stores, which will further enable our pharmacists to work directly with customers and doctors and adjudicate and fill prescriptions in a more efficient manner. We also drive pharmacy sales growth via our automatic refill program, prescription file buys, in-store immunization programs, fully integrated diabetes program, a specialty pharmacy program, a workers compensation program and several initiatives aimed at managed care providers and doctors. We believe these activities and our focus on generic prescription drugs and direct marketing efforts will attract new customers to our stores and increase profitability. We also continue to develop and implement programs designed to improve customer satisfaction. We believe that by executing our "With us, it's personal" program that is aimed at delivering more personalized service along with faster prescription delivery to our customers, our growth will continue. Although we are already an industry leader in dispensing generic drugs, which have a higher gross margin compared to branded drugs, we continue to take additional steps to further improve our generic efficiency, including adding functionality to our proprietary pharmacy information system to aid our pharmacists in dispensing generic prescriptions whenever possible. We are increasing customer loyalty by establishing a strong community presence through health expositions and not-for-profit activities, focusing on the attraction and retention of managed care customers, partnering with several Medicare endorsed card programs to provide discounts to senior citizens and participating in almost all of Medicare endorsed prescription cards for senior citizens.

Grow Front-End Sales.    We intend to grow front-end sales through continued emphasis on core drugstore categories, a focus on seasonal and cross-merchandising, offering a wider selection of products and services to our customers and effective promotions in our weekly advertising circulars. Our focus for expanding our products and services includes a continued strengthening of our collaborative relationship with our suppliers, an emphasis on our Rite Aid brand products, which provide better value for our customers and higher margins for us, ethnic products targeted to selected markets and a conversion of our one-hour photo development to digital technology.

Contain Expenses.    We continue to execute our cost management programs. Our emphasis is on targeted expense areas that are subject to specific work plans for improvement that are continuously monitored. Some examples of targeted expense areas, include (i) workers compensation expense; (ii) utility expense and (iii) repair and maintenance expense. We plan to contain worker's compensation expense through improving workplace safety at our stores and distribution centers and actively managing open claims. We plan to contain utility expense through development and implementation of energy management procedures and systems and through analysis of energy data to facilitate lowest cost bidding for services. We plan to contain repair and maintenance expense by consolidating contracts where applicable, and consistently seeking out lowest cost bidders for preventive maintenance services.

Focus on Customers and Associates.    Our "With us, it's personal" commitment encourages associates to provide customers with a superior customer service experience. We obtain feedback on our customer service performance by utilizing an automated survey system that collects store specific information from customers shortly after the point of sale, frequent customer surveys by an independent third party, and mystery shoppers. We also have several programs in place that enhance customer satisfaction, examples of which are the maintenance of a customer support center that centrally receives and processes all customer calls and our "never out of stock" program. We continue to develop and implement associate training programs to improve customer satisfaction and educate our associates about the products we offer. We have implemented programs that create compensatory and other incentives for associates who provide customers with excellent service and who improve our corporate culture. We believe that these steps further enable and motivate our associates to deliver a superior customer service.

Products and Services

During fiscal 2004, sales of prescription drugs represented approximately 63.6% of our total sales, an increase from 63.2% in fiscal 2003 and 61.4% in fiscal 2002. In fiscal years 2004, 2003 and 2002, prescription drug sales were $10.5 billion, $9.9 billion, and $9.3 billion, respectively.

We sell over 24,000 different types of non-prescription, or front-end products. The types and number of front-end products in each store vary, and selections are based on customer needs and

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preferences and available space. No single front-end product category contributed significantly to our sales during fiscal 2004 although certain front-end product classes contributed notably to our sales. Our principal classes of products in fiscal 2004 were the following:

Product Class				Percentage of Sales
Prescription drugs					63.6	%
Over-the-counter medications and personal care					10.2
Health and beauty aids					4.8
General merchandise and other					21.4

We offer approximately 2,100 products under the Rite Aid private brand, which contributed approximately 11.4% of our front-end sales in the categories where private brand products were offered in fiscal 2004. During fiscal 2004, we added 217 products under our private brand. We intend to continue to increase the number and the sales of our private label brand products.

We have a strategic alliance with GNC under which we operate GNC "stores-within-Rite Aid-stores". GNC is a leading nationwide retailer of vitamin and mineral supplements and personal care, fitness and other health-related products. As of February 28, 2004, we operated 989 GNC stores-within-Rite Aid-stores.

Technology

All of our stores are integrated into a common information system, which enables our pharmacists to fill prescriptions more accurately and efficiently reduces chances of adverse drug interactions and which can be expanded to accommodate new stores. This common information system enables a customer to fill their prescription in any of our stores. Our customers may also order prescription refills over the Internet through www.riteaid.com powered by drugstore.com, or over the phone through our telephonic rapid automated refill systems. As of February 28, 2004 we had installed ScriptPro automated pharmacy dispensing units, which are linked to our pharmacists' computers and fill and label prescription drug orders, in 883 stores. The efficiency of ScriptPro units allows our pharmacists to spend an increased amount of time consulting with our customers. Additionally, each of our stores employs point-of-sale technology that supports sales analysis and recognition of customer trends. This same point-of-sale technology facilitates the maintenance of perpetual inventory records which together are the basis for our automated inventory replenishment process.

