store.
    
         As of September 29, 1996, the Company had a portfolio of 80
    non-operating properties, 13 of which are owned in fee and 67 of
    which are leased properties.  The Company has in place a number of
    strategies to dispose of these properties.
    
    
    WAREHOUSE FACILITIES
    
         The Company's warehouse facilities consist of the following: 
    
                                               Approximate
                     Location                  Square Footage
                     ---------               --------------- 
                     Ogden, Utah               638,000
                     Woodland, California      500,000
                     Wilsonville, Oregon       500,000
                     Ontario, California       415,900
                     Eugene, Oregon            200,000
                     Yakima, Washington         20,000
    
    
         The facilities in Ogden, Utah, Woodland and Ontario,
    California and Wilsonville, Oregon, are  owned in fee.  Those
    located in Eugene, Oregon and Yakima, Washington are leased. 
    
         The Company leases four warehouse facilities, pursuant to a
    master lease.   The master lease  includes two facilities that are
    subleased to certain affiliates of the Company.  See "Item 13. 
    Certain Relationships and Related Transactions - Relationship With
    Big 5" and "- Relationship With Gart."  The other two facilities
    located in Yakima, Washington and Eugene, 
    
                                 12
    <PAGE>
    Oregon serve Bi-Mart stores exclusively. The master lease provides
    the Company with options to purchase any real property under such
    lease for an amount equal to the greater of the property's fair
    market value (as agreed upon by the parties or determined by an
    independent appraiser, exclusive of the value of any ground lease
    or lessee improvements) or the property's "Adjusted Acquisition
    Cost", as defined.
    
    OTHER PROPERTIES
    
         The Company's corporate headquarters which is owned in fee is
    located in 160,000 square feet of office space in Wilsonville,
    Oregon, adjacent to the Wilsonville distribution center.  The
    Company also owns its 52,200 square foot ice cream manufacturing
    plant located in El Monte, California. 
    
    ITEM 3.     LEGAL PROCEEDINGS
    
         The Company and its subsidiaries are from time to time
    involved in ordinary routine litigation incidental to the conduct
    of their business.  The Company regularly reviews all pending
    litigation matters in which it is involved and establishes reserves
    deemed appropriate for such litigation matters.  Management
    believes that no such pending litigation matters will have a
    material adverse effect on the Company's financial statements taken
    as a whole or on its results of operations. 
    
    ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 
    
         None.
    
                                    PART II
                                   --------
    
    ITEM 5.    MARKET FOR THE REGISTRANT'S COMMON STOCK AND DEBT
    SECURITIES AND RELATED STOCKHOLDER MATTERS
    
         All of the outstanding common stock of Thrifty PayLess is held
    by Rite Aid.
    
    
    
    
    
    
    
    
    
    
    
    
                                 13
    <PAGE>
    ITEM 6.     SELECTED FINANCIAL DATA
    
                   SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
                              OF THRIFTY PAYLESS, INC.
                                (Dollars in millions)
    
         The following selected historical consolidated financial data
    presented in the table below is derived in part from, and should
    be read in conjunction with, the Consolidated Financial Statements
    and Notes thereto of the Company included elsewhere herein.  The
    Company had no operations prior to the 1992 Acquisition. 
    Accordingly, financial information for the 39 weeks ended September
    27, 1992 is that of Thrifty Corporation ("Predecessor Company")
    
<TABLE>
<CAPTION>
                                                                                           Predecessor
                                                         The Company (1)                    Company (1)(2)

                                              1996         1995        1994        1993     1992(3)(4)  
                                           ---------   ----------  ----------  ----------   ----------
<S>                                        <C>         <C>         <C>         <C>           <C>
CONSOLIDATED OPERATING DATA:
Sales..................................    $ 4,798.9   $ 4,658.8   $ 3,163.3   $ 2,119.1     $ 1,917.9
    Cost of sales, buying and occupancy      3,517.5     3,413.0     2,311.1     1,571.0       1,431.8 
        Gross Profit...................      1,281.4     1,245.8       852.2       548.1         486.1
    Selling and administration.........      1,022.7     1,065.5       746.8       538.8         559.7
    Write-off of goodwill..............           -           -           -           -           17.2
    Depreciation and amortization......         68.4        69.1        30.1         1.8          31.5
        Operating profit(loss).........        190.3       111.2        75.3         7.5        (122.3)
    Interest expense, net..............       (104.0)     (119.4)      (56.6)      (11.8)        (27.8)
    Loss on sale of assets.............           -           -           -           -          (25.6)
        Income (loss) before income
          taxes........................         86.3        (8.2)       18.7        (4.3)       (175.7)
    Income tax (expense) benefit.......        (36.0)        2.1        (8.3)        1.1          (0.5)
    Income (loss) from continuing
     operations........................         50.3        (6.1)       10.4        (3.2)       (176.2)
    Income(loss) from discontinued
     operations, net of income taxes...           -           -          5.2         3.7          39.1
    Extraordinary loss on debt
     extinguishment....................        (85.5)       (7.4)         -            -            -  
            Net income (loss)..........    $   (35.2)  $   (13.5)   $   15.6    $    0.5     $  (137.1)

OTHER OPERATING DATA:
    Number of stores at end of period..      1,049        1,040      1,068         535           637
    Same-store sales increases.........          3.3%         2.5%       4.0%        1.4%          4.9%
    Prescription sales ($).............    $ 1,600.6    $ 1,429.0   $  896.8    $  548.7     $   497.3
    Prescription sales (%).............         33.3%        30.7%      28.3%       25.9%         25.9%
    Cash provided by (used in)  
        operations.....................    $   119.4    $     8.5  $    64.6    $  (77.9)    $    (6.2)
    EBITDAL (5)........................        268.0        204.3      106.0        10.0         (75.6)
    Capital expenditures (6)...........         42.7         54.3       82.3        31.5          25.0

CONSOLIDATED BALANCE SHEET DATA:
    Working capital....................    $   499.0    $   509.3 $    469.6    $  139.5     $   280.2
    Total assets (7)...................      2,067.9      2,101.5    2,139.4       688.8       1,046.2
    Long-term debt.....................        794.4        913.2      866.9        62.4          91.1
    Shareholder's equity...............        378.8        294.9      308.4        46.1         261.1

OTHER DATA:
    Ratio of earnings to fixed charges.          1.5x         N/A        1.2x        N/A           N/A

</TABLE>









                                    14
<PAGE>
       NOTES TO SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
                         OF THRIFTY PAYLESS, INC.
                           (Dollars in Millions)
    
    (1)  The fiscal periods include 52 weeks for fiscal 1996, 1995 and 
    1994, 53 weeks for fiscal 1993, and 39 weeks for fiscal 1992.
    
    (2)  The Predecessor Company period include the operations of Pay'n
    Save until July 25, 1992, when it was sold to PayLess Drug.
    
    (3)  Includes the initial two days (September 26 and September 27)
    of the Company's period.
    
    (4)  The fiscal period ended September 27, 1992, represents the
    nine-month period created by a change in fiscal year end of Thrifty
    Drug from December to September.
    
    (5)  EBITDAL represents operating income plus depreciation and
    amortization expense, write-off of goodwill and LIFO provision,
    including step-up. EBITDAL is not intended to represent cash flow
    or any other measure of performance in accordance with Generally
    Accepted Accounting Principles (GAAP).  EBITDAL is included here
    because management believes that certain investors find it to be
    a useful tool for measuring a company's ability to service its
    debt.  See the Consolidated Statements of Cash Flows in the
    Consolidated Financial Statements for Thrifty PayLess included
    elsewhere herein.
    
    (6)  Capital expenditures do not include expenditures for business
    acquisitions.
    
    (7)  Included in total assets are net assets related to
    discontinued operations of $49.1, and $57.4, at October 3, 1993,
    and September 25, 1992, respectively.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
                                 15
    <PAGE>
    ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
            CONDITION AND RESULTS OF OPERATIONS  
    
    COMPARABILITY OF FINANCIAL DATA
    
         As a result of the Acquisition, PayLess Drug's operations are
    included in the Company's financial statements beginning  April 20,
    1994. Consequently, results of operations for the Company between
    fiscal 1995 and 1994 are not comparable.  Additionally, concurrent
    with the Company's acquisition of PayLess Drug, certain sporting
    goods  operations were discontinued and have been accounted for as
    discontinued operations. The accompanying discussion and analysis
    does not discuss discontinued operations.
    
    RESULTS OF CONTINUING OPERATIONS
    
         The following table sets forth the Company's operating results
    for the periods indicated, both in millions of dollars and
    expressed as a percentage of sales.
    
    <TABLE>
    <CAPTION>
                                             Fiscal 1996    Fiscal 1995    Fiscal 1994
                                             -----------    -----------    -----------
    <S>                                      <C>           <C>             <C>
    
    Sales                                    $4,798.9      $  4,658.8      $ 3,163.3
    Cost of sales, buying and occupancy       3,517.5         3,413.0        2,311.1
    Gross profit                              1,281.4         1,245.8          852.2
    Selling and administration                1,022.7         1,065.5          746.8
    Depreciation and amortization                68.4            69.1           30.1
    Operating profit                            190.3           111.2           75.3
    Interest expense, net                      (104.0)         (119.4)         (56.6)
    Income (loss) before taxes                   86.3            (8.2)          18.7
    Income tax (expense) benefit                (36.0)            2.1           (8.3)
    Income (loss) from continuing operations $   50.3      $     (6.1)     $    10.4 
    
    EBITDAL                                  $  268.0      $    204.3      $   106.0 
    
    Sales                                       100.0%          100.0%         100.0%
    Cost of sales, buying and occupancy          73.3            73.3           73.1 
    Gross profit                                 26.7            26.7           26.9
    Selling and administration                   21.3            22.9           23.6
    Depreciation and amortization                 1.4             1.5            1.0 
    Operating profit                              4.0             2.4            2.4 
    Interest expense, net                        (2.2)           (2.6)          (1.8)
    Income (loss) before taxes                    1.8            (0.2)           0.6
    Income tax (expense) benefit                 (0.8)             -            (0.3)
    Income (loss) from continuing operations      1.0  %         (0.2)%          0.3%
    
    EBITDAL                                       5.6  %          4.4 %          3.4%
    
    </TABLE>
    
    
    
    
    
    
    
    
                                 16
    <PAGE>
    
    COMPARISON OF THE 52 WEEK PERIOD ENDED SEPTEMBER 29, 1996 ("FISCAL
    1996") WITH THE 52 WEEK PERIOD ENDED OCTOBER 1, 1995 ("FISCAL
    1995")
    
         Sales for fiscal 1996 increased by $140.1 million or 3.0
    percent as compared to fiscal 1995.  Comparable store sales
    increased 3.3 percent with pharmacy comparable store sales up 12.4
    percent and non-pharmacy merchandise comparable store sales lower
    by 0.7 percent.  Pharmacy sales as a percentage of total sales were
    33.3 percent for fiscal 1996, up from 30.7 percent of sales in
    fiscal 1995.  Third-party pharmacy sales as a percent of total
    pharmacy sales were 74.9 percent for fiscal 1996 compared to 70.0
    percent in fiscal 1995.
     
        Gross profit as a percent of sales was 26.7 percent for fiscal
    1996, consistent with fiscal 1995.  FIFO gross profit as a
    percentage of sales was 26.9 percent in fiscal 1996 compared to
    27.3 percent the prior year.  The decrease in FIFO gross profit
    results primarily from continued pressure on gross margins related
    to lower margin third-party pharmacy sales.
    
         Selling and administration expenses for fiscal 1996 were 21.3
    percent of sales compared to 22.9 percent in fiscal 1995.  The
    decrease results primarily from cost reductions realized by
    combining administrative services and operations of Thrifty Drug
    and PayLess Drug stores including a reduction in advertising
    expense of $31.5 million.  Additionally, a gain on the sale of
    properties of $7.8 million was realized in fiscal 1996 with no such
    gain in fiscal 1995.
    
         Net interest expense decreased by $15.4 million to $104.0
    million or 2.2% of sales in fiscal 1996 compared with $119.4
    million or 2.6% of sales in fiscal 1995.   In April 1996, T P
    Holdings and the Company completed a recapitalization, as described
    below, reducing both the level of long term debt and the average
    effective interest rate.
    
         The effective income tax rate for fiscal 1996 was 41.7%
    compared to 25.6% for fiscal 1995.  The change in the effective tax
    rate results from the leveraged effect of goodwill amortization,
    and other items not deductible for income tax purposes.
    
          Operating profit increased $79.1 million to $190.3 million
    or 4.0 percent of sales in fiscal 1996 compared to $111.2 million
    or 2.4 percent of sales in fiscal 1995.
    
           As discussed in Note 3 of the Consolidated Financial
    Statements, the Company completed a recapitalization in fiscal 1996
    resulting in an $85.5 million (net of a $9.5 million tax benefit)
    extraordinary loss associated with early extinguishment 
    
                                 17
    <PAGE>
    of debt.  In the prior year, the Company realized a $7.4 million
    (net of a $4.5 million tax benefit) extraordinary loss related to
    early extinguishment of debt.
    
         EBITDAL was $268.0 million or 5.6 percent of sales for fiscal
    1996 compared to $204.3 million or 4.4 percent of sales in fiscal
    1995.
    
    COMPARISON OF THE 52 WEEK PERIOD ENDED OCTOBER 1, 1995 ("FISCAL
    1995") WITH THE 52 WEEK PERIOD ENDED OCTOBER 2, 1994 ("FISCAL
    1994")
    
         The financial results of fiscal 1994 include approximately 23
    weeks of operations of PayLess Drug compared to 52 weeks for fiscal
    1995.  Accordingly, an increase of approximately 44% in sales with
    related costs and operating expenses in fiscal 1995 compared to
    fiscal 1994 relate to the additional weeks of PayLess Drug's
    operations.
    
