John Heinbockel - Goldman Sachs Ed Kelly - Credit Suisse Karen Miller - Bear Stearns Mark Husson - HSBC Meredith Adler - Lehman Brothers Derrick Wenger - Jefferies & Co. Mark Wiltamuth - Morgan Stanley Carla Casella – JP Morgan Steve Chick – JP Morgan Mary Austin - Pax World Funds Andrew Berg - Post Advisory Group

Good morning. My name is Lisa, and I will be your conference operator today. At this time I would like to welcome everyone to Rite Aid's first quarter conference call. (Operator Instructions) At this time I would like to turn the call over to Mr. Kevin Twomey, Chief Financial Officer. Please go ahead, sir.

Thank you, Lisa and good morning, everyone. We welcome you to our first quarter conference call. Mary Sammons, our President and CEO; and Jim Mastrian, our Chief Operating Officer are also on the call with me. Our agenda for today's call will be as follows: Mary will give an overview of our first quarter; I will review the first quarter financial results and confirm specific guidance for fiscal 2007; and then we will take questions. Before we start, I would like to remind you that today's conference call includes certain forward-looking statements. These forward-looking statements are made in the context of certain risks and uncertainties that could cause actual results to differ. Also, we will be using a non-GAAP financial measure. The risks, uncertainties and definition of the non-GAAP financial measure, along with the reconciliation to the GAAP measure, are described in more detail in our SEC filings. With that in mind, let's get started.