In fiscal 2004, we developed and implemented several new technologies and applications, including electronic signature capture, loss prevention analytics, some computer based training modules, and transportation management systems. We continued to focus on vendor collaboration, through the development of category management workstations which integrate and coordinate the many different data sources. We continued to enhance category management applications through the development of promotional price optimization and market basket analysis, all of which support decisions for front-end selection, assortment, pricing, promotion and product placement.

In fiscal 2005, we are focusing on technology initiatives such as the roll-out of our next generation pharmacy dispensing system, expansion of e-prescribing and enhancing our automated refill system. We believe our next generation pharmacy system is state of the art and will enhance workflow. Our next generation pharmacy system was designed with optimal ease of use in mind so as to further enable our pharmacists to work directly with customers and doctors.

Suppliers

During fiscal 2004, we purchased approximately 90% of the dollar volume of our prescription drugs from a single supplier, McKesson Corp ("McKesson"), under a contract, which runs through March 2009. Under the contract, McKesson has agreed to sell to us all the branded pharmaceutical products we require. With limited exceptions, we are required to purchase all of our branded pharmaceutical products from McKesson. If our relationship with McKesson was disrupted, we could

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temporarily have difficulty filling prescriptions until we found a replacement supplier, which could negatively affect our business. We purchase generic (non-brand name) pharmaceuticals from a variety of sources. We purchase our non-pharmaceutical merchandise from numerous manufacturers and wholesalers. We believe that competitive sources are readily available for substantially all of the non-pharmaceutical merchandise we carry and that the loss of any one supplier would not have a material effect on our business.

We sell private brand and co-branded products that generally are supplied by numerous competitive sources. The Rite Aid and GNC co-branded PharmAssure vitamin and mineral supplement products and the GNC branded vitamin and mineral supplement products that we sell in our stores are developed by GNC, and along with our Rite Aid brand vitamin and mineral supplements, are manufactured by GNC.

Customers and Third-Party Payors

During fiscal 2004, our stores served an average of 1.8 million customers per day. The loss of any one customer would not have a material adverse impact on our results of operations. No single customer or health plan contract accounted for more than 10% of our total sales in fiscal 2004.

In fiscal 2004, 93.3% of our pharmacy sales were to customers covered by pharmacy benefit plans which are provided by third-party payors (such as an insurance companies, prescription benefit management companies, governmental agencies, private employers, health maintenance organizations or other managed care providers) that agree to pay for all or a portion of a customer's eligible prescription purchases and negotiate with us for reduced prescription rates. During fiscal 2004, the top five third-party payors accounted for approximately 30% of our total sales, the largest of which represented 10.2% of our total sales. During fiscal 2004, state sponsored Medicaid agencies accounted for approximately 11.3% of our total sales, the largest of which was less than 3% of our total sales. Any significant loss of third-party payor business could have a material adverse effect on our business and results of operations.

Competition

The retail drugstore industry is highly competitive. We compete with, among others, retail drugstore chains, independently owned drugstores, supermarkets, mass merchandisers, discount stores, dollar stores and mail order pharmacies. We compete on the basis of store location and convenient access, customer service, product selection and price. We believe continued consolidation of the drugstore industry, continued new store openings and increased mandatory mail order will further increase competitive pressures in the industry.

Marketing and Advertising

In fiscal 2004, marketing and advertising expense was $255.7 million, which was spent primarily on nationwide weekly advertising circulars. We have implemented various programs that are designed to improve our image with customers. These include several customer events, including our Rite Aid Health and Beauty Expos. Our front-end and prescription suppliers are invited to participate in these events by displaying, demonstrating and providing samples of their products and services in exhibit booths. We continue to implement programs that are specifically directed to our pharmacy business. These include direct marketing programs, displaying and distributing printed materials educating customers about various diseases and treatment for these diseases, displaying both pharmacy and front end products that are related and partnering with several Medicare endorsed card programs to provide a discount card to senior citizens. Also, commencing in fiscal 2005, we intend to launch a television advertising compaign focused on our "With us, it's personal" message in 33 markets that represent 74% of our pharmacy sales.

Associates

We believe that our relationships with our associates are good. As of February 28, 2004, we had approximately 72,500 associates, 12% of which were pharmacists, 50% of which were part-time and

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38% of which were unionized. Associate satisfaction is critical to the success of our strategy. We have surveyed our associates to obtain feedback on various employment-related topics, including job satisfaction and their understanding of our core values and mission.

There is a national shortage of pharmacists. We have implemented various associate incentive plans in order to attract and retain qualified pharmacists. We have also expanded our efforts in recruitment of pharmacists through an increase in the number of recruiters, a successful pharmacist intern program and good relations with pharmacy schools.

Research and Development

We do not make significant expenditures for research and development.