         Sales for fiscal 1995 were $4,658.8 million compared to
    $3,163.3 million for fiscal 1994, an increase of $1,495.5 million
    or 47.3%.  In addition to the increase noted above, comparable
    store sales (excluding PayLess Drug) increased by 2.5% compared to
    fiscal 1994 with an 8.6% increase in pharmacy sales and a 0.4%
    increase in non-pharmacy merchandise comparable store sales. On a
    pro forma combined basis (including PayLess Drug), comparable store
    sales increased by 2.8% in fiscal 1995 compared to fiscal 1994 with
    an 11.3% increase in pharmacy sales and a 0.5% decrease in non-
    pharmacy merchandise sales.
    
         Pharmacy sales as a percentage of total sales were 30.7% for
    fiscal 1995 as compared to 28.5% for fiscal 1994 on a pro forma
    combined basis.  The growth in pharmacy sales was primarily the
    result of increased third-party payors sales, which as a percentage
    of total pharmacy sales was 70.0% in fiscal 1995, compared to 65.8%
    for fiscal 1994, on a pro forma combined basis. 
    
         Gross profit, net of buying and occupancy costs, as a
    percentage of sales was 26.7% for fiscal 1995 compared to 26.9% for
    fiscal 1994.  The decrease was due in part to reduced gross profit
    margins in the pharmacy area. Additionally, the LIFO valuation
    expense (income) was $24.0 million  in fiscal 1995 compared with
    $(0.6) million in fiscal 1994.
    
         Selling and administration expenses as a percentage of sales
    were 22.9% for fiscal 1995 compared to 23.6% for fiscal 1994.  The
    decrease is primarily related to reductions in administration
    expense as the Company combined administrative services of Thrifty
    Drug and PayLess Drug into one location.
    
    
                                 18
    <PAGE>
         Depreciation and amortization expense increased to $69.1
    million in fiscal 1995 as compared to $30.1 million in fiscal 1994. 
    The increase relates to a full year charge for PayLess Drug and
    depreciation on capital additions during fiscal 1995.
    
         Net interest expense was $119.4 million for fiscal 1995
    compared to $56.6 million for fiscal 1994.  The increase is
    primarily the result of a full 52 week period of interest in fiscal
    1995 compared to approximately 23 weeks borrowing in fiscal 1994
    and a balance outstanding in fiscal 1995 under the Company's
    revolving line of credit.
    
         The effective income tax rate for fiscal 1995 was 25.6%
    compared to 44.4% in fiscal 1994.  The  change in effective tax
    rate is primarily the result of the leveraged effect of goodwill
    amortization, a non-deductible expense.
    
         In September 1995, PayLess Drug was merged into the Company
    which required early payment of a  debt obligation.  The early
    payment resulted in an extraordinary charge of $7.4 million, net
    of a tax benefit of $4.5 million.
    
          Net income (loss) for fiscal 1995 was ($13.5) million
    compared to $15.6 million in fiscal 1994.  The decrease is related
    to items noted above.
    
         EBITDAL was $204.3 million or 4.4% of sales in fiscal 1995,
    compared to $106.0 million or 3.4% of sales for fiscal 1994 as a
    result of the factors described above.
    
    
    LIQUIDITY AND CAPITAL RESOURCES
    
         Historically, the Company's primary sources of liquidity have
    been cash from operations and borrowings under its $750.0 million
    secured bank facility.  The secured bank facility has historically
    been used to meet seasonal fluctuations in working capital
    requirements, primarily inventory purchases, with such requirements
    peaking in November, and capital expenditures.  
    
         For fiscal 1996, cash flow provided by operating activities
    was $119.4 million. Included as uses of cash are payments for store
    closures, cancellation of leases and employee severance of $26.0
    million related primarily to the Acquisition and the consolidation
    of operations.  Cash used in investing activities was $37.7 million
    with capital expenditures of $42.7 million and proceeds from the
    sale of assets of $14.6 million.  Cash used in financing activities
    was $81.3 million, primarily the net effect of the 1996
    recapitalization.
    
    
    
                                 19
    <PAGE>
         Management estimates capital expenditures for fiscal 1997 to
    be $84.1 million.  In addition, management anticipates that
    approximately $16.5 million in payments will be made in fiscal 1997
    relating to leases on closed stores and Acquisition related
    severance costs.  Management believes that cash from operations,
    combined with borrowing from Rite Aid Corporation and other
    financing sources, in the ordinary course of business, will be
    sufficient to enable the Company to meet all of its obligations
    when due.
    
         In connection with the Merger, Rite Aid entered into a 364
    day revolving credit facility with a syndicate of commercial banks
    that provides for loans in an aggregate amount of up to $1.0
    billion.  This credit facility is a revolving credit facility that
    converts in December 1997 to a term loan that will mature in
    December 1998.  In addition, Rite Aid has a 5 year, $1.0 billion
    revolving credit facitly that expires on July 19, 2001.  The
    facilities have per annum facility fees of .07% and .085%,
    respectively, and will be used for general corporate purposes
    including loans to Thrifty PayLess and support of Rite Aid's
    commercial paper program. Loans under the credit facilities bear
    interest at a floating rate based, at Rite Aid's option, on LIBOR,
    Money Market, CD rates or the lenders' Base Rate.  No amounts were
    outstanding under the Rite Aid Credit Facilities as of December 20,
    1996.
    
         The funds for the repayment of Thrifty PayLess' outstanding
    obligations under its secured bank facility (approximately $718.1
    million aggregate principal amount at December 12, 1996), the
    conversion of outstanding T P Holdings stock options into cash upon
    consummation of the Merger (approximately at $46.3 million) and the
    payment of certain fees and expenses relating to the Merger
    (estimated at $30.0 million) were provided through the issuance of
    commercial paper by Rite Aid.
    
      On December 20, 1996, Rite Aid Corporation issued certain
    unsecured notes and debentures (the "Securities") with an aggregate
    principal amount of $1.0 billion.  These securities will not be
    redeemable prior to maturity and will not be subject to any sinking
    fund.  Three tranches were issued as follows:
    
    Principal
    Amount           Rate      Security       Maturity
    ---------        ----      --------  -------------------
    $350,000,000     6.70%     Notes     Due December 15, 2001
    $350,000,000     7.125%    Notes     Due  January 15, 2007
    $300,000,000     7.70%     Debenture Due February 15, 2027
    
      Interest on the 6.70% notes is payable semiannually on June
    15 and December 15 of each year, commencing June 15, 1997; interest
    on the 7.125% notes is payable semiannually on July 15 
    
                                  20
    <PAGE>
    and January 15 of each year, commencing July 15, 1997; and interest
    on the 7.70% Debentures is payable semiannually on August 15 and
    February 15 of each year, commencing August 15, 1997.
    
      The net proceeds to Rite Aid were $991.6 million after
    deducting expenses and were used to repay commercial paper issued
    by Rite Aid in connection with the extinguishment of Thrifty
    PayLess' secured bank facility and to refinance other commercial
    paper previously issued by Rite Aid.  Rite Aid's commercial paper
    to be repaid has a weighted average interest rate of approximately
    5.5% per annum.  Obligations repaid under Thrifty PayLess' secured
    bank facility in connection with the  Merger had an average
    interest rate of 7.2% per annum and an average maturity of 31 days
    as of November 24,1996.
    
      As a result of the Merger, Rite Aid is obligated to offer to
    purchase all of Thrifty PayLess' outstanding 12 1/4% Senior
    Subordinated Notes due 2004 (approximately $195.0 million aggregate
    principal amount) at 101% of the principal amount thereof.  On
    December 23, 1996, Rite Aid began its tender offer to purchase
    these securities and solicited consents that would eliminate
    substantially all covenants governing this debt.
    
         The Company's financial condition is affected by economic
    conditions in its primary markets, including California, Oregon and
    Washington, and by regulatory conditions relating to the industries
    in which the Company competes.  Management cannot predict the
    nature or effect of any health care legislation that may be passed;
    however, the implementation of certain types of regulations could
    adversely affect the pricing of prescription drugs, the amount of
    reimbursements paid by governmental agencies and third-party payors
    or the amount of insurance coverage the Company is required to
    provide its employees.
      
         The Company has adopted various tax positions (including the
    adoption of the LIFO  method of inventory accounting), which
    positions it believes comply with applicable tax laws and
    regulations.  However, in the event such positions are challenged
    and are not upheld, there could be a material adverse effect on the
    Company's liquidity and financial condition.  The Company's
    consolidated federal tax returns  for the fiscal years 1992 through
    1994 are currently being examined by the Internal Revenue Service,
    which has challenged and/or raised issues with respect to certain
    positions adopted by the Company.
    
    
    
    
    
    
    
                                 21
    <PAGE>
    FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED
    
         In March 1995, the Financial Accounting Standards Board issued
    Statement of Financial Accounting Standards No. 121, "Accounting
    for the Impaired of Long-Lived Assets and for Long-Lived Assets to
    Be Disposed Of."  Statement No. 121 provides specific guidance
    regarding when impairment of long lived assets such as plant,
    equipment and certain intangibles, including goodwill, should be
    recognized and how impairment losses of such assets should be
    measured.  Statement No. 121 is effective for fiscal years
    beginning after December 15, 1995.  The Company is preparing to
    adopt Statement No. 121 in fiscal 1997 and expects that the impact
    on its statements of operations and financial position will not be
    material.
    
    
    IMPACT OF INFLATION AND CHANGING PRICES
    
         The Company's internal inflation trend remained consistent
    during the three-year period ended September 29, 1996 with
    decreases in front end merchandise offset by higher pharmacy costs. 
    Though not significant, inflation continues to cause increases in
    product, occupancy and operating expenses, as well as the cost of
    acquiring capital assets.  The effect of higher costs is minimized
    by achieving operating efficiencies and passing vendor price
    increases along to consumers.
    
    
    ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    
         Incorporated by reference to Item 14 of this Report on Form
    10-K.
    
    
    ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
    ACCOUNTING AND FINANCIAL DISCLOSURE
    
         None.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
                                 22
    <PAGE>
                                  PART III
                                  --------
    
    ITEM 10.     DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
    PERSONS OF THE REGISTRANT
    
         The following table sets forth information with respect to the
    Company's directors and executive officers as constituted September
    29, 1996 through the date of the Merger (December 12, 1996). 
    Following the Merger, the following persons ceased to hold the
    positions indicated below.
     
    Name                           Age         Positions with the Company
    -----------------------       ----         --------------------------
    Gordon D. Barker               50          Chief Executive Officer,  
                                               President and Director
    David R. Jessick               43          Executive Vice President
                                               & Chief Financial Officer
    Richard Juliano                49          Executive Vice President-
                                               Merchandising
    Barbara R. Crane               45          Senior Vice President,
                                               Store Operations- North
    James W. Gaube                 47          Senior Vice President,
                                               Real Estate
    John J. Greer                  54          Senior Vice President,
                                               Store Operations-South
    Don P. Davis                   45          Senior Vice President, MIS
    James C. Hamilton              53          Senior Vice President,
                                               Human Resources
    Andrew A. Striefel             51          Senior Vice President,
                                               Merchandising 
                                               & Advertising
    Willard E. Wilson              54          Senior Vice President,
                                               Health Services
    Gary S. Meade                  50          Vice President, 
                                               Legal Affairs & Secretary
    Leonard I. Green               63          Director
    Jonathan D. Sokoloff           39          Director
    Jennifer Holden Dunbar         33          Director
    Jack W. Goodall                58          Director
    Richard J. Lynch, Jr.          45          Director
    Frank G. Felicella             49          Director
    
         The executive officers of the Company served at the pleasure
    of the Board of Directors.  The directors of the Company were
    elected at each annual meeting of stockholders to serve for a term
    of one year or until their successors have been elected and
    qualified.
    
         Gordon D. Barker was named Chief Executive Officer and a
    Director of the Company in January 1996 and continued to serve as
    President, which position he has held since December 1994.  He had
    previously served as Chief Operating Officer of the Company since
    December 1994 and as the Senior Executive Vice President of the
    Company from the Acquisition to December 1994.  
                                 23
    <PAGE>
    Prior to the Acquisition, Mr. Barker had served in a variety of
    positions since joining PayLess in 1968, including appointments as
    Executive Vice President in 1993, Senior Vice President of
    operations in 1991, Senior Vice President of Pharmacy in 1990 and
    Vice President, Pharmacy in 1989.
    
         David R. Jessick has served as Executive Vice President -
    Finance and Chief Financial Officer of the Company since the
    Acquisition.  Mr. Jessick became Senior Vice President and Chief
    Financial Officer of PayLess in December 1990.  For more than five
    years prior to 1990, he served in a variety of positions with
    PayLess, including Vice President and Corporate Controller and
    Assistant Treasurer.
    
         Richard Juliano was named Executive Vice President of
    Merchandising, Marketing and Advertising in April 1996.  Prior to
    joining the Company, Mr. Juliano was Senior Vice President of
    Merchandising and Marketing at Phar-Mor, a position he held since
    1990.
    
         Barbara R. Crane has been Senior Vice President of Operations
    - North since October, 1995.  Prior to this, Ms. Crane was Senior
    Vice President of Operations of the Company since the Acquisition. 
    Prior to the Acquisition, Ms. Crane had served in a variety of
    positions since joining PayLess in 1970, including appointments as
    Vice President of Merchandising Systems in 1993 and District
    Manager in 1985.
    
         James W. Gaube has served as Senior Vice President of Real
    Estate, Design and Construction since April, 1995.  Mr. Gaube was
    the Western Regional Real Estate Director for Home Depot, Inc. from
    July, 1994 through March, 1995.  From the Acquisition to June,
    1994, Mr. Gaube served as Senior Vice President of Real Estate for
    the Company.  Prior to the Acquisition, Mr. Gaube served as Senior
    Vice President of Real Estate for PayLess, having been promoted to
    that position in 1990.
    