Thanks, Kevin. Good morning, everyone and thank you for joining us today to discuss the results of our first quarter of fiscal 2007. As you saw from the press release this morning, our positive pharmacy trends continued with a substantial increase in pharmacy same-store sales. Prescription count also continued to rise. We delivered a profitable quarter but adjusted EBITDA declined over last year, primarily because of higher occupancy costs related to our new store development program. On our last conference call, we told you that we expected increased occupancy costs from the new and relocated stores we have opened in the last five quarters to negatively impact SG&A, until those stores generate enough sales to cover their expenses; and that we had planned for that negative impact in our full-year guidance. Growing our store base is critical to our long-term success. As the new stores gain momentum, they will be significant contributors to revenue and same-store sales growth. Total same-store sales for the first quarter increased by 3.6% with pharmacy same-store sales up by 4.4% and positive prescription count growing at a faster rate than fourth quarter. Both pharmacy same-store sales and prescription count increased in all divisions of the Company. Medicare Part D contributed to the increase with Medicare accounting for 11% of all prescriptions dispensed in the quarter. Our ‘Living More’ senior loyalty program continues to give us a leg up in attracting seniors, as evidenced by enrolment in the program climbing over 2 million during the quarter. Our ongoing tactical marketing plans for priority markets, and health condition marketing programs supporting our health and wellness commitment, also contributed to the increase. Our intensified focus on pharmacy with the new operational organization structure we put in place last fiscal year and our aggressive strategy on prescription filed bys were also key factors. Pharmacy gross margin rate was down for the quarter because of the lower reimbursement rate from Medicare Part D. We continue to expect the increase in volume generated from the new benefit to offset the lower rates long term. New generic prescriptions dampened pharmacy comps by 170 basis points, as we continue to lead the industry in generic dispensing. 60% of the prescriptions we dispensed this quarter were generic, compared to 57% in the first quarter of last year. Our goal is to achieve 66% within the next 12 months. We are ready to take advantage of the coming generic wave with: a marketing plan in place to inform patients, physicians and managed care payers about new generics as they become available; enhancements to our Next Gen dispensing system to alert and remind pharmacists; and a system to monitor generic dispense rates by store. We expect these new generics will help offset some of the margin pressure from Medicare and Medicaid. Let me add here a comment about yesterday's news about the deal Merck has made with United Healthcare, discounting the price of Zocor just as a generic version comes to market. This is a one-time, short-term pricing strategy during the 180-day exclusivity period. Such moves have happened before, and we have included these possibilities in our fiscal 2007 guidance. Our focus will continue to be on controlling health care costs by dispensing generics whenever possible, because there is no better long-term value to the patient and the payer than generic drugs. As part of our initiatives to attract new pharmacy customers and reinforce our health and wellness commitment, we held a very successful health and beauty expo in Seattle during the quarter. Thousands of people lined up for free health screening during the two-day event. Our in-store health clinics and stores in the Portland, Oregon area continue to bring new patients to Rite Aid. We are in the final stages of reaching agreements with similar service providers to expand this treatment option for common family illnesses into other markets, as well as close to announcing other health-related services that further extend our health platform. We also hosted the deans of the leading pharmacy schools at our Deans Education Conference, reinforcing the already strong relationships that give us an advantage with recruiting pharmacy talent. On the front end, same-store sales continued to increase with a 2.1% gain for the quarter. Core drugstore was solid, with OTC particularly, strong as our efforts in growing home health care to target the aging population; and our health condition marketing program on allergies, paid off. Our stores are now focused on skincare, and we're getting great response. These health condition marketing programs reinforce the expertise of our pharmacists as health care providers and provide an opportunity to market related products. Health and beauty and vitamins were positive, with GNC comps particularly strong. Our GNC stores within a store continue to perform significantly better than the overall vitamin category, and we plan to add GNC stores to 115 more of our stores this year, bringing our commitment to this differentiating department to over one-third of our stores. We saw our strongest private brand sales to date in May, contributing to private brand penetration of 12.4% for the quarter. Increasing private brand penetration is one of our targeted front-end initiatives for the year, and we plan to add more than 275 new SKUs to our assortments, as well as increase our marketing and in-store support. Seasonal sales were softer than expected, primarily due to cold, wet spring weather on the West Coast where our bigger stores carry a large amount of summer seasonal, including significant lawn and garden and outdoor living. This shift in our mix, with lower contribution from high margin seasonal, also had some negative impact on front-end margins. Summer has finally come to the West, and we are already seeing seasonal sales take off. Our digital photo services continue to attract new customers, but one-hour photo remains a challenge. Store execution improved during the quarter, as Jim Mastrian and his team focused on strengthening operational execution, which is also one of our critical priorities. Our stores did a great job keeping labor in line with sales while focusing on the right levels to improve customer satisfaction. Our customers rated us higher this quarter on key measures that drive drugstore choice, including wait time. Customer complaints continue to decline. Jim has started ‘A Day in the Life of a Store Program’ for our corporate managers and executives so they can thoroughly understand how the decisions they make at headquarters impact store operations. This experience will also show them how they can better help the stores serve our customers. As for our new store growth program, we are on target to deliver the 125 stores planned this year, even though we had minimal openings this quarter. Like last year, most of our new and relocated stores are expected to open in the back half of the year. We remain committed to our goal of opening 800 to 1,000 new and relocated stores by 2010, and we are just as committed to our aggressive prescription filed by program and evaluating acquisition opportunities as they arise that would help us dense up our key strategic markets more quickly. You can see from this morning's press release that we have raised our fiscal 2007 sales guidance and are confirming net income, adjusted EBITDA and CapEx guidance. We raised our sales guidance to reflect current and expected sales trends, but have kept the remainder of the guidance the same because of the wide range we have given. We are pleased with these positive trends in sales and the progress we are making on our strategic initiatives. Our new and relocated store program is on track, and our new operations organizational structure is starting to produce results. Our critical priority teams are focused on implementing initiatives around our six priorities for the year: We are getting a significant number of new customers for Medicare Part D, and our ‘Living More’ senior loyalty programs is attracting shoppers to our stores. Our health and wellness programs and services are helping boost sales, and with a 60% generic dispense rates, we have the expertise and the plan to make the most of the new generics coming to market. We remain optimistic about the business of retail pharmacy and that we have the right strategies in place for long-term growth. I will now turn it back to Kevin.