Licenses, Trademarks and Patents

The Rite Aid name is our most significant trademark and the most important factor in marketing our stores and private brand products. We hold licenses to sell beer, wine and liquor, cigarettes and lottery tickets. As part of our strategic alliance with GNC we have a license to operate GNC "stores-within-Rite-Aid-stores". Additionally, we hold licenses granted to us by the Nevada Gaming Commission that allows us to place slot machines in our Nevada stores. We also hold licenses to operate our pharmacies and our distribution facilities. Together, these licenses are material to our operations.

Seasonality

We experience moderate seasonal fluctuations in our results of operations concentrated in the fourth fiscal quarter as the result of the concentration of the cold and flu season and the holidays. We tailor certain front-end merchandise to capitalize on holidays and seasons. We increase our inventory levels during our third fiscal quarter in anticipation of the seasonal fluctuations described above. Our results of operations in the fourth and first fiscal quarter may fluctuate based upon the timing and severity of the cold and flu season, both of which are unpredictable.

Regulation

Our business is subject to various federal and state regulations. For example, pursuant to the Omnibus Budget Reconciliation Act of 1990 ("OBRA") and comparable state regulations, our pharmacists are required to offer counseling, without additional charge, to our customers about medication, dosage, delivery systems, common side effects and other information deemed significant by the pharmacists and may have a duty to warn customers regarding any potential adverse effects of a prescription drug if the warning could reduce or negate such effect.

The appropriate state boards of pharmacy must license our pharmacies and pharmacists. Our pharmacies and distribution centers are also registered with the Federal Drug Enforcement Administration and are subject to Federal Drug Enforcement Agency regulations relative to our pharmacy operations, including regulations governing purchasing, storing and dispensing of controlled substances. Applicable licensing and registration requirements require our compliance with various state statutes, rules and/or regulations. If we were to violate any applicable statute, rule or regulation, our licenses and registrations could be suspended or revoked.

In recent years, an increasing number of legislative proposals have been introduced or proposed in Congress and in some state legislatures that would effect major changes in the healthcare system, either nationally or at the state level. The legislative initiatives include drug importation and a prescription drug benefit for Medicare participants, changes in qualified participants and changes in reimbursement rates. Although we believe we are well positioned to respond to these developments and near-term the senior discount drug cards are not expected to have a significant impact, we cannot predict the long-term outcome or effect of legislation resulting from these efforts.

Our pharmacy business is subject to patient privacy and other obligations, including corporate, pharmacy and associate responsibility imposed by the Health Insurance Portability and Accountability

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Act. As a covered entity, we are required to implement privacy standards, train our associates on the permitted uses and disclosures of protected health information, provide a notice of privacy practice to our pharmacy customers and permit pharmacy customers to access and amend their records and receive an accounting of disclosures of protected health information. Failure to properly adhere to these requirements could result in the imposition of civil as well as criminal penalties.

We are also subject to laws governing our relationship with associates, including minimum wage requirements, overtime and working conditions. Increases in the federal minimum wage rate, associate benefit costs or other costs related to associates could adversely affect our results of operations.

In addition, in connection with the ownership and operations of our stores, distribution centers and other sites, we are subject to laws and regulations relating to the protection of the environment and health and safety matters, including those governing the management and disposal of hazardous substances and the cleanup of contaminated sites. Violations of or liabilities under these laws and regulations as a result of our current or former operations or historical activities at our sites, such as gasoline service stations and dry cleaners, could result in significant costs.

Corporate Governance and Internet Address

We recognize that good corporate governance is an important means of protecting the interests of our stockholders, associates, customers, and the community. We have closely monitored and implemented relevant legislative and regulatory corporate governance reforms, including provisions of the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"), the rules of the Securities and Exchange Commission interpreting and implementing Sarbanes-Oxley, and the corporate governance listing standards of the New York Stock Exchange.

Our corporate governance information and materials, including our Certificate of Incorporation, Bylaws, Corporate Governance Guidelines, the charters of our Audit Committee, Compensation Committee and Nominating and Governance Committee, our Code of Ethics for the Chief Executive Officer and Senior Financial Officers and our Code of Ethics and Business Conduct are posted on the corporate governance section of our website at www.riteaid.com and are available in print upon request to Rite Aid Corporation, 30 Hunter Lane, Camp Hill, Pennsylvania 17011, Attention: Corporate Secretary. Our Board will regularly review corporate governance developments and modify these materials and practices as warranted.

Our website also provides information on how to contact us and other items of interest to investors. We make available on our website, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports, as soon as practical after we file these reports with the SEC.

Item 2.    Properties

As of February 28, 2004, we operated 3,382 retail drugstores. The overall average selling square feet of each store in our chain is 11,100 square feet. The overall average total square feet of each store in our chain is 12,700. The stores in the eastern part of the U.S. average 8,700 selling square feet per store (9,700 average total square feet per store). The stores in the central part of the U.S. average 9,500 selling square feet per store (10,200 average total square feet per store). The stores in the western part of the U.S. average 16,800 selling square feet per store (20,500 average total square feet per store).