         John J. Greer has served as Senior Vice President of Store
    Operations - South since October, 1995.  Mr. Greer served as Vice
    President, Labor Relations from May 1995 to October 1995.  From the
    Acquisition to May, 1995, Mr. Greer served as Group Vice President,
    Labor Relations for the Company.  Prior to the Acquisition, Mr.
    Greer served in a number of store operations positions after
    joining Thrifty Corporation in 1965, including Vice President of
    Store Operations and Regional Vice President of Operations for the
    Southern Division.
    
    
    
    
    
    
                                 24
    <PAGE>
         Don P. Davis has served as Senior Vice President of MIS of the
    Company since November 1994.  Prior to such time, he was Vice
    President of MIS for the Company since the Acquisition.  Prior to
    that time, Mr. Davis had served in a variety of positions since
    joining PayLess in 1982, including as Vice President of MIS since
    1990 and Planning Manager prior to that.
    
         James C. Hamilton has been Senior Vice President of Human
    Resources of the Company since August 1994.  Before then, he had
    served as District Manager for PayLess' operations in Northern
    California and  Southern Oregon since 1980.
    
         Andrew A. Striefel has served as Senior Vice President of
    Merchandising and Advertising of the Company since September 1994. 
    Prior to that time, Mr. Striefel has served in a variety of
    positions since joining PayLess in 1967, including appointments as
    Vice President of Merchandise in 1991 and Director of Merchandise
    in 1990.
    
         Willard E. Wilson has served as Senior Vice President of
    Health Services of the Company since the Acquisition.  Prior to the
    Acquisition, Mr. Wilson had served in a variety of positions since
    joining PayLess in 1965, including appointments as Vice President
    of Pharmacy Operations in 1991 and Director of Merchandising in
    1988.  
    
         Gary S. Meade was named Secretary of the Company in March
    1995.  He has served as Vice President, Legal Affairs of the
    Company since August 1993.  Prior to that time, Mr. Meade had
    served in a variety of positions since joining the Thrifty
    Corporation Legal Department in 1970, including as Vice President,
    Legal Affairs since 1986.
    
         Leonard I. Green has served as director of the Company since
    September 1992.  Since 1989, he has been, individually or through
    a corporation, a partner of LGA, which is the general partner of
    GEI.  Before forming LGA in 1989, Mr. Green had been a partner of
    the merchant banking firm of Gibbons, Green, van Amerongen for more
    than five years.  Mr. Green is also a director of Carr-Gottstein
    Foods Co., Foodmaker Inc., Horace Mann Educators Corp. and several
    private companies.
    
         Jonathan D. Sokoloff has been a director of the Company since
    September 1992.  He joined LGA as a partner in 1990.  Mr. Sokoloff
    was previously a Managing Director at Drexel Burnham Lambert
    Incorporated.  Mr. Sokoloff is also a director of Carr-Gottstein
    Foods Co., and several private companies.
    
         Jennifer Holden Dunbar has been a director of the Company
    since September 1992.  She joined LGA as an associate in 1989,
    became a principal in 1993, and through a corporation became a
    
                                 25
    <PAGE>
    partner in 1994.  Ms. Holden Dunbar previously was an associate
    with the merchant banking firm of Gibbons, Green, van Amerongen and
    a financial analyst in mergers and acquisitions with Morgan Stanley
    & Co.  Ms. Holden Dunbar is also a director of Kash n' Karry Food
    Stores, Inc., and several private companies.
    
         Jack W. Goodall became a director of the Company in October
    1992.  He has been President of Foodmaker, Inc., since April 1970,
    its Chief Executive Officer since February 1979 and its Chairman
    since October 1985.  He is director of Ralcorp Holdings, Inc. and
    Van Camp Seafood Company, Inc.  Mr. Goodall indirectly owns an
    approximately 0.5% limited partnership interest in GEI.
    
         Richard J. Lynch, Jr. has served as a director of the Company
    since the Acquisition.  Since February 1996, Mr. Lynch has served
    as the President and Chief Operating Officer of The Sports
    Authority, Inc., a publicly owned retail sporting goods chain. 
    Prior thereto, since 1988, he had served as Senior Vice President,
    Chief Financial Officer, Treasurer and Secretary of such company. 
    Prior to 1988, Mr. Lynch served as Executive Vice President and
    Chief Financial Officer of Sportsclub, Inc.
    
         Frank G. Felicella has served as a director of the Company
    since the Acquisition.  Mr. Felicella has served since 1993 as the
    Chief Executive Officer and President of Builders Square, Inc., a
    chain of retail home improvement centers and a wholly-owned
    subsidiary of Kmart.  Mr. Felicella joined Builders Square in 1992
    as its President and Chief Operating Officer.  Prior to such time,
    Mr. Felicella served as Executive Vice President of Lechmere, Inc.
    until 1989 when he became Executive Vice President and Director of
    LMR Acquisition Corp., a company which was formed to acquire, and
    subsequently acquired, Lechmere, Inc. 
    
      Following the effectiveness of the Merger on December 12,
    1996, the following individuals assumed the positions indicated
    below with the Company:
    
    Name                       Age       Positions with the Company
    -----------------          ---       ----------------------
    Charles R. Kibler           50       President
    Franklin C. Brown           68       Executive Vice President and 
                                           Director
    Frank M. Bergonzi           51       Executive Vice President,
                                           Chief Financial Officer
                                           and Director
    Elliot S. Gerson            55       Senior Vice President and
                                           Assistant Secretary
    Joseph S. Speaker           38       Senior Vice President and
                                           Treasurer
    James E. Krahulec           50       Vice President and Director
    I. Lawrence Gelman          50       Secretary
    
                                 26
    <PAGE>
         Charles R. Kibler was appointed President on December 12,
    1996.  Mr. Kibler is an executive officer of Rite Aid and was
    appointed Senior Vice President of Drugstore Operations on March
    4, 1995; previously, Mr. Kibler served as Vice President of
    Drugstore Operations of Rite Aid for more than five years.
    
         Franklin C. Brown was appointed Executive Vice President and
    Director on December 12, 1996.  Mr. Brown is an executive officer
    of Rite Aid and was appointed Executive Vice President and Chief
    Legal Counsel in April 1993; previously, Mr. Brown was Senior Vice
    President and General Counsel for more than five years.
    
         Frank M. Bergonzi was appointed Executive Vice President,
    Chief Financial Officer and Director on December 12, 1996.  Mr.
    Bergonzi is an executive officer of Rite Aid and was appointed
    Executive Vice President and Chief Financial Officer of Rite Aid
    on March 4, 1995; previously, Mr. Bergonzi was Senior Vice
    President of Finance of Rite Aid Corporation for more than five
    years.
    
         Elliot S. Gerson was appointed Senior Vice President and
    Assistant Secretary on December 12, 1996.  Mr. Gerson is an
    executive officer of Rite Aid and joined Rite Aid as Senior Vice
    President and Assistant Chief Legal Counsel in November 1995;
    previously, Mr. Gerson was a partner in the law firm of Bolger,
    Picker, Hankin & Tannenbaum from May 1993 until joining Rite Aid,
    and a partner in the law firm of Wolf, Block, Schorr and Solis-
    Cohen from May 1984 to May 1993.
    
         Joseph S. Speaker was appointed Senior Vice President and
    Treasurer on December 12, 1996.  Mr. Speaker is an executive
    officer of Rite Aid and was appointed Senior Vice President of
    Accounting and Administration on May 24, 1996; previously, Mr.
    Speaker served as Vice President and Retail Controller since April
    1993.  From February 1991 until his appointment as Vice President,
    he had the positions of Assistant Vice President and Retail
    Controller.
    
         James E. Krahulec was appointed Vice President and Director
    on December 12, 1996.  Mr. Krahulec is an executive officer of Rite
    Aid and was appointed Vice President of Government and Trade
    Relations in July 1984, a position he has held for more than five
    years.
    
         I. Lawrence Gelman was appointed Secretary on December 12,
    1996.  Mr. Gelman is an officer of Rite Aid and was appointed
    Associate Counsel and Secretary on January 11, 1995; previously,
    Mr. Gelman held the position of Assistant Vice President and
    Assistant Secretary of Rite Aid for more than five years.
    
     
                                 27
    <PAGE>
    ITEM 11.     EXECUTIVE COMPENSATION
    
    EXECUTIVE COMPENSATION
    
         The following table sets forth for the periods shown the
    annual and long-term compensation of the Company's Chief Executive
    Officer, former Chief Executive Officer and three additional most
    highly compensated Executive Officers as of September 29, 1996. 
    On December 12, 1996, upon consummation of the Merger, all of the
    executive officers named below were replaced as indicated above
    under Item 10.
<TABLE>
<CAPTION>
                                                                        Long-Term Compensation
                                                                           Awards           Payouts
                                                                                Securities
                                                          Other Annual Restricted  Underlying           All Other
Name and Positions                 Annual Compensation   Compensation   Stock      Options     LTIP   Compensation
Held with the Company  Fiscal Year Salary($) Bonus($)      ($)       Awards($)  SARs(#)(1) Payouts($)   ($)(2)(5)
---------------------  ----------- -------- ----------   ----------   --------  ---------- ---------- ------------
<S>                        <C>     <C>      <C>          <C>          <C>        <C>       <C>        <C>  
Gordon D. Barker           1996    $360,769 $1,098,916   $  -         $  -       225,100   $  -       $16,007
 Chief Executive Officer   1995     300,000      -          -            -       161,700      -         8,608
 and Director (beginning   1994(3)  135,989    149,263      -            -          -         -         1,546
 January 16, 1996) and
 President; Formerly 
 Chief Operating Officer

David R. Jessick           1996     281,923  1,007,587      -            -        75,000      -         8,231
 Executive Vice President  1995     250,000      -          -            -       156,000      -         7,740
 and Chief Financial       1994(3)  113,324    124,386      -            -          -         -         1,103
 Officer

Barbara R. Crane           1996     164,365    331,235      -            -        45,000      -         9,787
 Senior Vice President,    1995     163,352      -          -            -        78,000      -         7,203
 Store Operations -        1994(3)   67,995     55,974      -            -          -         -         1,200
 North

Willard E. Wilson          1996     174,326    339,672      -            -        45,000      -        18,667
 Senior Vice President,    1995     172,253      -          -            -        78,000      -         9,073
 Health Services           1994(3)   67,995     55,974      -            -          -         -         1,992

Marty W. Smith             1996(5)   378,365   278,284      -            -          -         -        17,886
 Chairman and              1995(4)   342,308   175,000      -            -       300,000      -        38,066
 Chief Executive Officer
 (Up to January 16, 1996)


</TABLE>
    
    1) The securities underlying the options are shares of the TP
    Holdings Class B Stock.  For a description of terms pertaining to
    such options and other information relating thereto, see "1994
    Management Equity Plan".
    
    2)  For Messrs., Barker, Jessick, Wilson and Ms. Crane,  data
    represents the sum of (i) contributions under the PayLess Stores
    Retirement Plan and the TPI 401(k) Retirement Savings Plan of
    $12,839, $7,001 and $835 for Mr. Barker; $7,313, $6,890 and $797
    for Mr. Jessick; $16,940, $6,878 and $1,051 for Mr. Wilson; and
    $8,813, $6,750 and $1,049 for Ms. Crane, for 1996, 1995 and 1994,
    respectively; (ii) payment of premiums for term life insurance of
    $3,168, $1,607 and $711 for Mr. Barker; $918, $850 and $306 for Mr.
    Jessick; $1,727, $2,195 and $941 for Mr. Wilson; and $974, $453 and
    $154 for Ms. Crane, for 1996, 1995 
    
                                 28
    <PAGE>
    and 1994, respectively.  For Mr. Smith, represents amounts received
    after December 2, 1994 as follows; (I) contributions under the TPI
    401(k) Retirement Savings Plan of $3,981; and (ii) payment of
    premiums for term life insurance of $432 and $33,653 in accrued
    vacation.  Amounts for 1994 are for the period from the Acquisition
    through the end of fiscal 1994.
    
    3) For Messrs. Barker, Jessick, Wilson and Ms. Crane, data
    represent compensation received from the Company after the date of
    the Acquisition through the end of the 1994 fiscal year.  Mr.
    Barker was named the Company's Chief Executive Officer as of
    January 16, 1996, following the end of the Company's first quarter
    of fiscal 1996.  For the period from October 3, 1993 to the date
    of the Acquisition, Messrs. Barker, Jessick, Wilson and Ms. Crane
    received compensation from PayLess (which was then a wholly owned
    subsidiary of Kmart) in the amounts of $143,761, $117,986, $71,835
    and $67,871, respectively.  No data are shown for these individuals
    either (a) in respect of compensation received from Kmart at any
    time or (b) in respect of compensation received from PayLess for
    periods prior to fiscal 1994.  For each of the persons listed in
    the table, other annual compensation did not exceed the lesser of
    $50,000 or 10% of the total annual salary and bonus individuals.
    
    4) Mr. Smith was named Chairman and Chief Executive Officer of the
    Company on December 2, 1994 and resigned such position as of
    January 16, 1996, following the end of the Company's first quarter
    of fiscal 1996.  Prior to his appointment, Mr. Smith was the Chief
    Executive Officer of Bi-Mart, to which position he returned
    following his resignation.  Compensation reported here includes
    1995 compensation earned at Bi-Mart consisting of $62,500 in
    salary, $33,653 in accrued vacation and $175,000 in Bonus.  Mr.
    Smith's other annual compensation did not exceed the lesser of
    $50,000 or 10% of his total annual salary.
    