Thanks, Mary. If you will allow me, I will talk you through the operating statement. So let's start with revenue. Revenues from this quarter were $4.34 billion compared to $4.22 billion last year. That was an increase of $116 million. The revenue increase was primarily due to the 3.6% increase in same-store sales, partially offset by a lower number of stores. Pharmacy same-store sales increased 4.4%, as Mary had mentioned, and front end same-store sales increased 2.1%. The sales growth we described in our previous quarter conference call not only continues but is gaining momentum. Our prescription count growth for same-store sales continues to be positive for the quarter and is gaining momentum. Our initiatives for improving customer satisfaction, especially in the pharmacy, along with the programs Mary mentioned and prescription filed by continue to gain traction. Our new and relocated store program is going well. However, the 85 new or acquired and relocated stores that have opened since the beginning of fiscal 2006 were not significant contributors to revenue for this quarter, at least for now. Only six of those 85 stores were included in our same-store sales results. As time passes, the new, acquired and relocated store program will be a significant contributor to revenue growth and same-store sales growth. Gross profits were $1.184 billion, or 27.3% of revenues for this quarter versus $1.179 billion, or 27.94% of revenues for last year. The current quarter included a non-cash LIFO charge of $8.9 million versus $7.6 million in last year's quarter. The LIFO charge increase was due primarily to the effect of higher estimated product inflation. Excluding LIFO, this quarter's gross margin rate was 27.51% of revenues, compared to 28.12% of revenues last year or a decrease of 61 basis points. The 61 basis point decrease in FIFO gross margin rate consisted primarily of two pieces. One component was a 16 basis point decrease in contribution from pharmacy gross profit. The lower reimbursement rates for Medicare Part D prescriptions that Mary mentioned were only partially offset by an increase in volume and generic prescriptions, and reduced pharmacy shrink. Remember, the largest positive impact of new generics is expected in the second half of our fiscal year. The other component in gross margin rate decrease was a 47 basis point decrease in front end gross profit contribution. Although front end sales were higher than last year, the gross margin rate for front end was lower, due primarily to the shift in mix that Mary described and reduced gross profit contribution from the photo category. To a lesser degree, front end gross profit contribution was negatively impacted by higher product handling expenses such as freight that we were not able to pass on in the form of increased retail prices; and, slightly higher shrink. Selling, general and administrative expenses for the quarter increased as a percent of revenues by 25 basis points compared to the prior year. The increase was due primarily to a 22 basis point increase in occupancy expense coming from the new and relocated store program, and a 14 basis point impact from the absence in this quarter of any favorable litigation settlement income. Last year's first quarter included a $5.9 million of favorable litigation settlement income. So the 22 negative basis points for occupancy plus the 14 basis points due to the absence of settlement means all else being equal, our SG&A rate would have increased by 36 basis points. Instead, it was only 25 basis points up. That difference comes from good expense control. Store closing impairment charges were $2.9 million lower than last year's charge. The decrease was due primarily to a decrease in the discount rate used for present valuing the remaining lease liabilities. An increase in the discount rate, remember, reduces the required reserve. Interest expense was $69.3 million for the quarter versus $70.9 million in last year's quarter. The decrease was due to lower borrowings, the benefit of which was partially offset by higher interest rates. Cash interest expense was $64 million for the quarter versus $65.9 million last year; and non-cash interest expense was $5.3 million this year, versus $5 million last year. Loss on asset sales was $0.8 million in the current quarter, but was a gain of $0.5 million in last year's quarter. Regarding income taxes, income tax expense was $9.2 million lower due to lower pre-tax income. The effective income tax rate between the quarters was comparable. Net income growth for the quarter was $11 million compared to net income of $33.4 million last year. The decrease in net income was primarily due to the increase in selling, general and administrative expenses growing faster than sales which we have described thus far. Net income per diluted share was a $0.01 for the current quarter, compared to $0.05 per diluted share for last year's first quarter. Each quarter's diluted per share calculation included declared preferred stock dividends. Remember, preferred stock dividends are not included in net income, but they are considered in calculating earnings per share. Adjusted EBITDA for this quarter was $180.4 million or 4.2% of revenues, a decrease of $23.2 million from the prior year. The schedule attached to our press release today reconciles our net income to our adjusted EBITDA. The decrease was primarily due to the occupancy expense increase we have described. Now let's turn to the cash-flow statement. Net cash provided by operations was $121.8 million this quarter versus $172.8 million in last year's quarter. The $51 million decrease was primarily due to the decrease in adjusted EBITDA and a decrease in accounts receivable in the current quarter due to an increase in our pharmacy business. The prior year's first quarter had a decrease in accounts receivable that was caused by a difference in timing of cash remittances at the end of fiscal 2005. Net cash used in investing activities for this quarter was $62 million versus $22.1 million for last year's quarter. The increase was primarily the result of capital expenditures being higher than last year and proceeds from sale leasebacks being about the same; all in line with our new and relocated store program. For the quarter we spent $70.5 million for property, plant and equipment and $11.6 million for prescription file purchases for a total of $82.1 million of capital expenditures in the quarter. During the quarter we opened three stores, relocated four stores, acquired two stores, closed seven and remodeled 13. Also during the quarter we completed the sale and leaseback of 10 stores for net proceeds of $28.5 million. Net cash used in financing activities for this quarter was $24.8 million versus $178.5 million for last year's quarter. The change is primarily related to the difference in required maturity payments. Liquidity for us continues to be strong. Our availability under the revolver is over $1.1 billion. At the end of the quarter, we had $510 million outstanding under the $1.75 billion senior secured revolving credit facility. We also had outstanding letters of credit of $116 million at the end of the quarter. At the end of the prior year's first quarter, we had $448 million outstanding under our senior secured credit facility, but that consisted entirely of the old term loan which we paid off by using the new revolver. The $400 million accounts receivable securitization agreements continued to be a good source of liquidity. At the end of the quarter, we had utilized the securitization agreements for $345 million. Regarding required maturities in fiscal 2007, as we said at our last conference call, we continue to have choices and intend to be opportunistic. We may use the revolver or we may access the capital markets; or do both to fund the required maturities. Which specific funding source we ultimately use will depend on the economics and market conditions during fiscal 2007 or beyond. To wrap-up then, let's discuss guidance. We are increasing our sales guidance and confirming guidance previously given for fiscal 2007 for adjusted EBITDA, net income or loss and capital expenditures. We are estimating fiscal 2007 sales to be in the range of $17.4 billion to $17.65 billion. Sales guidance is based on same-store sales estimates of 2.0% to 4.0%. We are estimating fiscal 2007 adjusted EBITDA to be in the range of $650 million to $725 million. Our guidance reflects the fact that fiscal 2007 is a 52-week year and will benefit from an increased number of new generics, the timing of which is quite dynamic. Fiscal 2007 guidance also reflects our estimate of the effect of the planned timing and number of new and relocated stores. We have included in our guidance the full-year effects of reduced reimbursement rates and increased prescriptions from the Medicare Part D drug benefit plan that was introduced in late fiscal 2006. Finally, we have included in our fiscal 2007 guidance estimates of the negative impact from the Medicaid reimbursement rate reductions. We are estimating our net operating results to be in the range of net loss of $5 million and net income of $40 million or a loss of $0.07 per diluted share to net income of $0.02 per diluted share. Attached to our press release is a table that reconciles our adjusted EBITDA guidance to our guidance for net income or loss. Capital expenditures before sale and leaseback proceeds are estimated to be in the range of $450 million to $500 million for fiscal 2007. We estimate sale and leaseback proceeds to range from $50 million to $100 million. This concludes our prepared remarks. Lisa, we are now ready to take questions.