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The table below identifies the number of stores by state as of February 28, 2004:

State				Store Count
Alabama					116
Arizona					3
California					579
Colorado					29
Connecticut					36
Delaware					24
District of Columbia					8
Georgia					49
Idaho					20
Indiana					9
Kentucky					117
Louisiana					85
Maine					80
Maryland					138
Michigan					321
Mississippi					31
Nevada					36
New Hampshire					39
New Jersey					167
New York					385
Ohio					237
Oregon					70
Pennsylvania					349
Tennessee					47
Utah					26
Vermont					12
Virginia					132
Washington					134
West Virginia					103
Total					3,382

Our stores have the following attributes at February 28, 2004:

Attribute				Number				Percentage
Freestanding					1,806				53	%
Drive through pharmacy					1,288				38	%
One-hour photo development department					2,430	(1)			72	%
GNC stores-within a Rite Aid-store					989				29	%

(1)	1,137 of these have digital capabilities.

We own our corporate headquarters, which is located in a 205,000 square foot building at 30 Hunter Lane, Camp Hill, Pennsylvania 17011. We lease a 100,000 square foot building near Harrisburg, Pennsylvania for use by additional administrative personnel. We lease 3,106 of our operating drugstore facilities under non-cancelable leases, many of which have original terms of 10 to 22 years. In addition to minimum rental payments, which are set at competitive market rates, certain leases require additional payments based on sales volume, as well as reimbursement for taxes, maintenance and insurance. Most of our leases contain renewal options, some of which involve rent increases.

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We operate the following distribution centers and overflow storage locations, which we own or lease as indicated:

Location				Owned or Leased				Approximate Square Footage
Rome, New York					Owned				291,000
Utica, New York(1)					Leased				172,000
Poca, West Virginia					Owned				264,000
Dunbar, West Virginia(1)					Leased				109,000
Perryman, Maryland					Owned				885,000
Tuscaloosa, Alabama					Owned				238,000
Cottondale, Alabama(1)					Leased				155,000
Pontiac, Michigan					Owned				362,000
Woodland, California					Owned				521,300
Woodland, California(1)					Leased				200,000
Wilsonville, Oregon					Leased				518,000
Lancaster, California					Owned				917,000

(1)	Overflow storage locations.

The original terms of the leases for our distribution centers range from five to 22 years. In addition to minimum rental payments, certain distribution centers require tax reimbursement, maintenance and insurance. Most leases contain renewal options, some of which involve rent increases. Although from time to time, we may be near capacity at some of our distribution facilities, particularly at our older facilities, we believe that the capacity of our facilities is adequate for the foreseeable future.

We also own a 52,200 square foot ice cream manufacturing facility located in El Monte, California.

On a regular basis and as part of our normal business, we evaluate store performance and may reduce in size, close or relocate a store if the store is redundant, under performing or otherwise deemed unsuitable. When we reduce in size, close or relocate a store, we often continue to have leasing obligations or own the property. We attempt to sublease this space. As of February 28, 2004, we have 7,669,442 square feet of excess space, of which 4,772,545 square feet was subleased.

Item 3.    Legal Proceedings

    Federal investigations

There are currently pending federal governmental investigations, both civil and criminal, by the United States Attorney, involving various matters related to prior management's business practices. We are cooperating fully with the United States Attorney. We have begun settlement discussions with the United States Attorney for the Middle District of Pennsylvania. The United States Attorney has proposed that the government would not institute any criminal proceeding against us if we enter into a consent judgement providing for a civil penalty payable over a period of years. The amount of the civil penalty has not been agreed to and there can be no assurance that a settlement will be reached or that the amount of such penalty will not have a material adverse effect on our financial condition and results of operations. We have recorded an accrual of $20.0 million in fiscal 2003 in connection with the resolution for these matters; however, we may incur charges in excess of that amount and we are unable to estimate the possible range of loss. We will continue to evaluate our estimate and to the extent that additional information arises or our strategy changes, we will adjust our accrual accordingly.

These investigations and settlement discussions are ongoing and we cannot predict their outcomes. If we were convicted of any crime, certain licenses and government contracts such as Medicaid plan reimbursement agreements that are material to our operations may be revoked, which

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would have a material adverse effect on our results of operations, financial condition or cash flows. In addition, substantial penalties, damages or other monetary remedies assessed against us, including a settlement, could also have a material adverse effect on our results of operations, financial condition or cash flows.

    Reimbursement Matters

Multiple state attorneys general are investigating us for our reimbursement practices relating to partially filled prescriptions and fully filled prescriptions that are not picked up by ordering customers. We are supplying similar information with respect to these matters to the United States Department of Justice. We believe that these investigations are similar to investigations that were, and are being, undertaken with respect to the practices of others in the retail drug industry. We also believe that our existing policies and procedures fully comply with the requirements of applicable law and intend to fully cooperate with these investigations. We cannot, however, predict their outcomes at this time. An individual acting on behalf of the United States of America, has filed a lawsuit in the United States District Court for the Eastern District of Pennsylvania under the Federal False Claims Act alleging that we defrauded federal healthcare plans by failing to appropriately issue refunds for partially filled prescriptions and prescriptions which were not picked up by customers. The United States Department of Justice has intervened in this lawsuit, as is its right under the law. We have reached an agreement to settle these investigations and the lawsuit filed by the private individual for $7.2 million, which is subject to court approval. We have accrued $7.2 million for this potential liability.

