Kevin Twomey - CFO Mary Sammons - Chairman, President & CEO Jim Mastrian – Special Advisor Rob Easley - COO Pierre Legault - CAO

Meredith Adler - Lehman Brothers Ed Kelly - Credit Suisse Lisa Gill – JP Morgan John Heinbockel - Goldman Sachs Bryan Hunt - Wachovia Carla Casella – JP Morgan Karru Martinson - Deutsche Bank Keith Howlett - Desjardins Securities Mark Husson - HSBC

I would like to welcome everyone to the Rite Aid second quarter 2007 conference call. (Operator Instructions) Mr. Twomey, you may begin your conference. Kevin Twomey: Thanks, Lajuana and good morning, everyone. We welcome you to our second quarter conference call. Mary Sammons, our Chairman, President and CEO, Jim Mastrian, Special Advisor; Rob Easley, our Chief Operating Officer; and Pierre Legault, our Chief Administrative 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 second quarter and a brief update on our Brooks Eckerd's integration. I will review the second quarter financial results, and then we'll take questions. Before we start, I want to remind everyone that the Brooks Eckerd's acquisition closed on the first Monday of the second quarter; therefore, there are 13 weeks of Brooks Eckerd's results in our second quarter. I would also 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 a non-GAAP financial measure, along with a reconciliation to the GAAP measure, are described in more detail in our SEC filings. With that in mind, let's get started. Mary Sammons: Thanks, Kevin. Good morning, everyone and thanks for joining us today. As you can see from our press release, we had a strong second quarter as we significantly increased adjusted EBITDA in dollars and as a percent of sales. We continued to grow our business, delivered higher margin rates, and our team did a good job of controlling expenses. At the same time, the integration of the Brooks Eckerd's stores got off to an excellent start. We accomplished all of the milestones we set for the first 90 days, which I'll talk about later, and the cost savings synergies we forecasted have surpassed our original projections. We now expect $200 million this year and $300 million next year. And, as expected, we reported a net loss for the quarter impacted by expenses related to the acquisition. Total revenues increased by about 54% with most of the increase coming from the addition of the acquired stores. Now, I know that all of you want to know how the Brooks Eckerd's stores are doing in the first quarter, so let’s get that out of the way before I go into details of the quarter itself. As you know, Brooks Eckerd's store sales were negative when we acquired them back in June. That trend continued through the quarter, especially in categories where we discontinued unsustainable, and sometimes below cost, promotions. The good news is we've seen the margin rate improve and expect sales to do the same as we clear out all non-go-forward inventory, get our full merchandise mix into all of the stores, convert more stores, and launch the aggressive marketing program we have planned for later this year. Now onto second quarter same-store sales which do not include Brooks Eckerd. Same-store sales increased 1.1% during the quarter. Pharmacy same-store sales increased 1.4%, with prescription count up 0.4%. Our gross profit per script also grew nicely as we reaped the benefits from product cost savings and increased generics. Medicare prescriptions continued to increase, although at a much slower rate than we saw near the start of the program last year. Open enrollment in Medicare Part D starts again November 15th and our marketing programs with some of the largest Medicare prescription plan providers, United Health Care, Arc, Aetna and Wellpoint Anthem begin next month. We expect our senior loyalty program, Living More, to once again give us a competitive advantage in attracting more seniors to our stores. With the rollout of our Living More program to Brooks and Eckerd's senior customers, we've already reached 3 million members and expect the number to grow substantially the rest of the year. Fall buys were strong again this quarter and continue to contribute to pharmacy sales increases, especially with the high retention rates we're getting. This is shaping up to be one of our strongest fall buy years ever, and we expect them to improve our script growth performance going forward. The introduction of new generics had a negative impact on sales by 509 basis points this quarter, as compared to 194 basis point increase year over year but as I mentioned, had a positive impact on profitability. Our generic dispense rate climbed to nearly 66% during the quarter at core Rite Aid stores, with a 64.3% generic dispense rate for the company overall as we save money for both payors and patients. We expect new generics will continue to have a significant impact on sales during the second half of our fiscal year, although we see new introductions slowing some before picking up again in fiscal 2009. During the quarter, we continued our strategy to partner with respective regional health systems to open in-store clinics as we announced a partnership with St. Alphonsus Regional Medical Center in Boise, Idaho to open several clinics this year. We are exploring ways to accelerate our growth in this area. As part of our focus on health and wellness, in August we launched pain management as the newest topic in our series of health condition marketing programs. Our next big focus is diabetes with our diabetes awareness program starting in October, supported by our exclusive partnership with the American Diabetes Association. This is our most developed health condition marketing program and each year we have seen substantial