    5) For Mr. Smith, includes 1996 compensation earned at Bi-Mart of
    $156,250 in salary and $278,284 in bonus.  Other compensation
    includes $2,326 premiums for term life insurance and $15,560 for
    contributions under the PayLess Stores Retirement Plan.
    
    OPTION GRANTS IN FISCAL 1996
    
         Prior to the Merger, the executive officers were participants
    in the 1994 Management Equity Plan of T P Holdings, and the
    securities underlying the options were Class B common stock of T
    P Holdings.  The following table sets forth options to acquire T
    P Holdings' capital stock granted to the named executive officers
    during the fiscal year ending September 29, 1996.
    
    
    
    
                                 29
<PAGE>
<TABLE>
<CAPTION>
                                                                            Potential realizable
                                                                            value at assumed rates 
                   Number of      Percent of total                        of stock price
                  securities      options granted    Exercise or                appreciation for 
                  underlying       to employees      base price  Expiration      option term
Name             Options granted  in fiscal year      (#/Sh)         Date       5%       10% 
---------------  ---------------  --------------     -------      -------- ----------  ----------
<S>                <C>                 <C>            <C>         <C>      <C>         <C>
Gordon D. Barker   110,100             8.4%           $12.50      01/17/06 $  865,516  $2,193,388
                   115,000             8.8%           $14.00      04/22/06 $1,012,520  $2,565,925

David R. Jessick    75,000             5.7%           $14.00      04/22/06 $  660,339  $1,673,430

Barbara R. Crane    45,000             3.5%           $14.00      04/22/06 $  396,204  $1,004,058

Willard E. Wilson   45,000             3.5%           $14.00      04/22/06 $  396,204  $1,004,058

</TABLE>

    
         There were no exercises of options to acquire shares of 
    T P Holdings common stock during the year.  Pursuant to the Merger
    all options on T P Holdings' common stock converted into a right
    to receive cash equal to the difference between the option exercise
    price and 65 percent of the closing price of Rite Aid's common
    stock on December 12, 1996.  The closing price for Rite Aid's
    common stock on that date was $39.375.
    
    
    1994 MANAGEMENT EQUITY PLAN
    
         Effective October 19, 1994, the Board of Directors of T P
    Holdings adopted the 1994 Management Equity Plan (the "Plan").  The
    Plan terminated on December 12, 1996 in connection with the Merger. 
    Prior to its termination, the Plan provided for the sale to key
    employees of shares of T P Holding's common stock and for the grant
    to key employees of options to purchase such shares.  A maximum of
    3,600,000 shares of Class A Stock and 7,200,000 shares of Class B
    Stock were available for issuance under the Plan.  The Plan was
    administered by the Compensation Committee of the Board of
    Directors.
    
         Purchase of shares were made pursuant to a Management
    Subscription and Stockholders Agreement (the "Subscription
    Agreement"), which provided for payment to be made by means of a
    combination of cash, recourse promissory notes ("Recourse Notes")
    and non-recourse promissory notes "Non-Recourse Notes") as
    determined by the Company.  The promissory notes were secured by
    a pledge of all of the shares purchased by the individual, and were
    due five years from the date of issuance and bear interest at the
    rate of 8% per annum.  They also contain provisions requiring
    prepayments of principal and interest payments out of bonuses
    received by the individual.
    
    
    
                                 30
    <PAGE>
         Effective October 24, 1994, T P Holdings issued a total of
    413,760 shares of Class B Stock to members of management at a price
    of $10.50 per share, including 36,000 shares to each of Barbara R.
    Crane, Andrew A. Striefel and Willard E. Wilson; 30,000 shares to
    James C. Hamilton; and 19,200 share to Don P. Davis.  The
    consideration from these individuals consisted of cash and
    promissory notes as follows: from each of Barbara R. Crane, Andrew
    A. Streifel and Willard E, Wilson, a Recourse Note in the amount
    of $141,750, a Non-Recourse Note in the amount of $189,000 and cash
    in the total amount of $47,250; from Mr. Hamilton, a Recourse Note
    in the amount of $118,125, a Non-Recourse Not in the amount of
    $157,500 and cash in the amount of $39,375; from Don P. Davis, a
    Recourse Note in the amount of $75,600, a Non-Recourse Not in the
    amount of $100,800 and cash in the amount of $25,200.  Effective
    February 23, 1995, the Company issued 72,300 shares of Class B
    Stock to Mr. Barker and 48,000 shares of Class B Stock to Mr.
    Jessick at a price of $10.50 per share.  The consideration from
    these individuals consisted of the release and termination by the
    respective purchasers of their rights under the Pay Less Drug Store
    Northwest, Inc. Supplemental Executive Retirement Plan,
    representing the estimated present value of their accrued benefits
    in the amounts of $759,150 and $504,000, respectively.  Effective
    April 15, 1995, T P Holdings' issued 25,548 shares of Class B Stock
    to Mr. Smith at a price of $10.50 per share.  The consideration
    from Mr. Smith consisted of cash in the amount of $100,044 and the
    cancellation of a note payable from T P Holdings held by Mr. Smith
    in the aggregate principal amount of $224,255, which for this
    purpose were valued at approximately 75% of the face amount.
    
         Grants of stock options under the Plan were made pursuant to
    Stock Option and Stockholders Agreements ("Options Agreements"). 
    The Option Agreements generally provided that the options vested
    in installments of 20% per annum over a five-year period from the
    date of grant.
     
         On December 12, 1996, effective with the Marger, the Plan was
    terminated, and all outstanding options under the Plan converted
    to a right to receive cash equal to the difference between the
    option exercise price and 65 percent of the closing price of Rite
    Aid's common stock on December 12, 1996.  
    
    COMPENSATION OF DIRECTORS
    
         Prior to the Merger, Directors who were also officers of the
    Company or its subsidiaries received no additional compensation for
    their services as directors.  The Company's non-management
    directors received compensation for their service on T P Holdings'
    and the Company's Boards of Directors consisting of an annual
    retainer fee of $30,000 ($100,000 in the case of the Chairman of
    the Board) plus $1,500 for attendance at 
                                 31
    <PAGE>
    any meeting of the Board of Directors or any committee thereof plus
    direct out-of-pocket costs related to such attendance.  In
    addition, under the T P Holdings' Deferred Compensation Plan for
    Non-Management Directors, each non-management director was allowed
    to defer any portion or all of such compensation.  Amounts deferred
    under such plan's equity option were immediately converted to stock
    equivalents at the then current market price of T P Holdings'
    common stock and matched at a 25% rate by T P Holdings'.  A
    director's stock equivalents  account was distributed to the
    director in cash, based upon the ending number of stock equivalents
    and the market price of the T P Holdings' common stock, at the
    effective date of the Merger.  Further, pursuant to T P Holdings'
    Non-Employee Director Stock Option Plan, effective upon
    consummation of the 1996 recapitalization, each of Mr. Lynch and
    Mr. Felicella received options to acquire 30,000 shares of T P
    Holdings Class B Stock, subject to vesting, with an exercise price
    of $14.00 per share.  Both the deferred compensation plan for Non-
    Management Directors and the Non-Employee Director Stock Option
    Plan were terminated upon consummation of the Merger.
    
         On September 1, 1993, T P Holdings granted Mr. Goodall an
    option to purchase 150,000 shares of its Class A Stock at a price
    of $1.67 per share.  In connection with the Acquisition, Mr.
    Goodall received from T P Holdings a payment in lieu of his pro
    rata share of the distribution to the pre-Acquisition shareholders
    allocable to the shares subject to the option, consisting of cash
    in the amount of $852,750 plus PIK Notes in the principal amount
    of $418,000.
    
      Pursuant to a Management Services Agreement between the
    Company and LGA (the "Management Services Agreement"), prior to the
    consummation of the 1996 recapitalization, LGA was paid an annual
    fee for providing management, consulting and financial planning
    services (the "General Services").  In connection with the 1996
    recapitalization, the General Services provisions of the Management
    Services Agreement were canceled.  Pursuant to the Management
    Services Agreement, the Company may also pay LGA for reasonable and
    customary fees and reasonable expenses from time to time for
    providing financial advisory and investment banking services in
    connection with major financial transactions (the "Investment
    Services").  During fiscal 1996, in consideration of the Investment
    Services provided by LGA in connection with the 1996
    recapitalization and the cancellation of the General Services
    provisions, the Company paid LGA an aggregate fee of $16.3 million
    upon consummation of the 1996 recapitalization.
    
    
    
    
    
                                 32
    <PAGE>
    SEVERANCE AGREEMENTS
    
      In accordance with the terms of the Merger, Rite Aid agreed
    to extend certain severance arrangements to executives of the
    Company (the "Severance Plan").  The Severance Plan applies to
    employees of the Company specified below who were terminated
    December 12, 1996 (the "Effective Time") or who continue to be
    employed following the Effective Time.  Payments will be made to
    each eligible employees whose employment with Rite Aid or any of
    its subsidiaries is terminated by Rite Aid or such subsidiary
    without cause (as defined) or who terminates such employment for
    good reason (as defined), in either case (I) without being offered
    a position with Rite Aid or any of its subsidiaries at
    substantially comparable responsibility or compensation and (ii)
    within 24 months of the Effective Time.  The Severance Plan
    provides for unmitigated severance payments, payable in a lump sum
    payment.  The categories of executives specified below
    (collectively, the "Covered Executives") are entitled to severance
    benefits equal to the applicable multiple specified below,
    multiplied by their total salary plus "On Plan/Target" bonus for
    the Company's 1996 fiscal year.
    <TABLE>
    <CAPTION>
    
           Office or Category                                                  Multiple
           ------------------                                                  --------
           <S>                                                                   <C>
           Chief Executive Officer...........................................    3.0
           Executive Vice President and Chief Financial Officer..............    2.0
           Group A...........................................................    1.5
           Group B...........................................................    1.0
    </TABLE>
               
    For purposes of the foregoing, (I) "Group A" means current or
    previously board-approved Senior Vice Presidents as of October 13,
    1996, as well as three additional officers specified in the Merger
    Agreement and (ii) "Group B" means all vice presidents as of October
    13, 1996. In addition, a third group of employees consisting of group
    vice presidents and certain department heads are entitled to certain
    severance benefits.  Eligible employees under the Severance Plan are
    also entitled to (I) the continuation of health insurance for the
    severance period or until covered by a new employer's plan, whichever
    occurs first, and (ii) outplacement services to be provided by Rite
    Aid.  The Chief Executive Officer and Chief Financial Officer of the
    Company will also be entitled to retain the cars provided to them by
    the Company without payment to either Rite Aid or the Company.
    
    ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
    MANAGEMENT
    
         As of December 24, 1996 the Company had 1,000 shares of Common
    Stock outstanding all of which are owned by Rite Aid.
    
    
    
    
    
    
    
    
    
                                    33
    <PAGE>
    ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
    THE ACQUISITION
    
      The Purchase and Sale Agreement dated as of December 1, 1993,
    among the Company, T P Holdings and Kmart (the "Acquisition
    Agreement"), pursuant to which the Acquisition was consummated,
    contains representations and warranties customary for transactions
    similar to the Acquisition, most of which expired at the closing
    of the Acquisition.  Accordingly, neither the Company nor Kmart
    has, in general, any recourse with regard to a breach of any of the
    representations and warranties made by the other.  However, Kmart
    has agreed to indemnify the Company against any liabilities for
    income taxes of PayLess and its subsidiaries for any period ending
    on or before the closing date of the Acquisition.
    
    THE 1992 ACQUISITION
    
      In connection with the 1992 Acquisition, Pacific Enterprises
    agreed to indemnify T P Holdings and the Company against any
    uninsured losses arising out of any breach of any of Pacific
    Enterprises' representations and warranties (except with respect
    to certain tax and ERISA liabilities that were addressed in a
    separate Tax indemnity Agreement (see "Tax Indemnity Agreement"
    below)) and any of its covenants and agreements.  In connection
    with the Acquisition, the Company and Pacific Enterprises released
    each other from all indemnification claims arising in respect of
    breaches of representations and warranties other than environmental
    indemnity claims and tax and ERISA claims under the Tax Indemnity
    Agreement.
    
      The 1992 Acquisition was treated for both financial
    accounting and income tax purposes as an acquisition of assets. 
    The Company's purchase price was substantially less than the
    seller's aggregate carrying cost of the assets purchased.  The
    Company's financial cost and tax bases for such assets reflected
    this bargain purchase price.  Because of the differences between
    income tax and financial reporting respecting determination of the
    purchase price, allocation of the purchase price among the assets
    purchased (including inventory) and revenue and expense
    recognition, among other things, the Company's income for income
    tax purposes may differ substantially from its income for financial
    accounting purposes.
    
         Also in connection with the 1992 Acquisition, Thrifty
    Corporation sold all of the outstanding capital stock of United
    Merchandising Corp. ("Big 5"), the operator of the Big 5 Sporting
    Goods chain, to Big 5 Holding, Inc. ("Big 5 Holdings").  Big 5 is
    a wholly-owned subsidiary of Big 5 Corporation, a Delaware
    corporation, whose majority stockholder is GEI.  At the 
    
                                 34
    <PAGE>
    time of such sale of Big 5, the Company and Big 5 Holding entered
    into a separate agreement to implement and supplement, as between
    them, the provisions of the Thrifty Corporation and Big 5 purchase
    agreements relating to their respective indemnification claims
    against Pacific Enterprises.  In connection with the Acquisition,
    this agreement was amended to reflect the Company's release of
    certain indemnification claims against Pacific Enterprises.  In
    addition, in connection with the Acquisition, all of the capital
    stock of Gart Sports Company ("Gart") and MC Sports Company ("MC")
    were distributed to the Company's pre-Acquisition stockholders. 
    In connection therewith, the Company, Gart and MC entered into an
    agreement pursuant to which the Company conferred upon Gart and MC
    the economic benefit of those indemnification claims arising in the
    Company's favor under the Thrifty Corporation purchase agreement
    that relate to breaches of Pacific Enterprises' representations and
    warranties concerning Gart and MC, respectively.
    