(Operator Instructions) Our first question comes from John Heinbockel - Goldman Sachs. John Heinbockel - Goldman Sachs: If you look at your outlook for the rest of the year, even if I take the low end of your range, it implies a fairly significant improvement in trend from what we saw in the first quarter. How confident are you in that improved trend from the first quarter and where is the improvement going to come from?

Remember, John, the new generics that everybody is aware of are not kicking in really until our second half of the year; as well, we are going to be getting some traction from our previously opened new and relocated stores. The continuing sales growth is further helping to leverage the fixed cost. John Heinbockel - Goldman Sachs: It sounds like you're still fairly confident that you will see directionally a fairly nice increase in operating momentum in the back half of the year?

Yes, what we saw in the first quarter is really what we expected, so we feel good about our plans for the year.

The second quarter is going to be a tough comparison also. As you said, the back half of the year is where we start seeing that operating leverage. John Heinbockel - Goldman Sachs: Front end gross margin; was that what you thought it would be? What is your anticipation for the year? I can’t imagine we're going to see gross down 50 basis points throughout the year.

I mentioned that a big part of the front end gross margin problem really was the seasonal mix being less than it normally is for us in the first quarter. I mean the real seasonal product like the spring and summer goods, and summer goods have already bounced back with really the better change in weather. The category that will continue to be an issue until our new program is completed is really what has been going on with the photo category. As you make the move to lower-cost solutions for the customer and speedier prints, and get away from some of the higher fixed costs associated with the leased machines, I think that will still be an issue. John Heinbockel - Goldman Sachs: Was mix the bulk of the 47 basis point hit?

It was a larger part of it. John Heinbockel - Goldman Sachs: All right. Finally, are you seeing the number of available files increase dramatically, given what is happening with Part D in Medicaid?

We would expect it to continue to increase. That is really probably the biggest challenge that independent drugstores face, is what is going on with the whole Medicare program and what will be ahead with Medicaid. Our pipeline is definitely robust relative to things in process. John Heinbockel - Goldman Sachs: Is it too early to see progress with the states on dispensing fee relief other than, say, Louisiana and those one-offs?

Yes, Louisiana is really the only visible one out there. It does not mean that there is not a lot of activity going on. We are working along with our counterparts at CVS on lobbying efforts. We are also working on our own initiatives through our lobbyists and our own pharmacy services people on a state-by-state basis. It is too soon to tell what the outcome will be there.

Our next question comes from Ed Kelly - Credit Suisse. Ed Kelly - Credit Suisse: Good morning. I would like to drill down just a little bit deeper on John's gross margin question. On the pharmacy side, you're talking about 16 basis points of the decline related to pharmacy. Can you talk a little bit about how the pharmacy margin trends for the rest of the year, with generics picking up? Is it still down second quarter and then up second half?