increases in diabetes related products as a result. We will also host 1700 flu clinics in October to help our customers lead healthier lives. Immunizations in general have been a focus for us, and nearly 800 Rite Aid pharmacists can now give shots for flu, tetanus, pneumonia, and the like, year round. Our plans are to increase that number by 50% over the next year. On the front end, sales increased 0.6% with good margin rate improvement. Core drug store performed well; OTC, personal care and especially vitamins, thanks to our GNC Live Well department which give us a unique health and wellness advantage over our drug store competitors. As we announced in August, we've just extended our contract with GNC to nearly double the 1,300 departments we have now over the next seven years, and we'll start to add them to select Brooks Eckerd's stores this year. Private brand growth was solid, keeping us on track to substantially increase penetration this year, as we step up our marketing efforts and introduce about 200 new items. Photo continued to be a negative contributor, although once again, margins improved as a result of better efficiencies in our photo department. As we look to the holiday season, we have an aggressive marketing program and a great selection of seasonal merchandise for all of our stores to help us grow profitable front end sales. We have also added marketing and operational initiatives which we believe will have an impact on improving front end sales later in the year, including stepped up promotional pricing in key markets. During the quarter, we continued to make progress on our other critical priorities too. As I said at the start of my remarks, we again did a good job of controlling expenses. We are also starting to make headway on our spend and efficiency program, intended to keep focus on managing and reducing our costs to deliver more benefit to the bottom line this year and over the longer term. We're looking at all non-retail purchasing across the organization to make sure we're getting the best prices possible, and processes like third-party claims processing, to make sure we're being as efficient as we can. We continue to improve customer satisfaction in our stores. The recent results of our annual brand tracking study show that customers were significantly more satisfied with shopping at Rite Aid this year than last. The study asked customers to compare Rite Aid with our major competitors and this year, they told us we had improved in all of the Top 10 drivers of customer satisfaction for a drug store, including filling prescriptions in a timely fashion, having them ready when promised, and associates who value their business and go out of their way to help. As for new store growth, we remain on track to open 125 new and relocated stores this year. As you know from the introductions at the start of this call, Rob Easley, our new Chief Operating Officer, is here with us today. Rob brings broad experience in store operations, pharmacy, marketing and management from his 16 years at the ATB Grocery chain. Most of you who cover retail know that ATB is one of the most successful and innovative retailers in the country. Rob's joined Rite Aid as part of a succession plan that Jim Mastrian and I have been working on for some time, adding additional talented leaders to our strong team, who can build on the significant changes we have already made to improve our operations and strengthen our company. We're looking forward to working with Rob as he brings his valuable experience and successful track record to Rite Aid and we're glad to have him on our team. Rob, along with our new Executive VP of Stores, Brian Fiala, is already actively engaged with the rest of our management team in developing plans to continue to improve our performance. Rob's coming on Board to free Jim up to work with me on corporate strategy and oversee the Brooks Eckerd integration, our number one priority now and for the upcoming year. Let's talk about the integration and significant progress we've made combining Brooks Eckerd with Rite Aid. As I said at the outset of the call, the integration plan is going remarkably well, and we've hit every milestone in the first 90 days of the plan. We've successfully converted all of the fixed Brooks and Eckerd distribution centers, which included substantial equipment installations and remodeling in some of them. Our new DCs are now stocked with 8,500 new items and are now distributing Rite Aid merchandise to our acquired stores. Nearly 50% of the former Brooks and Eckerd's stores now have permanent Rite Aid exterior signs. The remainder are expected to be installed by Thanksgiving. Rite Aid private brand is now in all of the acquired stores and about two-thirds of the new front end merchandising planograms are in process of being set right now. We expect the rest of the new front end merchandise to be in all stores by mid November. On July 22nd, we implemented a chainwide advertising circular as planned. We completed the 23 pilot stores representing various Brooks and Eckerd footprints and we're very pleased with the outcome. This program gave us the chance to field test our plan and make improvements before ramping up, and after a review of the process and feedback from our associates, we made several changes. They included adding more hands-on systems training for pharmacy teams, and communicating better to all associates in the store during the minor remodel phase. As of today, about 300 stores have gone through systems conversion, and more than 40 stores have also completed the minor remodel. These minor remodels look great, and customers and associates have commented on how much better the stores