    Other

We, together with a significant number of major U.S. retailers, have been sued by the Lemelson Foundation in a complaint that alleges that portions of the technology included in our point-of-sale system infringe upon a patent held by the plaintiffs. The amount of damages sought is unspecified and may be material. We cannot predict the outcome of this litigation or whether it could result in a material adverse effect on our results of operations, financial conditions or cash flows.

We are subject from time to time to lawsuits arising in the ordinary course of business. In the opinion of our management, these matters are adequately covered by insurance or, if not so covered, are without merit or are of such nature or involve amounts that would not have a material adverse effect on our financial conditions, results of operations or cash flows if decided adversely.

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

No matter was submitted to a vote of our security holders, through the solicitation of proxies or otherwise, during the fourth quarter of our fiscal year covered by this report.

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PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our common stock is listed on the New York and Pacific Stock Exchanges under the symbol "RAD." On April 19, 2004, we had approximately 15,421 record shareholders. Quarterly high and low stock prices, based on the New York Stock Exchange composite transactions, are shown below.

Fiscal Year				Quarter				High				Low
2005 (through April 19, 2004)				First				$	5.75			$	5.11
2004				First					3.90				2.17
				Second					5.05				3.67
				Third					6.30				4.73
				Fourth					6.40				5.25
2003				First					4.22				3.01
				Second					3.24				1.75
				Third					2.65				1.79
				Fourth					3.05				2.02

We have not declared or paid any cash dividends on our common stock since the third quarter of fiscal 2000 and we do not anticipate paying cash dividends in the foreseeable future. Our senior secured credit facility does not allow us to pay cash dividends. Some of the indentures that govern our other outstanding indebtedness also restrict our ability to pay dividends. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."

We have not sold any unregistered equity securities during the period covered by this report, nor have we repurchased any equity securities during the period covered by this report.

Item 6.    Selected Financial Data

The following selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited consolidated financial statements and related notes appearing on pages 40-79.

				Fiscal Year Ended
				February 28, 2004 (52 weeks)				March 1, 2003 (52 weeks)				March 2, 2002 (52 weeks)				March 3, 2001 (53 weeks)(1)				February 26, 2000 (52 weeks)(1)
				(Dollars in thousands, except per share amounts)
Summary of Operations:
Revenues				$	16,600,449			$	15,791,278			$	15,166,170			$	14,516,865			$	13,338,947
Costs and expense:
Cost of goods sold, including occupancy costs					12,568,405				12,035,537				11,697,912				11,151,490				10,213,428
Selling, general and administrative expenses					3,594,405				3,471,573				3,422,383				3,412,442				3,651,248
Stock-based compensation expense (benefit) (2)					29,821				4,806				(15,891	)			45,865				(43,438	)
Goodwill amortization					—				—				21,007				20,670				24,457
Store closing and impairment charges					22,466				135,328				251,617				388,078				139,448
Interest expense					313,498				330,020				396,064				649,926				542,028
Interest rate swap contracts					—				278				41,894				—				—
Loss (gain) on debt modifications and retirements, net (3)					35,315				(13,628	)			221,054				100,556				—
Share of loss from equity investments					—				—				12,092				36,675				15,181