Well, we don't talk about the pieces of gross margin, but we do talk about the trend. That is that gross margin is going to be down in the second quarter and then it is going to be better in the third and the fourth quarter. And that is driven, as you can imagine, by the new generics.

It is both the new generics themselves, as well as the goal of continuing to increase generic penetration on existing generics, too. Ed Kelly - Credit Suisse: On the front end side, I know you don't want to specifically comment on segments here, but from a trend perspective, how should we view the front end as well?

Well, we would expect to see some recovery on the front end margins, again because of the reasons I have already talked about. The photo situation will take a little longer to cycle through because you have got the equipment issues to deal with. We feel really positive about our front end business overall. We have always run a strong front end business, and even in strong businesses, you can have blips. Ed Kelly - Credit Suisse: I take it that it is pretty clear that you don't expect the gross margin to be down significantly the rest of the year?

The second quarter is going to be less, but we're not giving specifics. But like we said, the last half of the year's gross margin rate is where we are going to see the turnaround. Ed Kelly - Credit Suisse: A bigger picture question: proven pharmacy volume is obviously a big driver to the turnaround in your story here. I think the scrip volume on a per store basis at Rite Aid is at least 20% below your major competitor. Mary, I would like your take on, what are really the key initiatives in place, and how long does it take to get traction on something like that?

Well, I think we have talked at length about a number of them, but I would be glad to repeat them. Certainly the new and relocated store program is part, because your facility does have something to do with your prescription sales. So getting a new and relocated store that has a drive-through is definitely a positive. So that is really important. What we're doing with our filed by program is also important because it can help take an existing store that might be moderate in scrips or even slightly low and really increase the volume that we are able to put through. So those are things they can have an immediate impact on what you're doing. All of our initiatives around improving the customer experience in the pharmacy are critical, and those are a lot of things, it is levels of staffing; and are they really getting the benefit out of the technology that we have invested in, in the past? It is really getting the pharmacist interaction with the customer so that we really get traction off our health and wellness commitment that we have made. Then it is all those initiatives around health and wellness that we are in some cases doing pilots with, but in some cases really doing programs for all of the stores, such as what we have done around allergy and diabetes and heart health and now doing with skin and vitamins. All of those things help position us better in terms of the customer. I mentioned that one of our critical priorities too for this year is recruiting and retaining pharmacy talent. It is a critical initiative for us because we know we are still dealing with a profession where there is a shortage of pharmacists. So getting out there and really having effective recruiting programs; and then really making sure that we support our pharmacist well with highly-trained technicians and the right kind of equipment to be able to do their job become real critical keys to build that associate loyalty, which is also what gets you to customer loyalty.

Our next question comes from Karen Miller - Bear Stearns. Karen Miller - Bear Stearns: In view of the considerable debt maturities you have over the next six to seven months, can you tell us what you have available in terms of the indentures on both your secured and unsecured notes?

Well Karen, if you assumed complete utilization of the revolver and complete utilization of the accounts receivable securitization -- which combined gives us somewhere in the neighborhood of $1.2 billion more capital -- so assume they are fully drawn, then we really don't have the capacity for any more secured debt. Karen Miller - Bear Stearns: Okay. On your cash flow statement that you sold and leased back some owned stores, can you tell us approximately how many those were? How many more owned stores do you have left that did not secure sale and leaseback obligations?

The sale and leaseback proceeds are in two lines on the cash flow statement. That is just the way accounting rules dictate. I apologize for the confusion. But the two lines combined are proceeds of over $28 million. That involves 10 stores, but those are new and relocated stores, not old, previously-owned stores. The sale and leaseback activity that we will have one a go forward basis will be dealing with the new and relocated store program. Karen Miller - Bear Stearns: But at this point how many unencumbered stores do you own?

I think it is roughly 210 or so. I would have to look it up.

Right around the 200 mark. Karen Miller - Bear Stearns: You mentioned that you might look to acquisitions to fill in some of your markets. How large would your appetite be? Is it just tuck-ins here and there? Or if a region came up, would you have an appetite for a couple of hundred stores?

Well, I think we have been fairly consistent in saying that our intent is to really dense up our strategic markets. We will certainly seriously consider anything that makes sense for us from a standpoint of achieving that objective and also increasing shareholder value.

Our next question comes from Mark Husson - HSBC. Mark Husson - HSBC: I just wanted to ask a question on the pharmacy business again. We noticed a couple of the changes have all pointed to recent pop-ups in comp store sales on the pharmacy side. Part of that may be Part D. I think it is great to know exactly what Part D is here, but can you kind of disaggregate the bits here? Do you know how much of that is kind of net new? You had originally said it had not really affected your cash business. Is that still the case?