look and feel. Sales in the stores that finished the full conversion to Rite Aid are moving in the right direction, even before they receive the benefit of additional planned marketing support. As we said before, there are about 150 pairs of stores that will be involved in pour-overs, closing the Brooks or Eckerd's stores and moving the prescription files to a nearby Rite Aid; or reverse pours, closing a Rite Aid store, and moving prescription files to a nearby Brooks or Eckerd's. About 50% of the pairs are pour-overs, and we expect them to be completed by the end of this fiscal year. We've completed about 25 pours already through September. The majority of the reverse pours are scheduled for fiscal 09. We've only completed a few of these and they've also gone well. Remember, before we can do a pour or reverse pour, we have to make sure that the pharmacy is able to handle the increased prescriptions and customers. They generally require a more complicated remodel, so they take a little longer to do than a typical minor remodel. All corporate and back office applications have been consolidated and updated to handle the combined network of stores. Our 44,000 new associates were converted to the payroll system in the first month, and have now been rolled over to Rite Aid benefit plans. Our property management system has been consolidated, and we continued the winddown of the former Brooks Eckerd's corporate headquarters, releasing about 50% of the associates there to date. As you can see, we've made a lot of progress in a very short time, and we remain on track to substantially complete the integration in our 16 month timeframe. My compliments and thanks go to all of our associates involved in the integration, including those at the former Brooks and Eckerd's stores. They've been terrific in digesting, implementing and supporting all of the changes I just mentioned, and enthusiastic about building a bigger and better Rite Aid. I'll now turn it over to Kevin. Kevin Twomey: Thanks, Mary. Let's talk through the operating statement which was attached to the press release. Revenues for this quarter were $6.60 billion compared to $4.29 billion last year. That was an increase of $2.3 billion, or a 53.9% increase. As Mary said, the increase was driven primarily by the Brooks Eckerd's acquisition. There was also a positive contribution from the 1.1% increase in same-store sales of core Rite Aid stores. The acquired Brooks Eckerd's stores are not included in the same-store calculations, but will be included one year from the acquisition date. We did close or sell 56 stores during the quarter. The breakdown of that count is as follows: 23 were related to the Federal Trade Commission required disposition; 20 were Brooks Eckerd's store closings, where the business was poured into the nearby Rite Aid; four were Rite Aid store closings where the business was poured into the nearby Brooks Eckerd's; and the remaining nine were normal Rite Aid store closings. Pharmacy same-store sales, which excludes the Brooks Eckerd's stores, increased 1.4%, which was driven primarily by a 0.4% increase in prescriptions. As Mary said, new generics had had a negative 509 basis point impact on pharmacy same-store sales during the quarter. The Brooks Eckerd's store pharmacy sales trend was negative during the quarter. They were negative when we closed on the acquisition. Our mix of generic prescriptions continued to increase. During the second quarter, all generic prescriptions were 64.3% of total prescriptions which was over 330 basis points higher than last year's second quarter. We expect this increasing trend to continue. Our mix of Medicare Part D prescriptions also continued to increase during the second quarter. Medicare Part D sales represented approximately 16.5% of pharmacy sales. Medicaid sales represent approximately 9.5% of pharmacy sales. We saw some weakness in the allergy season, and continued to anniversary the inception of the Medicare Part D program. Our growth initiatives, such as our focus on customer satisfaction, prescription file buys, marketing to Medicare patients, our senior loyalty program, and the new and relocated store program continued to produce results. We expect prescriptions to continue to grow. Front end same-store sales increased 0.6%. We had positive contribution from almost all of our core categories. The photo category continued to be a negative contributor. We also experienced weakness in a couple of categories. We made the decision to protect gross profit and sacrifice the sales when the vendor support promotion program was not available. Our sales mix consisted of less promotion sales in this year's second quarter when compared to last year’s second quarter. The Brooks Eckerd's stores' front end sales trend was negative during the quarter like pharmacy. They were negative when we closed on the acquisition. We continue to believe completing the Brooks Eckerd's integration, our initiatives for improving customer satisfaction, and our new and relocated store program, along with our consistent promotion program with a focus on health conditions, senior citizens and core categories will grow our front end sales. As Mary said, we also continue to sharpen some key promotion pricing in response to the competitive actions out there. Gross profit was $1.8 billion, or 27.22% of revenues for this quarter, versus $1.15 billion, or 26.84% of revenues for last year. The gross profit dollars increased due to the sales increase and an improvement in our gross margin rate. The current quarter included a non-cash LIFO charge of $16 million versus $8.9 million in last year's quarter. The LIFO charge increase is due primarily to the effect