    TRANSACTIONS WITH LGA
    
         LGA is the general partner of GEI, which, prior to the
    Purchase,  held approximately 83% of the outstanding shares of T
    P Holdings Class A Stock, which gave GEI control over the election
    of five of the seven members of T P Holdings and the Company's
    Boards of Directors.  The general partners of LGA include (I)
    Tardy-Green, Inc., a Delaware corporation, the capital stock of
    which is wholly owned by the Leonard and Emese Green Living Trust,
    whose co-trustees are Leonard and Emese Green, (ii) Jonathan D.
    Sokoloff, and (iii) Willow III, Inc., a California corporation, the
    capital stock of which is beneficially owned by Jennifer Holden
    Dunbar.  Messrs. Green and Sokoloff and Ms. Holden Dunbar are
    directors of the Company and T P Holdings.  See "Item 10. 
    Directors, Executive Officers, Promoters and Control Persons of the
    Registrant."  Each of them is also a director of Big 5, and Mr.
    Sokoloff and Ms. Holden Dunbar are also directors of Gart and MC. 
    
    TAX INDEMNITY AGREEMENT
    
      In connection with the 1992 Acquisition and the Big 5 Sale,
    Pacific Enterprises, T P Holdings, Thrifty Corporation and Big 5
    Holdings entered into a Tax Indemnity Agreement.  This agreement
    sets forth the parties' agreements with respect to various tax
    matters and obligations under ERISA, including the allocation of
    various tax obligations relating to the inclusion of member s of
    the affiliated group of corporations of which the Company is the
    common parent in certain consolidated and/or unitary tax returns
    of Pacific Enterprises and the obligations of the parties to
    cooperate in the preparation of tax returns or any examination
    thereof.
    
    
                                 35
    <PAGE>
    RELATIONSHIP WITH BIG 5, GART AND MC
    
    COMMON CONTROL AND OWNERSHIP
    
         Prior to the 1992 Acquisition, Big 5 was a wholly-owned
    subsidiary of Thrifty Corporation.  As noted previously, in
    connection with the 1992 Acquisition, Thrifty Corporation sold all
    of the outstanding capital stock of Big 5 to Big 5 Holdings, a
    wholly-owned subsidiary of Big 5 Corporation, whose majority
    stockholder is GEI.  Accordingly, GEI controls both Big 5 and the
    Company, and Messrs.  Green and Sokoloff and Ms. Holden Dunbar are
    members of the Boards of Directors of both the Company and Big 5. 
    In addition, prior to the Acquisition, each of Gart and MC was a
    wholly-owned indirect subsidiary of the Company.  In connection
    with the Acquisition, all of the outstanding capital stock of Gart
    and MC was distributed to the Company's pre-Acquisition
    stockholders on a pro rata basis.  As a result, GEI received
    approximately 83% of the outstanding shares of each of Gart and MC. 
    Accordingly, GEI controls Gart, MC and the Company, and Mr.
    Sokoloff and Ms. Holden Dunbar are members of the Boards of
    Directors of Gart, MC and the Company.  Each of Big 5, Gart and MC
    is a sporting goods retailer.
    
    SUBLEASES
    
         The Company currently subleases a warehouse facility located
    in Denver, Colorado, to Gart and certain business equipment and
    other personal property to Big 5, Gart and MC pursuant to subleases
    with such companies.  The Company leases such property from MLTC
    Funding, Inc. ("MLTC") pursuant to two Master Lease Agreements with
    MLTC dated as of December 15, 1988, as amended (the "Master
    Leases").  The terms of the subleases are structured so that the
    obligations of Big 5, Gart and MC thereunder are the same as the
    Company's obligations under the Master Leases.  Accordingly, the
    Company believes the terms of the subleases are comparable to those
    that could be obtained from an unrelated third party.
    
         Under the terms of the subleases, the monthly rental fees for
    the property subject thereto are calculated based on the
    acquisition price of such property in accordance with formulae set
    forth in the Master Leases.  The annual basic rent under the Big
    5 equipment sublease, the Gart warehouse sublease, the Gart
    equipment sublease and the MC equipment sublease is approximately
    $0.8 million, $0.2 million, $0.2 million and $0.3 million,
    respectively.  In addition, the sublessee under such subleases is
    required to pay expenses related to the property, including taxes
    (other than income taxes) and charges for utilities and
    communication services assessed with respect to the Gart warehouse
    as well as insurance coverage against loss of damage by fire, theft
    and certain other risks in amounts equal 
    
                                 36
    <PAGE>
    to the full replacement value of property subject to the subleases.
    The sublessee is further required to pay all costs incurred by MLTC
    in connection with the financing and leasing of the property
    subject to the subleases, plus penalty interest on overdue amounts.
    
         The Gart warehouse sublease generally has the same term as the
    Master Lease to which it is subject.  The subleases pertaining to
    equipment have different terms for various types of equipment
    (generally five, ten or twenty years from the date the item of
    equipment was first placed in service), subject to extension.
    
         Pursuant to the Master Leases, the Company has an option to
    purchase the property subject thereto from MLTC for an amount equal
    to the Adjusted Acquisition Cost (as defined in the Master Leases)
    at the date of purchase.  The Adjusted Acquisition Cost of property
    subject to the Master Leases is calculated based on the original
    acquisition cost thereof less a designated portion of monthly
    rental fees paid through the date of purchase.  The Adjusted
    Acquisition Cost decreases during the term of the Master Leases to
    a de minimis amount by the expiration of the term of the Master
    Leases.  Pursuant to the subleases, the sublessees have an option
    to purchase the property thereunder at any time on terms identical
    to those contained in the Master Leases, regardless of whether such
    property is then owned by MLTC or the Company.
    
    LEASE GUARANTEES
    
         The Company is the guarantor of approximately 89 of the leases
    for Big 5 store locations, 13 of the leases for Gart store
    locations, and one lease for an MC store location, which leases
    currently require aggregate annual rent payments of approximately
    $7.1 million, $1.0 million and $0.4 million, respectively.  Such
    guarantees expire upon the expiration of the respective leases. 
    The Company does not receive any separate consideration for such
    lease guarantees but does not believe such obligations present any
    material risk of substantial loss.
    
    TAX SHARING AGREEMENT
    
        T P Holdings has a Tax Sharing Agreement with its subsidiaries
    including the Company, which agreement allocates any income tax
    burdens or benefits generally based on the hypothetical separate
    tax return status of such companies.  Pursuant to such agreement,
    T P Holdings, on the one hand, and Gart and MC, on the other, have
    certain continuing obligations to one another arising in respect
    of the period that Gart and MC were subsidiaries of the Company.
    
    
                                 37
    <PAGE>
    LEASE OF CLOSED STORE SITES
    
         The Company anticipates that the sites of certain of its
    stores that may be closed in the future may be leased to Gart or
    Big 5.  Any such leases to Gart or Big 5 are expected to be on
    terms no less favorable than those that could be obtained from an
    unrelated third party.
    
    
    TRANSACTIONS WITH MANAGEMENT
    
         Loans to Executive Officers in Connection with Acquisitions 
        ----------------------------------------------------------
    of Common Stock.
    ----------------
    
         In connection with their acquisition of shares of T P
    Holdings' Class B common stock pursuant to the 1994 Management
    Equity Plan effective October 24, 1994, T P Holdings made both
    recourse and non-recourse loans to certain of its executive
    officers.  See "Item 11, Executive Compensation 1994 Management Equity
    Plan".
    
         Loans to Executive Officers in Connection with House 
         ----------------------------------------------------
    Purchases.
    ----------
    
         In connection with their purchases of houses or refinancing
    of existing mortgages in 1987 and 1988, PayLess Drug made secured
    loans of $200,000 to each of Gordon D. Barker, David R. Jessick and
    Don P. Davis. Effective April 25, 1988, PayLess Drug assigned the
    notes to a bank.  Under the terms of the assignment, the bank may
    require PayLess Drug to repurchase the note relating to a
    particular executive upon the occurrence of certain events,
    including, without limitation, default in payment of interest or
    principal or termination of the executive's employment with PayLess
    Drug.
    
         The loans bear interest at the rate of 8.5% per annum.  As
    part of their compensation packages, the Company pays the interest
    on the loans on behalf of the executives.  For the Company's 1996
    fiscal year, the interest paid on behalf of Messrs. Barker, Jessick
    and Davis amounted to $8,783, $8,783 and $12,466, respectively.
    
         The loans are payable on demand and require amortization on
    a level payment basis over a 15-year period from the date of
    issuance.  At September 29, 1996, the outstanding balances owed by
    Messrs. Barker, Jessick and Davis were $93,336, $93,336 and
    $133,335, respectively, down from $137,895, $138,172 and $155,556,
    respectively, at October 1, 1995.
                                 38
    <PAGE>
                               PART IV
    
    ITEM 14.     EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
    ON FORM 8-K
    
         Listed below are all financial statements, notes, schedules
    and exhibits filed as part of this Annual Report on Form 10-K:
    
         (a)(1), (2)   Financial Statements 
                       --------------------
    
              The following financial statements of the Registrant,
    together with the Independent Auditors' Report dated December 3,
    1996, on pages F-1 to F-18 of this Form 10-K are filed herewith:
    
    
                 (I)     Financial Statements
                        ---------------------
    
    
         Independent Auditors' Report
    
         Consolidated Balance Sheets as of September 29, 1996 and
    October 1, 1995 
    
         Consolidated Statements of Operations for the fiscal years
    ended September 29, 1996, October 1, 1995, and October 2, 1994.
    
         Consolidated Statements of  Shareholder's Equity for the
    fiscal years ended September 29, 1996, October 1, 1995, and October
    2,1994 .
    
         Consolidated Statements of Cash Flows for the fiscal years
    ended September 29, 1996, October 1, 1995, and October 2, 1994.
    
         Notes to Consolidated Financial Statements
    
        All schedules are omitted as the required information is
    inapplicable or the information is presented in the respective
    consolidated financial statements or related notes.
    
    
         (a)(3)   Exhibits
                  --------
    
              The following exhibits are filed with or incorporated by
    reference into this Annual Report:
    
    
    
    
    
                                    39
    <PAGE>
    Exhibit
    Number                      Description
    ------                      -----------
     2.1     Purchase and Sale Agreement, dated as of December 1, 1993,  
             among Thrifty PayLess, T P Holdings, and Kmart (1)
    
     2.2     Plan of Merger, dated as of May 26, 1995, between Thrifty
             PayLess and PayLess Drug Stores Northwest, Inc. ("PayLess
             Drug") providing for the merger of PayLess Drug into Thrifty
             PayLess, together with Articles of Merger filed with the
             State of Maryland Department of Assessments and Taxation and
             Certificate of Ownership filed with the State of California
             Secretary of State to consummate such merger (2)
    
     2.3     Agreement and Plan of Merger between T P Holdings and Rite  
             Aid Corporation dated as of October 13, 1996, and amended   
             November 11, 1996 (3)
    
     3.1     Articles of Incorporation of Thrifty PayLess filed with the
             California Secretary of State on May 14, 1992 (1)
    
     3.7     Certificate of Amendment of Articles of Incorporation of
             Thrifty PayLess filed with the Secretary of State of
             California on March 25, 1994 (1)
    
     4.1     Form of Indenture between Thrifty PayLess and First Trust
             National Association relating to the Senior Subordinated
             Notes (1)
    
     4.2     Form of Senior Subordinated Notes (filed together with Exhibit
            4.1)
    
     4.3     Note Purchase Agreement dated March 1, 1990 by PayLess Drug
             in favor of Nationwide Life Insurance Company and West Coast
             Life Insurance Company (1)
    
     4.4     Form of Indenture between Thrifty PayLess and First Trust
             National Association relating to the Senior Notes (1)
    
     4.5     Form of Senior Notes (filed together with Exhibit 4.4)
    
    10.1     Tax Indemnity Agreement, dated as of September 25, 1992,
             among PE, T P Holdings, Thrifty Corporation and Big 5
             Holdings (1)
    
    10.2     1994 Management Equity Plan (including forms of Management
             Subscription and Stockholders Agreement and Management Stock
             Option and Stockholders Agreement) (2)
    
    10.3     Credit Agreement dated as of April 20, 1994 among Thrifty
             PayLess and Bankers Trust Company, Citicorp USA, Inc. and
             Union Bank of Switzerland as Managing Agents, Union Bank of
             Switzerland as Facilities Manager and the Banks named
             therein (1)
    
    10.4     Amendment No. 1 dated as of August 17, 1994 to Credit
             Agreement (2)
                        
                                    40
    <PAGE>
    10.5     Amendment No. 2 dated as of June 23, 1995, to Credit
             Agreement (2)
    
    10.6     Amendment No. 3 and Waiver to the Credit Agreement dated as
             of September 28, 1995 (2)
    
    10.9     Severance Agreement dated June 7, 1995, among T P Holdings,
             Thrifty PayLess and Marty W. Smith (2)
    
    10.10    Tax Sharing Agreement dated as of September 25, 1992 among
             T P Holdings and its direct and indirect corporate
             subsidiaries (1)
    
    10.12     Term Sheet between PayLess Drug and McKesson Drug Company
              dated August 1, 1992 (1)
    
    10.13     Form of Amended and Restated Master Lease Agreement among
               Thrifty PayLess, Thrifty Corporation and MLTC Funding, Inc.
              (1)
    
    10.15     Form of Agreement and Release among PE, T P Holdings, Thrifty
             PayLess, Thrifty Corporation and Big 5 (1)
    
    10.16     Form of Management Services Agreement between Thrifty PayLess
             and Leonard Green & Associates, L.P. (1)
    
    10.17     Shareholders Agreement dated as of April 20, 1994 among GEI,
              Kmart, T P Holdings and Thrifty PayLess (2)
    
    
    10.18     First Amendment to Shareholders Agreement dated as of
              September 15, 1995 (2)
    
    10.19     Second Amendment to Shareholders Agreement dated as of
              September 15, 1995 (2)
    
    10.10     Third Amendment to Shareholders Agreement dated as of
              November 7, 1995 (2)
    
    12        Computation of Thrifty PayLess' Ratio of Earnings to Fixed
              Charges (4)
    
    21        Subsidiaries of the Registrant (1)
    
    27        Financial Data Schedule (4)
    
    ___________
    
    (1)     Incorporated by reference to the Registration Statement on Form
    S-1 filed by the Company and T P Holdings (No. 33-73592).
    