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				Fiscal Year Ended
				February 28, 2004 (52 weeks)				March 1, 2003 (52 weeks)				March 2, 2002 (52 weeks)				March 3, 2001 (53 weeks)(1)				February 26, 2000 (52 weeks)(1)
				(Dollars in thousands, except per share amounts)
Loss(gain) on sale of assets and investments, net					2,023				(18,620	)			(42,536	)			(6,030	)			(80,109	)
Total cost and expenses					16,565,933				15,945,294				16,005,596				15,799,672				14,462,243
Income (loss) from continuing operations before income taxes and cumulative effect of accounting change					34,516				(154,016	)			(839,426	)			(1,282,807	)			(1,123,296	)
Income tax (benefit) expense					(48,795	)			(41,940	)			(11,745	)			148,957				(8,375	)
Income (loss) from continuing operations before cumulative effect of accounting change					83,311				(112,076	)			(827,681	)			(1,431,764	)			(1,114,921	)
Income (loss) from discontinued operations, net of income tax expense of $13,846, and $30,903					—				—				—				11,335				9,178
Loss on disposal of discontinued operations, net of income tax benefit of $734					—				—				—				(168,795	)			—
Cumulative effect of accounting change, net of income tax benefit of $18,200					—				—				—				—				(27,300	)
Net income (loss)				$	83,311			$	(112,076	)		$	(827,681	)		$	(1,589,224	)		$	(1,133,043	)
Basic and diluted net income (loss) per share:
Income (loss) from continuing operations				$	0.11			$	(0.28	)		$	(1.82	)		$	(5.15	)		$	(4.34	)
(Loss) income from discontinued operations					—				—				—				(0.50	)			.04
Cumulative effect of accounting change					—				—				—				—				(0.11	)
Net income (loss) per share				$	0.11			$	(0.28	)		$	(1.82	)		$	(5.65	)		$	(4.41	)
Year-End Financial Position:
Working capital				$	1,894,247			$	1,676,889			$	1,580,218			$	1,955,877			$	752,657
Property, plant and equipment, net					1,883,808				1,868,579				2,096,030				3,041,008				3,445,828
Total assets					6,246,679				6,133,515				6,491,759				7,913,911				9,845,566
Total debt (4)					3,891,666				3,862,628				4,056,468				5,894,548				6,612,868
Redeemable preferred stock (5)					—				19,663				19,561				19,457				19,457
Stockholders' equity (deficit)					9,264				(112,329	)			9,616				(354,435	)			432,509
Other Data:
Cash flows from continuing operations provided by (used in):
Operating activities				$	227,515			$	305,383			$	16,343			$	(704,554	)		$	(623,098	)
Investing activities					(242,150	)			(72,214	)			342,531				677,653				(504,112	)
Financing activities					(15,931	)			(211,903	)			(107,109	)			(64,324	)			905,091
Capital expenditures					267,373				116,154				187,383				141,504				641,070
Cash dividends declared per common share				$	0			$	0			$	0			$	0			$	.3450
Basic weighted average shares					515,822,000				515,129,000				474,028,000				314,189,000				259,139,000
Diluted weighted average shares (6)					525,831,000				515.129,000				474,028,000				314,189,000				259,139,000
Number of retail drugstores					3,382				3,404				3,497				3,648				3,802
Number of associates					72,500				72,000				75,000				75,500				77,300

(1)	PCS was acquired on January 22, 1999. On October 2, 2000, we sold PCS. Accordingly, our Pharmacy Benefit Management ("PBM") segment was reported as a discontinued operation in the fiscal years ended March 3, 2001 and February 26, 2000.

(2)

Stock based compensation expense for the year ended February 28, 2004 was determined using the fair value method set forth in Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based Compensation". Stock based compensation expense (benefit) for the fiscal years ended March 1, 2003, March 2, 2002, March 3, 2001 and

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February 26, 2000 was determined using the intrinsic method set forth in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees".

(3)	Amounts related to the early extinguishment of debt that were previously recognized as an extraordinary item outside of results from continuing operations were reclassified as a gain or loss on debt retirements and modifications, which is a component of income or loss from continuing operations.

(4)	Total debt included capital lease obligations of $183.2 million, $176.2 million, $182.6 million, $1.1 billion, and $1.1 billion, as of February 28, 2004, March 1, 2003, March 2, 2002, March 3, 2001, and February 26, 2000, respectively.

(5)	Redeemable preferred stock was included in "Other Non-current liabilities" as of February 28, 2004.

(6)	Diluted weighted average shares for the year ended February 28, 2004 included the impact of stock options, as calculated under the treasury stock method.

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

Overview

Net income for fiscal 2004 was $83.3 million, compared to a net loss of $112.1 million in fiscal 2003 and $827.7 million in fiscal 2002. Reasons for the substantial improvement in our results in fiscal 2004 are described in more detail in the Results of Operations and Liquidity and Capital Resources sections of this Item 7. However, some of the key factors that impacted this improvement are summarized as follows:

Productivity of Existing Store Base.    Our strategy is to focus on improving the productivity of our existing store base. We have focused our efforts on improving the productivity of our stores by implementing programs to drive pharmacy sales growth, improving our product categories to offer more personalized products and service to our customers, increasing our mix of private brand and generic drug sales, developing programs that are specifically directed toward improving our pharmacy service and implementing associate programs that create compensatory and other incentives for associates to provide customers with better service. We believe that our improvements in revenues, gross margin as a percentage of revenues and selling, general and administrative costs (SG&A) as a percent of revenues that are detailed in the Results of Operations section are a direct result of our success in implementing this strategy of improving the productivity of our stores, evidenced by a rise in average revenue per store from $4.3 million in fiscal 2002 to $4.9 million in fiscal 2004.

Debt Refinancing.    In fiscal 2002 and again in fiscal 2004, we took several steps to improve our leverage and extend the terms of a substantial amount of our debt. In fiscal 2004, we replaced our senior secured credit facility with a new credit facility, issued new senior notes, and repurchased portions of several existing notes prior to maturity. These activities resulted in a loss of $43.2 million related to the termination of the old senior secured credit facility and the issuance of the new senior secured credit facility, offset by net gains of $7.9 million related to the note repurchases described above. Our fiscal 2002 refinancing, extended the maturity of the majority of our debt, converted a portion of our debt to equity and rescinded purchase options on certain sale-leaseback leases, resulting in their reclassification from capital leases to operating leases. These activities resulted in aggregate charges of $221.1 million in fiscal 2002. These steps have enabled us to reduce our debt from $6.6 billion as of February 26, 2000 to $3.9 billion as of February 28, 2004, and to extend the maturity of the majority of our debt to 2008 and beyond. These transactions are discussed in more detail in the Liquidity and Capital Resources section below.