of higher inventory related to the acquisition and product inflation. Excluding LIFO, this quarter's FIFO gross margin rate was 27.46% of revenues compared to 27.05% of revenues last year, an increase of 41 basis points. The 41 basis points increase in consolidated FIFO gross margin was due to an increase in the gross margin rate for both front end and pharmacy. The front end gross margin rate was 178 basis points better. The improvement was due primarily to four factors: (1) strong vendor support from our promotion program; (2) our ability to change retail prices to pass through cost increases; (3) a reduction in the mix of promotion sales; and (4) better contribution from photo. Pharmacy gross margin rate was 15 basis points better. The improvement was the net result of several positive factors partially offset by several negative factors. The positive factors were two. First, the increase in the generic sales mix. The increase came from not only new generics but also dispensing more of the older generics. Second, the generic purchasing synergies that lowered the cost of product. The negative factors were first, our Medicare Part D business as a larger part of pharmacy sales. I say negative in the sense of gross margin rate, not in the sense of sales. It was approximately 16.5% of pharmacy sales for the current quarter compared to 13.3% last year. As you all know, the reimbursement rate on Medicare Part D are lower than the average third party. Second, we continued to experience overall reimbursement rate pressures. Nothing new in this business. Third, three significant generics: Clopidogrel, Albuterol and Oxycodone went away. The last factor I want to mention is we did not experience as much of a benefit in the pharmacy shrink this year as we had the previous year. The prior year, we had made tremendous progress because of various initiatives, and this year's progress is at a more normal level. We expect gross pharmacy gross profit to continue to grow. Selling, general and administrative expenses for the quarter increased as a percent of revenues by 130 basis points compared to the prior year. 82 basis points of the increase was due to the $52.1 million of acquisition-related expenses in the current quarter whereas the prior year's quarter had none. This year's quarter also had had a 37 basis point increase in occupancy expense because of the new and relocated store openings, and a 45 basis point increase in depreciation and amortization due to the acquisition-related intangible amortization, the prescription file purchases, and the new and relocated store program. After considering the expenses related to the acquisition and the new and relocated store program, SG&A as a percent of revenue between the quarters actually decreased 34 basis points. The 34 basis points of improvement came from general and broad-based expense control. We are confident in being able to continue our broad-based expense control efforts, but we also intend to continue to develop our new and relocated store program. This means occupancy expense will continue to grow. Until the sales growth from the new and relocated stores has a chance to mature, occupancy expense as a percent of revenues will be greater than the previous years comparable period for a few more years. Moving down the operating statement, store closing impairment charges were $10.1 million higher than last year's charge. This was due primarily to a few more stores sold or closed, and a decrease in the discount rate used for the lease exit liability on some of our previously closed store liabilities. Interest expense was $123.3 million for the quarter versus $68.2 million in last year's quarter. The increase was primarily due to the increase in debt that funded the acquisition and to a much smaller extent, an increase in LIBOR. Cash interest expense was $116.7 million for the quarter, versus $62.9 million last year, and non-cash interest expense was $6.6 million this year versus $5.3 million last year. Acquisition-related financing commitment charge of $12.9 million was that portion of the acquisition-related financing cost that Generally Accepted Accounting Principles required us to expense. The remaining acquisition-related financing expense was deferred and will be amortized over the term of the related debt. Regarding income taxes, it was a benefit for the current quarter. The current quarter benefit was $39.3 million, compared to last year's second quarter income tax benefit of $3.2 million. Each quarter's tax benefit was in relation to the pre-tax loss and some adjustments each quarter were for developments that required discrete income tax adjustment. Net loss for the quarter was $69.6 million compared to a net loss of $0.3 million last year. The increase in the loss was a result of the items that I've just described. Loss per diluted share was $0.10 per share for the current quarter compared to $0.02 per diluted share for last year's second quarter. Each quarter's diluted per share calculation included declared preferred stock dividends. You remember that preferred stock dividends are not included in the net loss but they are considered in calculating per share amounts. Also remember the weighted average shares in the calculation for the current quarter included the 250 million shares we issued for the Brooks Eckerd's acquisition. Adjusted EBITDA for this quarter was $261.5 million or 4.0 % of revenues, an increase of $106.7 million for the prior year. The increase was primarily due to the increase in revenue and the resulting increase in gross profit and gross margin rate, along with good expense control. The schedule attached to our press release reconciles our net loss