Yes, cash is still staying pretty consistent. I mean a little bit of shift in it but not much. We are definitely seeing new customers and transferred customers. Mark Husson - HSBC: So of that 11%, do you think it was 1% of that net new for you? 2%?

Well, the pharmacies growth is coming from all of the things that we're doing. So we're just not breaking it down to that level of detail. You have got the filed bys, Medicare Part D, the growth that comes from new prescriptions because of aging population and demographics. We also have, although it is not very many, but we're starting to see some of our new and relocated stores get into the same-store sales calculations.

Medicare Part D is certainly a significant piece of the increase, because we have seen strong growth in our senior customers. We do track the different age segments. Also with our senior loyalty program, the ‘Living More’ program, we are also attracting seniors that are less in age than the 65 requirement. So that is also going to help us build more customer base for future years as new seniors enroll. Mark Husson - HSBC: I think both CVS and Walgreen both admit that they probably under index on the senior population in terms of their prescription business. Is that the case with Rite Aid?

I would say in the past we did under index on seniors. But a lot of it, when you think about seniors being very cost-conscious too, and a lot of them were probably using more of the Costco kinds of stores. I think now that they can through these plans go to their neighborhood drugstore, it really positions the drugstore to be in a good spot to pick up more senior business. Mark Husson - HSBC: One other question just on the photo business now. Can you just sort of give us a rough idea of the shape that the equipment is in? You say it is leased. I guess that means you're waiting for the leases on the analog equipment to run out before you get rid of them, or are you writing them off?

I'm going to let Jim answer that question for you.

Most of our leases expire very quickly here, and we have a plan that we have developed to convert older equipment to the newer technology. So that plan will be implemented very shortly. Mark Husson - HSBC: Is that going to be another lease situation, or are you actually going to acquire a Fuji minilab or something like that?

There are different types of equipment depending upon the business at individual stores. Like, for example, in certain stores, we're going to put in the labs, and they will have a cost if we decide to buy them of about $55,000. We may lease some. We may buy them. In other stores, there is these -- I call them high-powered printers -- and there is a variety of those, and they range from anywhere from $5,000 to as high as $20,000; it depends upon the bells and whistles that you hang onto them. Again, we will look at the purchase versus lease kind of economics in deciding that. Mark Husson - HSBC: There is not a big bulge in these write-offs occurring right now?

No, no.

No, there will be no write-offs.

Our next question comes from Meredith Adler - Lehman Brothers. Meredith Adler - Lehman Brothers: Could you talk just a little bit more about where you think you'll end up in the photo category? Are you planning to have digital capability everywhere, or as you said, some stores that are doing low-volume, will they not have any photo at all? What is the plan?

We already are digitally capable in every store where we have the one hour capability. And I think it is about 2,700 stores. So there are already a small number of our stores that don't have photo equipment. But we would expect that all of these stores we're talking about will have some version of what both Jim and Kevin described. Some will be set up with labs. Some will be set up what the printer solution. We still believe it is a viable business. It is just a business that is very different from what it represented a few years ago, and people just use digital differently. Meredith Adler - Lehman Brothers: Are you seeing pressure on the pricing of printing digital pictures?

I think there has been pressure on the pricing of digital print flowing from almost the day it got started. It is probably rationalized down to a low-level right away because of what really your mass stores did with it. I don't see that abating either. Meredith Adler - Lehman Brothers: All right. Then there hasn’t been any discussion about any inflation on the branded side in the pharmacy. Another public drugstore chain has talked about that as being the driver of revenue growth for them. Can you just comment on what you're seeing right now in terms of inflation?

Well, we definitely have seen inflation higher than maybe we would have initially expected it this year. I read the same article that I think the others have talked about too. It should result in higher sales numbers, but you have got to remember too that it usually has little or no impact on margins just because of reimbursements on brands. Meredith Adler - Lehman Brothers: Okay. And then I would like to just end by talking about what you're seeing in the reimbursement environment. We are talking about what is going to happen with Medicaid reimbursement for generics in January of '07, but can you talk a little bit about the environment on the commercial or private side? Has the pressure increased at all?

I think the reimbursement pressures are definitely there with prescription medicine, but Medicare is probably what stands out the most just because of the change from what had been Medicaid reimbursement rates to the Medicare rates. That is the single biggest factor relative to reimbursement. Even with generics too -- and you've got a lot of generics in that whole Medicare mix too -- you've got the same situations on reimbursements being tougher. Meredith Adler - Lehman Brothers: My final question would be, somebody asked you about making big acquisitions. Are you actually seeing small chains -- there aren't a lot of them left -- but seeing more interest? I think the conclusion from the Happy Harry's sale was that even very well-positioned regional chains are feeling pressure. Are you seeing more of that at all?