    
    
    (2)    Incorporated by reference to the Annual Report on Form 10-K
    filed by the Company for the fiscal year ended October 1, 1995
    
    
    
                                    41
    <PAGE>
    (3)     Incorporated by reference to the form 8-K of T P Holdings
            dated October 24, 1996. 
    
    (4)     Filed herewith.
    
    
         (b)     Reports on Form 8-K
    
                 N/A 
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
                                    42
    <PAGE>
                                  SIGNATURES
    
         Pursuant to the requirements of Section 13 or 15(d) 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, as of December 24, 1996.
      
                                    THRIFTY PAYLESS INC.
    
                                    By:      /s/ Charles R. Kibler 
                                             ----------------------- 
                                             Charles R. Kibler
                                             President (Principal
                                             Executive Officer)
    
    
         Pursuant to the requirements of the Securities Exchange Act of
    1934, this report has been signed by the following persons on behalf
    of the registrant and in the capacities indicated as of December 24,
    1996.
    
              Signature                               Title
    
    
          /s/ Charles R. Kibler                       
         ----------------------------              
         Charles R. Kibler                     President (Principal
                                               Executive Officer)
                                                     
    
          /s/ Frank M. Bergonzi                        
         ----------------------------
         Frank M. Bergonzi                     Executive Vice President,
                                               Chief Financial Officer
                                               and Director (Principal
                                               Financial and Accounting
                                               Officer)
    
          /s/ James E. Krahulec                      
         ----------------------------
         James E. Krahulec                     Vice President and
                                               Director
                                                      
    
    
         
                                                    
    
    
                              
                                    43
    <PAGE>                                                         
        <PAGE>
                                     Independent Auditors' Report
    
    
    
    The Board of Directors
    Thrifty PayLess, Inc.:
    
    
    
    We have audited the accompanying consolidated balance sheets of Thrifty
    PayLess, Inc., and subsidiaries as of September 29, 1996 and October
    1, 1995 and the related consolidated statements of operations,
    shareholder's equity and cash flows for each of the years in the three-
    year period ended September 29, 1996.  These consolidated financial
    statements are the responsibility of the Company's management.  Our
    responsibility is to express an opinion on these consolidated financial
    statements based on our audits.
    
    We conducted our audits in accordance with generally accepted auditing
    standards.  Those standards require that we plan and perform the audit
    to obtain reasonable assurance about whether the financial statements
    are free of material misstatement.  An audit includes examining, on a
    test basis, evidence supporting the amounts and disclosures in the
    financial statements.  An audit also includes assessing the accounting
    principles used and significant estimates made by management, as well
    as evaluating the overall financial statement presentation.  We believe
    that our audits provide a reasonable basis for our opinion.
    
    In our opinion, the consolidated financial statements referred to above
    present fairly, in all material respects, the financial position of
    Thrifty PayLess, Inc. and subsidiaries as of September 29, 1996 and
    October 1, 1995 and the results of their operations and their cash
    flows for each of the years in the three-year period ended September
    29, 1996, in conformity with generally accepted accounting principles. 
    
    
    
                                              KPMG Peat Marwick LLP
    Portland, Oregon
    December 3, 1996
    Except Note 14 which is as of December 13, 1996
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
                                    F-1
<PAGE>
                      THRIFTY PAYLESS, INC. AND SUBSIDIARIES
                            CONSOLIDATED BALANCE SHEETS
                                (Dollars in millions)
    
                                           ASSETS
<TABLE>
<CAPTION>
                                                       1996        1995
                                                     --------    ---------
<S>                                                  <C>         <C>
Current assets:
   Cash and cash equivalents......................   $    5.6    $     5.2    
   Receivables, net of allowance for doubtful 
     accounts of $10.8 in 1996 and $5.9 in 1995...      106.4         82.6
   Inventories....................................    1,160.0      1,160.7
   Prepaid expenses and other current assets......       33.1         42.8
          Total current assets....................    1,305.1      1,291.3
Property, plant and equipment, net................      557.4        581.9
Leasehold interests, net..........................       86.7         93.6
Deferred income taxes.............................       19.8         15.8
Other assets......................................       98.9        118.9

                                                     $2,067.9    $ 2,101.5

                           LIABILITIES AND SHAREHOLDER'S EQUITY

                                                       1996        1995  
Current liabilities:
   Current maturities of long-term debt...........  $    28.1    $   27.1
   Accounts payable...............................      366.9       347.9
   Accrued expenses ..............................      237.3       260.4
   Deferred income taxes..........................      173.8       146.6
          Total current liabilities...............      806.1       782.0
Long-term debt, excluding current maturities......      794.4       913.2
Other long-term liabilities.......................       88.6       111.4
          Total liabilities ......................    1,689.1     1,806.6

Commitments and Contingencies

Common shareholder's equity:
   Common stock (no par value, 1,000 shares 
     authorized and outstanding) and 
     paid-in-capital..............................      411.8       292.7
   Accumulated earnings (deficit).................      (33.0)        2.2 
     Total shareholder's equity...................      378.8       294.9 
                                                    $ 2,067.9   $ 2,101.5

</TABLE>







          See accompanying Notes to Consolidated Financial Statements.

                                    F-2
<PAGE>
<PAGE>
                       THRIFTY PAYLESS, INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF OPERATIONS
                                (Dollars in millions)
<TABLE>
<CAPTION>


                                                     1996     1995      1994
                                                  --------  --------  --------
<S>                                               <C>       <C>       <C>
Sales............................................ $4,798.9  $4,658.8  $3,163.3
Cost of goods sold, buying and occupancy.........  3,517.5   3,413.0   2,311.1
        Gross Profit.............................  1,281.4   1,245.8     852.2
Costs and expenses:
    Selling and administration...................  1,022.7   1,065.5     746.8
    Depreciation and amortization................     68.4      69.1      30.1
        Operating profit ........................    190.3     111.2      75.3
Non-operating income (expense):
    Interest expense.............................   (105.0)  ( 120.4)    (59.1)
    Interest income..............................      1.0       1.0       2.5
        Income (loss) from continuing operations
             before income taxes and
             extraordinary loss..................     86.3     ( 8.2)     18.7
Income tax (expense) benefit.....................    (36.0)      2.1      (8.3)

        Income (loss) from continuing operations
             before extraordinary loss...........     50.3     ( 6.1)     10.4

Income from discontinued operations, net of
    income tax expense of $3.2 in 1994...........       -         -        5.2 

        Income (loss) before extraordinary loss..     50.3     ( 6.1)     15.6

Extraordinary loss from early extinguishment of
    debt, net of income tax benefit of $9.5 and
    $4.5 in 1996 and 1995, respectively..........    (85.5)    ( 7.4)       -  

        Net income (loss)........................ $  (35.2) $  (13.5)  $  15.6

</TABLE>















          See accompanying Notes to Consolidated Financial Statements

                                     F-3
<PAGE>
                        THRIFTY PAYLESS, INC. AND SUBSIDIARIES
                  CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
                             (Dollars in millions)

<TABLE>
<CAPTION>                                                                                     
                                   Common Stock
                                       and                                    Total
                                 Paid-in Capital          Accumulated     Shareholder's
                               Shares         Amount   Earnings (Deficit)    Equity
                              ---------       ------   ------------------   -------- 
                           (In thousands)
<S>                            <C>            <C>           <C>              <C>     
Balance at 
October 3, 1993........        1.0            $ 46.0        $  0.1           $ 46.1 
  Contribution of PayLess
    Drug common stock from
    T P Holdings.......          -             246.7            -             246.7

  Net income...........          -                -           15.6             15.6 

Balance at 
October 2, 1994........        1.0             292.7          15.7            308.4
 
  Net loss.............          -                -          (13.5)           (13.5)

Balance at 
October 1, 1995........        1.0             292.7           2.2            294.9

Cash contribution from
T P Holdings...........          -             119.1            -             119.1

  Net loss.............          -                -          (35.2)           (35.2)

Balance at 
September 29, 1996.....        1.0            $411.8        $(33.0)          $378.8 


</TABLE>
























                 See accompanying Notes to Consolidated Financial Statements
                                            F-4
<PAGE>
                              THRIFTY PAYLESS, INC. AND SUBSIDIARIES
                               CONSOLIDATED STATEMENTS OF CASH FLOWS
                                      (Dollars in millions)
<TABLE>
<CAPTION>
                                                          1996          1995           1994   
<S>                                                    <C>           <C>            <C>
Operating Activities:
     Net income (loss) ...........................     $ (35.2)      $ (13.5)       $   15.6
     Adjustments to reconcile net income (loss) to
          net cash provided by operating
          activities:
          Depreciation and amortization............       68.4          69.1            30.1
          Debt discount and fee amortization.......        7.3           9.0             3.6
          Deferred tax provision ..................       32.8           8.6            11.8
          Gain on sale of assets...................       (7.8)           -               -
          Extraordinary loss.......................       85.5           7.4              -
Changes in operating assets and liabilities:
     Receivables...................................      (19.2)         (4.6)           (4.6)
     Inventories...................................        0.7          51.6           (53.8)
     Prepaid expenses..............................        9.7         (12.2)           (0.4)
     Accounts payable..............................       18.9         (48.3)           50.3
     Accrued expenses..............................      (41.7)        (58.6)           12.0 
               Net cash provided by  
                     operating activities..........      119.4           8.5            64.6 
Investing activities:
     Additions to property, plant and equipment....      (42.7)        (54.3)          (82.3)
     Proceeds from sale of  properties.............       14.6          22.2            19.7
     Decrease (increase) in other assets...........       (9.6)        (16.9)            0.4
     Acquisition of PayLess Drug, net of cash
          acquired.................................         -             -           (528.8)
     Investing activities related to discontinued
          operations...............................         -             -             (7.6)
               Net cash used in investing 
                    activities.....................      (37.7)        (49.0)         (598.6)
Financing activities:
     New borrowings................................      669.6         159.9           723.3
     Distribution to T P Holdings..................         -             -           (101.9)
     Contributions from T P Holdings...............      119.1            -              4.3 
     Principal payments on long-term debt..........     (870.0)       (118.2)         (185.9)
     Payments on ESOP reimbursement liability......         -             -            (53.1)
     Financing activities related to discontinued
          operations...............................         -             -              9.8 
                Net cash provided by (used in)
                 financing activities..............      (81.3)         41.7           396.5 

Increase (decrease) in cash and cash equivalents...        0.4           1.2          (137.5)
Cash and cash equivalents, beginning of year.......        5.2           4.0           141.5  

Cash and cash equivalents, end of year.............   $    5.6        $  5.2          $  4.0 
Supplemental disclosure of cash flow information:
     Cash paid during the year for:
          Interest.................................   $  112.9        $ 130.7         $ 25.8 

          Income taxes.............................   $    2.0        $    -          $   -  
</TABLE>
                 See accompanying Notes to Consolidated Financial Statements
                                            F-5
<PAGE>
                      THRIFTY PAYLESS, INC. AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              (Dollars in millions)
    
    
    
    
    (1)     THE COMPANY
    
         The accompanying consolidated financial statements present the
    financial position and results of operations of Thrifty PayLess, Inc.
    and subsidiaries (the "Company" or "Thrifty PayLess"), a wholly owned
    subsidiary of Thrifty PayLess Holdings, Inc. ("T P Holdings").  
    
         The Company was incorporated in 1992 under the laws of the State
    of California and was established for the purpose of assisting in the
    acquisition of Thrifty Corporation and its subsidiaries ( "Thrifty
    Drug") from Pacific Enterprises ("PE"),("the 1992 Acquisition").  On
    September 25, 1992, PE transferred its ownership of Thrifty Drug to the
    Company.  Concurrently, the Company was acquired by T P Holdings, a
    corporation newly formed for the purpose of the 1992 Acquisition by
    Green Equity Investors, L.P. ("GEI") an investor group led by Leonard
    Green & Associates, L.P. ("LGA"), for a purchase price of $50.0.
    Additionally, on April 20, 1994, the Company purchased PayLess Drug
    Stores Northwest, Inc. ("PayLess Drug") from Kmart Corporation
    ("Kmart"). Operations of PayLess Drug are included in the consolidated
    financial statements since the date of acquisition.
    
         The Company is the largest drug store chain on the West Coast and
    one of the largest in the United States.  As of September 29, 1996, the
    Company operated a total of 1,004 Thrifty Drug and PayLess Drug stores
    and 45 Bi-Mart membership stores.  The Company's stores are located
    throughout the Western United States with 677 in California, 155 in
    Washington, 113 in Oregon and additional 104 stores in other western
    states.
    
    
    (2)     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
    
         (A) PRINCIPLES OF CONSOLIDATION.  The consolidated financial
    statements include the accounts of the Company and its wholly owned
    subsidiaries.  All significant intercompany accounts and transactions
    have been eliminated in consolidation.  Certain amounts reflected in
    prior years' financial statements have been reclassified to conform
    with the current year presentation.
    