to our adjusted EBITDA. Now let's turn to the cash flow statement which is also attached to the press release. Net cash used by operations was $139.6 million this quarter versus cash provided by operations of $16.1 million in last year's second quarter. The use of cash for the current second quarter was primarily due to integration expense and the increase in inventory net of the increase in accounts payable, both of which exceeded adjusted EBITDA net of cash interest expense. The inventory began its normal build for the holidays, but we also significantly increased inventory as we worked through the Brooks Eckerd's store assortment change. Net cash used in investing activities for this quarter was $1.278 billion versus $56.3 million for last year's second quarter. The increase was primarily due to the acquisition and the higher level of capital expenditures. Our new and relocated store and prescription filed by programs are ramping up. For the quarter, we spent $162.2 million for property, plant and equipment and $15.9 million for prescription file buys for a total of $178.1 million of capital expenditures for the quarter. During the quarter, we acquired the 1,858 Brooks Eckerd's stores, opened 11 stores, relocated eight stores, acquired one other store, and closed or sold 56 stores. We also remodeled 18 stores during the quarter in core Rite Aid. Net cash provided in financing activities for this quarter was $1.476 billion versus $25.7 million for last year's second quarter. The current quarter's cash provided in financing activity was primarily due to the acquisition. Regarding liquidity, it continues to be strong. Our availability under the revolver is over $950 million. At the end of the quarter, we had $603 million outstanding under our $1.75 billion senior secured revolving credit facility. We also had outstanding letters of credit of $187.8 million at the end of the quarter. The accounts receivable securitization agreements were amended shortly after the second quarter. The agreements were increased to $650 million from $400 million to take advantage of the lower cost. We have in place a back stock credit facility for the securitization program that expires in 2010. The accounts receivable securitization agreement continued to be a good source of liquidity. At the end of the current second quarter, we had utilized the securitization agreements for $290 million. Total debt at the end of the second quarter increased $2.604 billion since the beginning of the fiscal year and advances from the sale of accounts receivable decreased by $60 million. The combined balance at the end of the second quarter increased $2.54 billion since the beginning of the fiscal year. The increase was due to the Brooks Eckerd's acquisition and the total debt balance at the end of the quarter is where we expected it to be. Throughout fiscal 2008, we will have on average approximately $1 billion available for additional borrowings under our revolver. Further, required maturities in total for the next three years are less than $155 million. Finally, let's discuss guidance. We are confirming our guidance previously given for fiscal 2008 adjusted EBITDA which we expect to be between $1.0 billion to $1.125 billion. We are also confirming our guidance for fiscal 2008 capital expenditures and integration expense. We expect capital expenditures to be between $825 million and $875 million before sale and lease back proceeds and integration expense to be approximately $145 million. We are increasing our guidance for cost savings related to the acquisition. We expect to realize approximately $200 million of cost savings in fiscal 2008 and approximately $300 million in fiscal 2009. The increase in cost savings is primarily from lower cost of product and better vendor support, combining stores in close proximity to one another, and fewer stores required to be divested by the Federal Trade Commission in several states than when we expected. Based on current sales trends and the timing of our planned initiatives, fiscal 2008 sales are expected to be in the range of $24.5 billion to $25.1 billion. Same-store sales guidance, which does not include the acquired stores, is expected to be between 1.3% to 3.3%. Previous sales guidance was $25.3 billion to $26.0 billion, and previous same-store sales guidance was 3.8% to 5.8%. We're estimating our operating results for fiscal 2008 to be a net loss between $78 million to $161 million, or a loss per diluted share between $0.15 to $0.27. Previously, we had guided to a net loss of $47 million to $129 million or a loss between $0.11 to $0.23 per diluted share. The net loss estimates increased primarily due to an increase in estimated amortization expense and an increase in expected interest expense. The increase in amortization expense is due to an increase from our original estimate in the amount of acquired amortizable intangible assets. The increase in interest expense is based on the recent increase in LIBOR, which affects the interest expense for borrowings under the revolver and the term loan. Attached to our press release is a table that reconciles our adjusted EBITDA guidance to our guidance for net loss. We're also updating our accretion per diluted share estimates for fiscal 2009. Accretion related to the Brooks Eckerd's acquisition in fiscal 2009 is expected to be between $0.12 to $0.14 per diluted share, which was previously $0.18 to $0.20 per diluted share. The difference is the result of a delay in the timing for closing some of the stores in close proximity to one another, partially offset by the increase in the cost savings. This concludes our prepared remarks. Lajuana, we are now ready to take questions.