I would expect that there will be opportunities in different sizes relative to possible acquisitions in the future. I think there is a lot of pressure on the industry from what has gone on here, and I think who will feel it first will be the independents and the smaller regionals.

Our next question comes from Derrick Wenger - Jefferies & Co. Derrick Wenger - Jefferies & Co.: Are you now in violation of any debt covenants? What are the most restrictive covenants and which of those could trigger any default?

Well, there are no restrictive covenants in this revolver. We have to draw down over $1.65 billion before the one covenant kicks in as it deals with fixed charge coverage. So, for all practical purposes, it is just the normal kind of administrative covenant things. As far as the secured indentures are concerned, there are no financial covenants also. Derrick Wenger - Jefferies & Co.: That fixed charge coverage, what is that? Does that include preferred dividends in the calculation, and what is the test that has to be met if that were the case?

I'm not sure how to answer your question. I can certainly help you understand the calculation off-line if you choose to call me later. Derrick Wenger - Jefferies & Co.: Okay. What is the actual number in terms of --

Well, it is not relevant, and so we don't even bother talking about it. Like I said, we have to have drawn down over $1.65 billion of the revolver before it becomes effective. Derrick Wenger - Jefferies & Co.: Right, and the revolver permits you to pay down debt?

That is correct.

Our next question comes from Mark Wiltamuth - Morgan Stanley. Mark Wiltamuth - Morgan Stanley: I wanted to focus a little bit more on Medicare Part D. If your cash mix has not really changed much, it seems like the margin damage on the front end of the plan probably has not been as bad. Now that volumes are rising, are we at the point now that Medicare Part D has clicked in to be a net positive for you?

Medicare Part D really, until you build significant volume increases, you are going to have enough of a margin rate hit that it is a negative impact on your margins. Now as the volume continues to build, which we believe it will, I mean you are going to have an aging population. We believe we will continue to win more seniors for our business, that that will in the future the volume will offset it. The volume dollars will be there. But we also believe in terms of margin rate it really will take more of the generics and continuing to increase the generic percent of our mix, that will be big margin drivers. Mark Wiltamuth - Morgan Stanley: Okay. And in your press release, you characterize that the EBITDA decline was more due to the new store program. But yet if you look at the basis point impact you laid out for us, the front end decline was a bigger factor. Were there some gross margin drags associated with the new stores that we are just not seeing when you call out all the numbers?

No, there really are not any margin drags associated with the new store programs. Other than when you open them, you do run grand opening kinds of programs so you would have your immediate opening kind of impact on margin. Nothing that I would say is a significant contributor. It is really the reasons that we talked about on the front end margins.

Yes, gross profit dollars are higher. In terms of the EBITDA dollars, what is driving that to go down, it is the occupancy expense. Mark Wiltamuth - Morgan Stanley: Okay. And then lastly, I just wanted to focus a little attention on this new Zocor news. I guess when we first saw the news that there was going to be an authorized generic, we all viewed this as an extended branded period for the Zocor. So maybe we would push off those positives from the generic story for Zocor towards the end of the year. But now with the news that is going with this new deal with cutting the price on Zocor, does that mean we should look at this as a net positive for margins for the drug retailers?

I'm not sure how you're getting to that conclusion. How are you believing it would be a net positive? Mark Wiltamuth - Morgan Stanley: Well, I'm just curious, it seems like it is almost like the Zocor price cut is going to make this almost competitive with the other generics out there. I'm just curious if that would translate into some margin positives for you?

I don't believe it does at all. I mean it will help the customer because they will have a lower co-pay on it. But it does not really help the drugstore.

Our next question comes from Carla Casella - JP Morgan. Carla Casella - JP Morgan: Can you talk a little bit about, in California what is your crossover with CVS? Have you seen any impact of them with the new stores they have acquired there?

Well, the crossover to CVS would be the same that it had been with Sav-On. We competed with them in a significant number of markets there. They were a good competitor. We expect CVS to be a good competitor good. We do very well in that California market. Carla Casella - JP Morgan: Can you just remind us with Sav-On, are there any particular markets where you compete more head-to-head or where you are more dominant than they are?

Well, you have markets like San Diego and Los Angeles, those kinds of markets. You've got strong Sav-On presence, and those are very strong markets for us. Carla Casella - JP Morgan: Okay. On the East Coast, I am wondering if you're seeing any impacts yet of Jean Coutu's effort in renovating Eckerd stores?