          (B) FISCAL YEAR.  The Company's fiscal year ends on the Sunday
    closest to September 30.  The fiscal year refers to the year in which
    the period ends (e.g.; fiscal 1996 ended September 29, 1996).
    
          (C) CASH AND CASH EQUIVALENTS.  The Company considers all highly
    liquid debt investments with an original maturity of three months or
    less such as certificates of deposit, commercial paper, government
    paper and money market accounts, to be cash equivalents.  
    
                                    F-6
    <PAGE>
    
    
    
                      THRIFTY PAYLESS, INC. AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              (Dollars in millions)
    
    
          (D) INVENTORIES.  Inventories consist of merchandise held for
    resale and are stated at the lower of last-in, first-out (LIFO) cost
    or market.  A summary of inventories follows:
                                                     1996        1995 
         Merchandise inventories, at lower of
             FIFO cost or market..............   $ 1,066.7     $1,058.1
         Acquisition step-up costs............       106.8        110.8
         LIFO reserve.........................       (13.5)        (8.2)
         Merchandise inventories, at lower of 
             LIFO cost or market..............   $ 1,160.0     $1,160.7 
    
         (E) PROPERTY, PLANT AND EQUIPMENT.   Property, plant and equipment
    are stated at cost.  Depreciation is computed on a straight-line basis
    over the estimated useful lives of the assets.  Useful lives for
    buildings are between 20 and 30 years, and for furniture, fixtures and
    equipment are between 5 and 20 years.  Major renewal and renovations
    are capitalized.  Maintenance and repairs are charged to expense.
    
         (F) LEASEHOLD INTERESTS.  Leasehold interests represent the
    present value of the excess of current market rents at dates of
    acquisition over the below market rents of leases acquired. Such costs
    are amortized on a straight-line basis over the remaining lives of the
    underlying leases (approximately 15 years).  At September 29, 1996 and
    October 1, 1995, accumulated amortization was $17.1 and $10.2,
    respectively.
         (G) PRE-OPENING AND CLOSING COSTS.  Costs incurred with the
    opening of a new store are expensed during the first full month of
    operations.  Upon deciding to close a store, the Company expenses the
    undiscounted future net lease obligation, non-recoverable investment
    in fixed assets and other expenses directly related to discontinuance
    of store operations.
    
          (H) GOODWILL.  Goodwill is amortized on a straight-line basis
    over 15 years.  Amortization expense was $3.6, $3.6 and $1.3 for fiscal
    1996, 1995 and 1994, respectively.  The Company reviews the
    realizability of its intangible assets, including goodwill, annually,
    based upon expectations of nondiscounted cash flows and operating
    income.  As of September 29, 1996, management believes that there are
    no materially impaired intangible assets.
    
          (I) INSURANCE. The Company is primarily self insured for workers'
    compensation and public liability expenses.  Self insurance liabilities
    are based on claims filed and estimates for claims incurred but not
    reported.  These liabilities are not discounted.
    
         (J) ADVERTISING.  Net advertising costs are expensed when incurred
    and were $41.0, $72.5, and $42.7 for fiscal 1996, 1995, and 1994,
    respectively.
    
    
                                    F-7
    <PAGE>
                      THRIFTY PAYLESS, INC. AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              (Dollars in millions)
    
    
         (K) INCOME TAXES. Deferred income taxes are provided  at the
    current statutory rates on the difference between financial statement
    and tax basis of assets and liabilities and are classified in the
    consolidated balance sheet as current or long-term consistent with the
    classification of the related asset or liability giving rise to the
    deferred income taxes.
    
         (L) ESTIMATES. The preparation of financial statements in
    conformity with generally accepted accounting principles requires
    management to make estimates and assumptions that affect the reported
    amounts of assets and liabilities and disclosure of contingent assets
    and liabilities at the date of the financial statements and the
    reported amounts of revenues and expenses during the reporting period. 
    Actual results could differ from those estimates
    
    
    (3)     THE RECAPITALIZATION
    
         In April 1996, the Company and T P Holdings implemented a
    recapitalization plan (the "Recapitalization") designed to reduce
    indebtedness and interest expense, improve operating and financial
    flexibility and increase shareholder's equity.  The Recapitalization
    included the following components: (I) the offering of 24.3 million of
    T P Holding's Class B common stock with net proceeds to T P Holdings
    of approximately $307.3; (ii) the redemptions, with proceeds of the
    offering, of $105.0 in outstanding principal amount of the Company's
    12 1/4% Senior Subordinated Notes due 2004 and $175.5 in outstanding
    principal amount of T P Holdings' 11 5/8% Senior Notes due 2006 (the
    "PIK Notes"); (iii) the repurchase, with proceeds of the offering, of
    $12.8 million of the remaining outstanding principal amount of T P
    Holdings' PIK Notes that were not redeemable; (iv) the repurchase, with
    borrowings under the new bank facility (the "New Bank Facility") of
    $249.7 in outstanding principal amount of the Company's 11 3/4% Senior
    Notes due 2003; and, (v) the procurement of the $1 billion New Bank
    Facility which (a) refinanced the Company's existing indebtedness under
    its Credit Agreement ("Old Bank Facility"), dated April 20, 1994, as
    amended, (b) provided financing used to repurchase the 11 3/4% Senior
    Notes and,   provided for a lower interest rate on the Company's
    indebtedness.  Under the Old Bank Facility, interest rates were at
    LIBOR plus a spread ranging between 2.625% and 3.375% with respect to
    various tranches.  The New Bank Facility interest rate is LIBOR plus
    1.50%, subject to reduction upon achieving certain performance
    measures.  As a result of the Recapitalization, the Company incurred
    an extraordinary charge in fiscal 1996 of $85.5 (net of a $9.5 tax
    benefit) to write-off deferred financing fees, original issue
    discounts, consent fees, premiums, and other expenses.
    
    
    
    
                                    F-8
    <PAGE>
                      THRIFTY PAYLESS, INC. AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              (Dollars in millions)
    
    
    (4)     PURCHASE OF PAYLESS ("THE ACQUISITION")
    
         On April 20, 1994, the Company and T P Holdings  acquired PayLess
    Drug from Kmart for approximately $983.8.  Shortly after the purchase,
    the Company repaid $46.6 of PayLess Drug's long-term debt which is
    reflected as part of the purchase price.  Consideration for the
    purchase consisted of; (1) cash of $572.6 from the Company and T P
    Holdings (including expenses of $30.5); (2) senior notes of $100.0
    (valued at $76.2) from T P Holdings; (3) $50.0 senior subordinated
    notes (valued at $44.7) from T P Holdings; (4) $5.3 in Class C common
    stock of T P Holdings and (5) all the outstanding Class B common stock
    of T P Holdings (valued at $285.0 and representing 48.3% of all T P
    Holdings outstanding voting common stock).  The Acquisition has been
    accounted for using the purchase method of accounting; wherein, $58.9
    in goodwill was recognized after recording $103.6 in leasehold
    interests. The operations of PayLess Drug are included in the
    Consolidated Statement of Operations as of the date acquired.
    
         In connection with the Acquisition, the Company transferred the
    stock of its sporting goods subsidiaries, Gart Sports Company ("Gart")
    and MC Sports Company ("MC"), and $101.9 in cash to T P Holdings in
    partial consideration of the shares of PayLess Drug's capital stock
    sold by T P Holdings to the Company.  To finance, in part, the
    Acquisition and related transactions, the Company and T P Holdings
    raised $800.0 through bank debt and the sale of publicly traded debt
    securities of the Company and Class C common stock of T P Holdings. 
    Effective with the Recapitalization described in Note 3, all Class C
    common shares converted to Class B common shares on a basis of 20
    shares of Class C converting to 6 shares of Class B.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
                                    F-9
    <PAGE>
                      THRIFTY PAYLESS, INC. AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              (Dollars in millions)
    
    
    
    (5)     ACQUISITION RESERVE
    
         Upon the consummation of the Acquisition and the 1992 Acquisition,
    the Company had plans to close specific overlapping and unprofitable
    stores.  Accordingly, the Company accrued, as part of the acquisitions,
    the estimated future cash payments, primarily future lease payments and
    costs and expenses associated with subleasing or terminating such
    leases.  At September 29, 1996, minimum annual lease payments for the
    closed stores was $12.6.  Remaining terms of the leases related to
    these closed stores range up to 20 years.  As of September 29, 1996,
    and October 1, 1995, the acquisition reserve for these future costs was
    $42.0 and $68.0, respectively.  Additionally, amounts charged to this
    reserve in fiscal 1996 and 1995, were $26.0 and $27.3, respectively.
    
    
    (6)     PROPERTY, PLANT AND EQUIPMENT, NET
    
         Property, plant and equipment, net consists of the following:
    
                                                    1996         1995  
    Land.....................................     $ 100.1      $ 104.3
    Buildings................................       349.0        339.8
    Furniture, fixtures and equipment........       235.2        214.1
                                                    684.3        658.2
    Less accumulated depreciation ...........       126.9         76.3
    
         Property, plant and equipment, net..     $ 557.4      $ 581.9
    
         In the 1992 Acquisition, the excess of estimated market value of
    the net assets acquired over the purchase price was greater than the
    noncurrent assets acquired.  Accordingly, the noncurrent assets,
    including property, plant and equipment, was reduced to zero at
    September 25, 1992.  The aforementioned amounts reflect assets acquired
    subsequent to the 1992 Acquisition.
    
    (7)     ACCRUED EXPENSES
    
         Accrued expenses consists of the following:
    
                                                    1996        1995  
    
    Employee wages and benefits..............     $  83.8     $  67.7
    Self Insurance...........................        35.4        39.7
    Income and non-income taxes..............        36.0        33.5
    Interest.................................        18.2        33.2
    Other....................................        63.9        86.3
                                                  $ 237.3     $ 260.4
    
    
    
    
                                    F-10
    <PAGE>
                      THRIFTY PAYLESS, INC. AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              (Dollars in millions)
    
    (8)     LONG-TERM DEBT
          Long-term debt consists of the following:            1996     1995 
    
     Revolving note payable, under a working capital line
     of credit agreement, bears interest of LIBOR + 1.50%
     or at the average of the three lead banks' prime rate
     + 0.5%.  Final maturity is December 31, 2002. Weighted
     average interest rate at September 29, 1996 was 7.11%.   $355.5    $  -
    
     Term Loan, secured by substantially all of the 
     Company's assets including capital stock of its 
     subsidiaries and bears interest of LIBOR + 1.50% or 
     at the average of the three lead banks' prime rate 
     + 0.5%.  Final maturity is December 31, 2002.  
     Interest rate at September 29, 1996 was 7.0%..........    249.9       -
    
     Senior Subordinated Notes, unsecured and bearing an 
     effective interest rate of 14.3% due April 15, 2004; 
     35% of principal called in April 1996 and remaining 
     principal callable subsequent to April 15, 1999. 
     Amounts are net of unamortized discount of $18.0 and 
     $29.7 in 1996 and 1995, respectively..................    177.0    270.3
    
     Term Loan Notes payable with tranches A, B and C 
     bearing interest at varying rates including at the 
     average of the three lead banks' prime rate + 1.5% to 
     2.25 or the average of LIBOR + 2.625% to 3.375.  
     Prepaid April 1996....................................       -     302.9
    
     Senior Notes, unsecured and bearing interest at 11.75%
     due April 15, 2003; Redeemed April 1996...............      0.3    250.0
    
     Revolving note payable, under a working capital line
     of credit agreement with interest due at the three
     lead banks' prime rate plus 1.5% or the average of
     LIBOR + 2.625%. Prepaid April 1996....................       -      69.9
    
     Notes payable, bearing interest at 5 - 12% are 
     in varying installments through April 1, 2010.
     Secured by various owned properties of the Company....     39.8     47.2
    
    
           Total notes payable.............................    822.5    940.3
           Less current maturities.........................     28.1     27.1
    
           Long-term debt..................................   $794.4   $913.2
    
    
    
    
    
    
    
                                    F-11
    <PAGE>
                      THRIFTY PAYLESS, INC. AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              (Dollars in millions)
    
    (8)     LONG-TERM DEBT (CONTINUED)
    
         Annual maturities of long-term debt at September 29, 1996, are
    as follows:
    
         1997.............................................       $  28.1
         1998.............................................          28.2
         1999.............................................          33.1
         2000.............................................          38.1
         2001.............................................          42.9
         Thereafter.......................................         652.1
                                                                 $ 822.5
    
         As of September 29, 1996, the Company had available a $650.0
    revolving line of credit of which $50.0 was available for import
    letters of credit. As of September 29, 1996, $275.3 was available for
    working capital requirements, including $30.8 for import letters of
    credit.  In addition, the Company had a $100.0 line of standby letters
    of credit of which $82.0 was being used as collateral for the Company's
    master lease facility (see "Commitments and Contingencies") and as
    deposits with various states for the Company's self insured workers
    compensation plan.  Commitment fees for these standby letters of credit
    range from 0.20% to 0.375% per year.
    
         The Term Loan, revolving working capital line of credit agreement, 
    and the Senior Subordinated Note Indentures include various
    restrictions on the Company including, among other things, (1) the
    payment of dividends on and redemption of capital stock by the Company,
    (2) the incurrence of indebtedness by the Company or its subsidiaries
    or the issuance of preferred stock by the Company's subsidiaries, (3)
    certain sales of assets and capital stock, (4) the creation of liens,
    (5) the Company's and its subsidiaries' ability to consolidate or merge
    with or into, or to transfer all or substantially all of its assets to
    another person, and (6) transactions with affiliates, including certain
    fees and payments to affiliates.  In addition, the Senior Subordinated
    Note Indenture prohibits the incurrence of indebtedness that is
    subordinated to the Senior Subordinated Notes.  These restrictions are
    subject to a number of qualifications or exceptions.
    