Closure of Under-Performing Stores.     We performed a rigorous review of underperforming stores, and, based on these reviews, decided to close 5, 40 and 116 stores in fiscal 2004, 2003 and 2002, respectively. As a result of these closures and our annual review of our stores' operating performance for potential impairment, we have recorded store closing and related impairment charges of $22.5 million, $135.3 million, and $251.6 million in fiscal 2004, 2003 and 2002, respectively. We believe that these closures were necessary to improve the productivity of our remaining store base and to eliminate underperforming stores. As part of our ongoing business activities, we will continue to assess stores for potential closure. There can be no assurance that other such actions may not be required in the future, or that such actions would not have a material adverse effect on our operating results for the period in which we take those actions.

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Substantial Investigation Expenses.     We have incurred substantial expenses in connection with defense against litigation related to prior management's business practices and the defense of prior management. We incurred $15.1 million in fiscal 2004, $20.7 million in fiscal 2003, and $17.5 million in fiscal 2002. We expect to incur approximately $5.0 million in fiscal 2005, and expect to continue to incur significant legal and other expenses until the resolution of the U.S. Attorney's case against certain of our former executive officers and the investigation of certain other matters.

Stock-Based Compensation Expense.    We recorded stock-based compensation expense (benefit) of $29.8 million, $4.8 million and $(15.9) million in fiscal 2004, 2003, and 2002, respectively. The expense recorded in fiscal 2004 resulted primarily from the application of the fair value method of accounting for stock-based compensation expense, which we adopted as of the beginning of fiscal 2004. The expense (benefit) recorded in fiscal 2003 and 2002 resulted primarily from the impact of applying variable plan accounting to several of our stock-based compensation plans and the vesting of restricted stock grants.

Dilutive Equity Issuances.    At February 28, 2004, 516.5 million shares of common stock were outstanding and an additional 176.4 million shares of common stock were issuable related to outstanding stock options, convertible notes and preferred stock.

Our 176.4 million shares of potentially issuable common stock consist of the following:

(Shares in thousands)

Strike price				Outstanding Stock Options (a)				Convertible Notes (b)				Preferred Stock				Total
				(Shares in thousands)
$5.50 and under					52,986				—				75,964				128,950
$5.51 to $7.50					2,307				38,462				—				40,769
$7.51 and over					6,702				—				—				6,702
Total issuable shares					61,995				38,462				75,964				176,421

(a)	The exercise of these options would provide cash of $292.6 million

(b)	The conversion of these notes to equity would reduce the principal amount of debt by $250.0 million

Working Capital.    We generally finance our inventory and capital expenditure requirements with internally generated funds and borrowings under our senior credit facility. We expect to use cash from operations and, when necessary borrowings under our revolving credit facility to finance inventories and to support our continued growth. The majority of our front-end sales are in cash. Third-party payors, which typically settle in fewer than 30 days, accounted for 93.3% of our pharmacy sales and 59.3% of our revenues in fiscal 2004.

Industry Trends    We believe pharmacy sales in the United States will increase at least 30% over the next three years based on studies provided by pharmacy benefit management companies and the Congressional Budget Office. This rate of increase is lower than it has been in the past five years. The anticipated increase of 30% over the next three years is expected to be driven by the "baby boom" generation entering their fifties, the increasing life expectancy of the American population, the introduction of several new drugs, the rate of inflation and expanded consumer access to drug benefits under the recent Medicare program modifications.

The retail drugstore industry is highly competitive and has been experiencing consolidation. We believe that continued consolidation of the drugstore industry, continued new store openings, increased mandatory mail order and drug importation will further increase competitive pressures in the industry. In addition, sales of potential generic pharmaceuticals continue to grow as a percentage of total prescription drug sales, which has a dampening effect on sales growth. The growth rate of prescription drug sales has also been impacted by slower introductions of successful new prescription drugs.

The retail drugstore industry relies significantly on third party payors at an increasing rate. Third party payors, especially state sponsored Medicaid agencies, have recently evaluated and reduced certain reimbursement levels. Also, modifications to the Medicare program are being implemented that will provide discount cards to senior citizens in the near term and will expand coverage of

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prescription drugs. If third-party payors, including state sponsored Medicaid agencies, reduce their reimbursement levels, or if Medicare covers prescription drugs at lower reimbursement levels, sales and margins in the industry could be reduced, and the profitability of the industry could be adversely effected.