Not that I can specifically call out, no.

Our next question comes from Steve Chick - JP Morgan. Steve Chick - JP Morgan: Related to the comments about potential acquisitions, with your leverage ratio of I think it is 5X net debt to EBITDA in my math, if you did something opportunistically, would the idea be that the leverage ratio would stay the same? Or do you guys feel comfortable that you could increase that if it was value additive to shareholders?

Well, again remember we would only consider things that we believe would increase shareholder value, obviously, over the long-term, and obviously the leverage is a piece of that. So that would be part of anything we looked at. I would say that within a short period of time anything we would consider doing would keep us at a leverage ratio that is acceptable to us. It would be comparable to where we are today or better.

Steve, we have said before that the dollar of debt is not our focus as much as it is our coverage ratios, because we want to maintain or improve our profile. As you and I both know that for example, even in our current sale and leaseback program and our new and relocated store program, if the timing of the sale and leasebacks is not immediately after that, you could see a little blip in debt. So within a reasonable short period of time, we do believe we are going to get our coverage ratios; keep them the same or improve them. Steve Chick - JP Morgan: Okay, that is helpful. Kevin, I have tried to ask this before, but related to your occupancy cost as a percentage of sales, the 22 basis points is double where I think it was in the second half of '06. Like I said, I have tried this before, but can you give us a sense of what you're thinking about what that rate will look like as you go through by the end of this year, particularly as you add on the new stores?

Well, if I talked about it in the context of the SG&A expense as a percent of revenues, as I said before in our last conference call, that throughout fiscal 2007 that rate will be higher than the previous year's quarter. But the rate, if you will, the difference between the rates is going to get less and less as the year progresses. Steve Chick - JP Morgan: Okay. So 22 basis points of a drag on a good sales number, is it going to get higher than that as the year goes on? I would think it would.

For example, the 125 stores in particular are somewhere in the neighborhood of 35% of them in the third quarter and 40% of them in the fourth quarter. We are going to see that ramp kick in with very little sales. But we are also going to see the sales coming in from some of our previous activities and that sort of stuff. So again, the rate, if you will, in this year's quarters will be higher than last year's, but the difference between them will not be as pronounced.

That is all taken into account, too, in our guidance that we have provided, Steve. Steve Chick - JP Morgan: All right, okay. Are you still targeting 200 remodels for the year? Is that about right, Kevin?

No, we did not say 200. I think last year we had somewhere in the neighborhood of 125, and we said we're looking at our remodel program in a way that it does not overburden us with regard to our new and relocated store program. So consequently there is some give-and-take with regard to the remodels. We are continuing our commitment to the remodel program, but as I said, we don't want it to slow down the new and the relos.

I mentioned too that we are also adding GNC to about 115 of our stores, and as we go through and do that addition to the stores, we also do a minor remodel on those stores. Steve Chick - JP Morgan: Okay. Great. Thanks. Congrats on your sales progress.

Our next question comes from Mary Austin - Pax World Funds. Mary Austin - Pax World Funds: I was wondering if you have considered something like a kick-back program with your drugs with people that have unused drugs? I know there has been some articles regarding the environment and drugs that people throwaway affecting the environment, getting into the water and so forth?

We have not considered anything in this line at all. Mary Austin - Pax World Funds: Zocor, has there been any other branded drug companies that might be also considering lowering their prices during the exclusivity area timeframe? Do you think this might be a trend, is what I'm getting at?

Well, there are none that we know of. It does not mean that there could not be. There have been some that happened in the past, and I expect there could be more in the future. But I don't see it as being a trend.

Our final question comes from Andrew Berg - Post Advisory Group. Andrew Berg - Post Advisory Group: Just going back to the rent issue for a second, can you tell me what your rent expense was in this quarter and what it was in the May quarter last year, please?

No, we have not disclosed that, Andrew. We have said that for the year that the rent expense is going to go up approximately $20 million to $25 million over fiscal 2006. Andrew Berg - Post Advisory Group: Okay and that '06 number is what, about $570 million?

That is correct. Andrew Berg - Post Advisory Group: Maybe I missed it -- what is the breakout in terms of your sales, front end versus pharmacy, the total number that you have broken out?

I'm not sure I understand your question, Andrew. Andrew Berg - Post Advisory Group: The $4.3 billion in total revenue. What is the dollar amount front end?

Roughly 36% is front end and 64% is pharmacy. Andrew Berg - Post Advisory Group: Thank you.

We would like to thank you all for participating in our conference call.

Thank you.

This concludes today's conference. You may now disconnect.