         The Senior Subordinated Notes are general unsecured obligations
    of Thrifty PayLess.  Since bank indebtedness is secured by
    substantially all of the assets of Thrifty PayLess and its
    subsidiaries, in the event of a bankruptcy, the banks would have a
    prior claim on such assets.  Further, the Senior Subordinated Notes are
    effectively subordinated to the indebtedness of Thrifty PayLess'
    subsidiaries (primarily Bi-Mart) and are on a parity with Thrifty
    PayLess' trade creditors. 
    
    
    
    
    
    
                                    F-12
    <PAGE>
                      THRIFTY PAYLESS, INC. AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               (Dollars in millions)
    
         The Company has an interest rate cap agreement which caps the
    interest rate on $84.0 at between 8.875% and 10.125% for a three year
    period.  As consideration for this agreement, the Company paid $1.2
    which is being amortized over the three year period of the agreement. 
    In addition, the Company has an interest rate collar agreement covering
    $16.0 million of debt with a ceiling rate of 10.375% and a Floor rate
    of 8.045%.
    
         In September 1995, the Company merged PayLess Drug into the
    Company.  The merger obligated the Company to prepay $87.6 of a note
    payable, which was due October 1, 2004, plus pay a prepayment premium.
    The prepayment of the note payable resulted in an extraordinary after-
    tax loss of $7.4, net of a related income tax benefit of $4.5.
    
    (9)     FAIR VALUE OF FINANCIAL INSTRUMENTS  
    
         SFAS No. 107 "Disclosures About Fair Value of Financial
    Instruments," requires disclosure of the fair value of certain
    financial instruments.  The estimated fair value amounts of the
    Company's financial instruments have been determined by management,
    using market information and valuation methodologies.  Considerable
    judgment is required to develop the estimates of fair value, thus, the
    estimates provided herein are not necessarily indicative of the amounts
    that could be realized in a current market exchange.  The use of
    different market assumptions or valuation methodologies may have a
    material effect on the estimated fair value amounts. The Company
    determines fair value of its long-term notes payable based on rates
    currently available to the Company for debt with similar terms and
    maturities.  The estimated fair value for long-term notes payable as
    of September 29, 1996 was $863.7 compared to the carrying value of
    $822.5.
    
    (10)     EMPLOYEE BENEFIT PLANS
    
         The Company contributed and charged to expense $4.0 , $3.4  and
    $1.8 in fiscal 1996, 1995 and 1994, respectively, for collective
    bargained, multi-employer pension plans.  These contributions are
    determined in accordance with provisions of negotiated labor contracts
    and generally are based on the number of years worked.
    
         The Company also sponsors various other retirement and savings
    plans which cover a significant number of employees not covered by
    multi-employer pension plans.  These plans include individual accounts
    for each participant and specify how contributions to the participant's
    account are to be determined.  Company contributions, which in some
    cases are discretionary, to these plans are based on a percentage of
    an employee's contributions or compensation.  The cost of these plans
    was $15.2, $15.4 and $12.1 in fiscal 1996, 1995 and 1994, respectively. 
    
         The Company does not provide post-employment or post-retirement
    medical benefits to its management and employees.
    
    
                                    F-13
    <PAGE>
                            THRIFTY PAYLESS, INC. AND SUBSIDIARIES
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                    (Dollars in millions)
    
    
    (11)    COMMITMENTS AND CONTINGENCIES
    
         The Company leases certain stores, distribution facilities,
    vehicles and equipment with terms expiring at various dates from 1996
    through 2024.  Certain of these leases are covered under a master lease
    facility.  Certain operating leases include contingent rentals based
    upon a percentage of sales over specific amounts.
    
         Total rent expense for each fiscal year was:
    
                                             1996      1995       1994 
      Minimum rentals...............        $155.5     $141.1     $102.2
      Contingent rentals............          17.9      15.2       17.0
      Sublease rental income........         (23.2)    (21.6)    ( 10.6)
    
          Total.....................        $150.2    $134.7     $108.6 
    
         At September 29, 1996, minimum rental commitments for the next
    five fiscal years and thereafter under noncancelable leases were as
    follows: 1997 - $136.3; 1998 - $130.0; 1999 - $121.5; 2000 - $111.8;
    2001 - $101.2; and thereafter - $1,426.0.  Minimum sublease rental
    income to be received in the future under operating leases totaled
    $76.8 at September 29, 1996.
    
         The Company is a party to several legal proceedings and claims
    arising in the normal course of business.  Although the outcome of such
    proceedings and claims cannot be determined with certainty, management
    believes that their final outcome should not have a material adverse
    effect on the Company's consolidated financial position or results of
    operations.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
                                    F-14
    <PAGE>
                       THRIFTY PAYLESS, INC. AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               (Dollars in millions)
    
    (12)     INCOME TAXES
    
         Income tax (expense) benefit related to continuing operations
    consists of the following:
                                                     1996      1995     1994 
  Current income taxes:
       Federal taxes..........................   $ (2.9)    $ 12.5   $  1.6 
       State and local taxes..................     (0.3)      (1.8)     1.9 
                                                   (3.2)      10.7      3.5 
  Deferred income taxes:
       Federal taxes..........................    (26.2)     (10.7)    (8.5)
       State and local taxes..................     (6.6)       2.1     (3.3)
  
                                                  (32.8)      (8.6)   (11.8)
  
                                                 $(36.0)    $  2.1   $ (8.3)
  
  
       The Company is party to a tax sharing agreement with T P Holdings
    that provides for, among other things, the inclusion of the Company in
    T P Holdings' consolidated income tax return.  In general, such tax
    sharing agreement provides that the Company and each of its
    subsidiaries will be responsible for paying to T P Holdings its
    Separate Tax Liability (as defined in the tax sharing agreement),
    computed as a flat tax on its income at the highest marginal rate
    applicable to corporations under the various income tax systems
    provided under the Internal Revenue Code.  Similar provisions apply
    with respect to the filing of combined or consolidated state income or
    franchise tax returns and the payment of tax.  As a result of the tax
    sharing agreement and the filing of consolidated tax returns with T P
    Holdings, substantially all accrued taxes payable is an intercompany
    account with T P Holdings.
    
         The effective income tax rate (expense) benefit varied from the
    expected expense (benefit), based upon application of the Federal
    statutory  income tax rate, as follows: 
      
                                                   1996      1995     1994
  
  Expected tax (expense) benefit............     $(30.2)    $  2.9   $ (6.5)
  State and local taxes, net of
    federal tax effect......................       (4.5)      (0.2)    (1.4)
  Goodwill amortization.....................       (1.3)      (1.3)    (0.4)
  Federal and state tax rate change.........         -         0.3       -
  Other, net................................         -         0.4       -  
                                                 $(36.0)    $  2.1    $(8.3)
  
  
  
  
  
  
  
                                    F-15
  <PAGE>
                      THRIFTY PAYLESS, INC. AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              (Dollars in millions)
    
         The tax effects of temporary differences that give rise to
    significant portions of the deferred tax assets and liabilities at
    September 29, 1996 and October 1, 1995, are presented below:
    
                                                               1996     1995
  Deferred tax assets:
       Accrued expenses.................................    $ 64.4   $ 66.9
       Property, plant and equipment....................       7.8     19.0
       Net operating loss carryforward benefit..........      62.6     44.3
       Deductible transaction costs.....................       8.4      9.6
       Alternative minimum tax credit prepayment........       1.0      1.2
       Other............................................       0.9      1.5 
            Total gross deferred tax assets.............     145.1    142.5
       Valuation allowance for deferred tax assets......    (116.2)   (87.7)
  
            Net deferred tax assets.....................      28.9     54.8 
  
  Deferred tax liabilities:
  
       Inventories......................................     136.7    138.9
       Debt obligations.................................      27.2     26.0
       Discount on notes................................        -       4.9
       Stock of subsidiaries............................      13.7     13.7
       Other............................................       5.3      2.1 
            Total gross deferred tax liabilities........     182.9    185.6
                 Net deferred tax liability.............    $154.0   $130.8
  
  
       The net increase in valuation allowance for fiscal 1996 of $28.5
    primarily relates to net operating loss deferred tax assets generated
    in fiscal 1996.  The net change in the total valuation allowances for
    fiscal 1995 of $9.9 related primarily to the Acquisition.  It is
    management's opinion that it is more likely than not that the net
    deferred tax assets of $28.9 will be realized.    
    
         At September 29, 1996, the Company has federal regular income tax
    and alternative tax net operating loss carryforwards for income tax
    purposes of approximately $167.7 and $19.5, respectively.  The net
    operating loss carry-forwards expire between years 2009 and 2011.
    
    
    (13)     RELATED PARTY TRANSACTIONS
    
         Thrifty PayLess has provided certain administrative support
    services to Big 5, Gart and MC and was reimbursed monthly for such
    services.  Thrifty PayLess was reimbursed $0.3 and $2.2 for
    administrative services in 1995 and 1994, respectively.  Sublease
    revenues from Big 5, Gart and MC amounted to $0.4 in 1996, 1995 and
    1994.  Additionally, Thrifty PayLess is a guarantor of certain lease
    obligations for Big 5, Gart and MC which leases currently require
    aggregate annual rent payments of approximately $8.5.
    
    
                                    F-16
    <PAGE>
                      THRIFTY PAYLESS, INC. AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               (Dollars in millions)
    
    
         In consideration with the Acquisition, the Company entered into
    a ten year Management Services Agreement (the Agreement) with LGA for
    management, consulting and financial planning services.  The Agreement
    provided for an annual fee of $1.0 million plus reasonable expenses. 
    The Company paid $0.5, $0.9 and $0.8 in 1996, 1995 and 1994,
    respectively to LGA under this Agreement.  As part of the
    Recapitalization, the General Services provision of the Agreement was
    canceled.  In consideration of Investment Services provided by LGA in
    connection with the Recapitalization and the cancellation of the
    General Services provision of the Agreement, the Company paid LGA an
    aggregate of $16.3 million.  In 1995, the Company paid LGA $0.45 for
    consulting services associated with obtaining tranch C of the Term
    Loan.  During 1994, the Company paid LGA $15.1 for services related to
    the Acquisition.  Additionally, the Company paid $5.0 to an investment
    banking firm that held 6% of T P Holdings' voting stock for its
    services related to the Acquisition.
    
         During fiscal 1994, Kmart billed the Company $20.5 for imported
    merchandise and $0.4 for various administrative services, $20.4 of
    which was paid to Kmart during fiscal 1995. During fiscal 1995 the
    Company also purchased pharmacy files and inventories from Kmart for
    $0.2.  In addition, pursuant to the Purchase and Sale Agreement related
    to the Acquisition, the Company received $4.3 in fiscal 1995 as an
    adjustment of the purchase price related to income taxes.
    
    
    (14)     SUBSEQUENT EVENT
    
         On December 12, 1996, T P Holdings was merged into Rite Aid
    Corporation (Rite Aid).  As a condition of the merger, all outstanding
    debt under the Company's term loan and revolving line of credit
    agreement were paid off by Rite Aid and replaced with inter-company
    notes payable to Rite Aid.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
                                    F-17
<PAGE>
        (15)     QUARTERLY INFORMATION (UNAUDITED)
    
<TABLE>
<CAPTION>
                                  First   Second     Third    Fourth
                                 Quarter  Quarter   Quarter   Quarter  Annual
                                --------  -------  --------  -------- --------
<S>                             <C>       <C>      <C>       <C>      <C>
FOR THE 52 WEEK PERIOD ENDED 
SEPTEMBER 29, 1996
Net sales ...................   $1,307.1  $1,123.1 $1,213.4  $1,155.3 $4,798.9
Gross profit ................      360.8     290.9    318.1     311.6  1,281.4
Net income (loss) from 
continuing operations........       27.7      (7.8)    10.5      19.9     50.3
EBITDAL......................      100.7      40.5     62.6      64.2    268.0

FOR THE 52 WEEK PERIOD ENDED 
OCTOBER 1, 1995
Net sales ...................   $1,301.5  $1,098.0  $1,172.7  $1,086.6 $4,658.8
Gross profit ................      363.7     286.5     312.6     283.0  1,245.8
Net income (loss) from 
continuing operations........       19.9     (12.7)      1.3     (14.6)    (6.1)
EBITDAL......................       80.1      31.7      51.2      41.3    204.3

FOR THE 52 WEEK PERIOD ENDED 
OCTOBER 2, 1994
Net sales....................   $ 556.6   $ 497.5   $1,024.4 $1,084.8 $3,163.3
Gross profit.................     141.3     129.0      275.8    306.1    852.2
Net income (loss) from 
continuing operations........       6.1      (3.1)       3.1      4.3     10.4
EBITDAL......................      15.5       0.5       43.3     46.7    106.0

</TABLE>


        EBITDAL REPRESENTS OPERATING INCOME BEFORE INTEREST AND TAXES PLUS
    DEPRECIATION AND AMORTIZATION EXPENSE AND THE LIFO PROVISION, INCLUDING
    ACQUISITION STEP-UP COSTS.  EBITDAL IS NOT INTENDED TO REPRESENT CASH
    FLOW OR ANY OTHER MEASURE OF PERFORMANCE IN ACCORDANCE WITH GENERALLY
    ACCEPTED PRINCIPLES (GAAP).  EBITDAL IS INCLUDED BECAUSE MANAGEMENT
    BELIEVES THAT CERTAIN INVESTORS FIND IT TO BE A USEFUL TOOL FOR
    MEASURING A COMPANY'S ABILITY TO SERVICE ITS DEBT.
    
 
    
    
    
    
    
    
    
    
    
    
    
    
    
                                    F-18
    <PAGE>