Results of Operations

Revenue and Other Operating Data

				Year Ended
				February 28, 2004 (52 Weeks)				March 1, 2003 (52 Weeks)				March 2, 2002 (52 Weeks)
				(Dollars in thousands)
Revenues				$	16,600,449			$	15,791,278			$	15,166,170
Revenue growth					5.1	%			4.1	%			4.5	%
Same store sales growth					5.7	%			6.7	%			8.3	%
Pharmacy sales growth					5.8	%			7.1	%			9.6	%
Same store pharmacy sales growth					6.4	%			9.7	%			11.4	%
Pharmacy sales as a % of total sales					63.6	%			63.2	%			61.4	%
Third-party sales as a % of total pharmacy sales					93.3	%			92.7	%			92.0	%
Front-end sales growth (decline)					3.9	%			(0.5	)%			1.9	%
Same store front-end sales growth					4.6	%			1.9	%			3.6	%
Front-end sales as a % of total sales					36.4	%			36.8	%			38.6	%
Store data:
Total stores (beginning of period)					3,404				3,497				3,648
New stores					2				3				7
Closed stores					(26	)			(97	)			(168	)
Store acquisitions, net					2				1				10
Total stores (end of period)					3,382				3,404				3,497
Remodeled stores					170				138				64
Relocated stores					7				12				22

Revenues

The 5.1% growth in revenues for fiscal 2004 was driven by pharmacy sales growth of 5.8%, and front-end sales growth of 3.9%. Sales growth in both pharmacy and front end was driven by same store sales, which are discussed in more detail in the paragraphs below. We include in same store sales all stores that have been open in each comparable fiscal year. Stores in liquidation are considered closed. Relocated stores are not considered new stores in our calculation.

Fiscal 2004 pharmacy same store sales increased by 6.4%, due primarily to increases in price per prescriptions and, to a lesser extent, increases in the number of prescriptions filled. The increase in price per prescription was driven by inflation, partially offset by an increase in generic sales mix. The increase in the number of prescriptions filled was aided by prescription file purchases, a more severe flu season, and favorable industry trends. Favorable industry trends include an aging population, the use of pharmaceuticals to treat a growing number of healthcare problems, and the introduction of a number of successful prescription drugs. Partially offsetting increases in the number of prescriptions filled was an increase in third-party payors requiring customers to use mail order for certain prescriptions and a reduction in hormone replacement therapy and non-sedating antihistamine prescriptions.

Fiscal 2004 front-end same store sales increased 4.6%, primarily as a result of improvement in most core categories, such as over-the-counter items, consumables and vitamins and improved assortments. Also contributing to front-end same store sales increases was the switch of certain prescriptions to over-the-counter products.

Pharmacy and front-end same store sales increases in fiscal 2004 benefited from increased business in our Southern California stores, driven by the migration of customers impacted by a union strike at several grocery store chains. The union strike ended the beginning of March 2004. Early indications are we will be successful in retaining a significant amount of these customers in both the pharmacy and front-end parts of our business.

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The 4.1% growth in revenues for fiscal 2003 was driven by pharmacy sales growth of 7.1%, offset slightly by a front-end sales decline of 0.5%. The decline in front-end sales was a direct result of closing 97 stores in fiscal 2003, partially offset by same store sales growth of 1.9%.

Fiscal 2003 pharmacy same store sales increased by 9.7%, due to increases in both the number of prescriptions filled and sales price per prescription. Factors contributing to our pharmacy same store sales increases include inflation, improved attraction and retention of managed care customers, our increased focus on pharmacy initiatives, such as predictive refill, and favorable industry trends. These favorable factors were partially offset by the increase in generic sales mix, a reduction in hormone replacement therapy prescriptions and the impact of a less severe flu season than in the prior year.

Fiscal 2003 front-end same store sales increased 1.9%, primarily as a result of improvement in most core categories, such as over-the-counter items, consumables and vitamins, and improved assortments.

Fiscal 2002 (52 weeks) revenues increased 4.5% over fiscal 2001 (53 weeks). Excluding the extra week, revenues would have increased 6.5%, driven by increases of 1.9% in front-end and 9.6% in pharmacy. Same store sales growth for fiscal 2002 was 8.3% (pharmacy of 11.4% and front-end of 3.6%). As fiscal 2001 was a 53 week year, same store sales are calculated by comparing the 52 week period ended March 2, 2002 with the 52 week period ended March 3, 2001.

Fiscal 2002 pharmacy sales led sales growth due to an increase in both the number of prescriptions filled (on a comparable 52-week basis) and sales price per prescription. Factors contributing to our pharmacy same store sales increases include inflation, improved attraction and retention of managed care customers, our reduced cash pricing, our increased focus on pharmacy initiatives, such as predictive refill, and favorable industry trends.

Front-end fiscal 2002 sales also increased. The increase was primarily a result of increased sales volume due to improved assortments, lower prices on key items and distributing a nationwide weekly advertising circular.

Costs and Expenses

				Year Ended
				February 28, 2004 (52 Weeks)				March 1, 2003 (52 Weeks)				March 2, 2002 (52 Weeks)
				(Dollars in thousands)
Costs of goods sold, including occupancy costs				$	12,568,405			$	12,035,537			$	11,697,912
Gross profit				$	4,032,044			$	3,755,741			$	3,468,258
Gross margin					24.3	%			23.8	%			22.9	%
Selling, general and administrative expenses				$	3,594,405			$	3,471,573			$	3,422,383
Selling, general and administrative expenses as a percentage of revenues					21.7	%			22.0	%			22.6	%
Stock-based compensation expense (benefit)