Your first question comes from Meredith Adler - Lehman Brothers. Meredith Adler - Lehman Brothers: I'd like to start by asking a question about synergies. I know that there had always been some items you were talking about but hadn't quantified. In the updated guidance that you've given us, are there some items that you haven't quantified previously that you're now including, and can you talk about whether you've actually done better in the areas that you had previously quantified? Mary Sammons: Meredith, probably the one most notable one that we hadn't quantified before was some impact from the pours and reverse pours, so some of that is in those numbers and then we've also done better on the cost savings on purchasing. Kevin Twomey: So what's still not in the revised increased synergies estimate, Meredith, is the front end purchasing scale for your second and third tier vendors. Also the, if you will, increasing the front end store productivity for the Brooks Eckerd's stores and then the distribution center rationalization, those still are not in there and that's because we still don't know the amount or the timing. Meredith Adler - Lehman Brothers: If you could just talk about guidance for this year and your comments about next year accretion, your amortization, your interest expense went up, your synergies also went up. Did those work out to be more or less a wash? Or are there other things for this year that are a negative? Kevin Twomey: Meredith, this increased savings all else being equal increases the accretion, but because of the delay in the closing of the Rite Aid stores that will pour into the Brooks Eckerd’s stores, for those stores, I have to take a charge to the P & L. That means that we originally thought that the that charge was going to be in fiscal 2008. It's now for the most part going to be in fiscal 2009, so that diluted some of the increase in our synergies and that's why the accretion number has come down. If you roll it out to 2010, then all of that is behind you and the synergies are going forward. Meredith Adler - Lehman Brothers: What about for this year? The interest expense and amortization versus the higher synergies? Are they just an equal wash? Kevin Twomey: Well, we've given you the guidance for the net loss but you could tell EBITDA has not changed, so to the extent that we have increased interest expense and we've increased the interest expense, it's a net reduction in the increase in the loss. I'm not quite sure how to answer your question. Meredith Adler - Lehman Brothers: Well, I think you did. Okay, thank you.

Your next question comes from Ed Kelly - Credit Suisse. Ed Kelly - Credit Suisse: Looks to me like a good quarter. Mary Sammons: It was a good quarter. Ed Kelly - Credit Suisse: Kevin, my first question for you is on the pharmacy gross margin because it's been a point of contention for some shareholders. You were down in Q1 but there were some buying issues. You were up this quarter and I think if I heard you right you said you think you'll be now up for the year which is kind of new. Can you just talk about why that's your thought process now?

Ed, the main reason is our gross profit per script is very strong and it's very much related to the improvement in our generics. I mentioned that we were about 66% and we intend that to keep going higher. The Brooks Eckerd's stores are coming on real strong on the generic percentage of mix too; and then you look at the cost savings on the generics because of the process we went through when we combined the companies, that's actually translating into a higher gross profit rate. Ed Kelly - Credit Suisse: That's good news. Mary, I was wondering if you could discuss your longer term capital plans, beyond integrating Eckerd? It seems like you're going to be gaining a significant amount of knowledge in terms of remodeling those stores. I think it's probably a fair assessment to say there are Rite Aid stores that need capital as well. So how do you think about remodels beyond Eckerd? Has your 800 to 1000 new store goal changed between the mix of new stores and relos?

I'll take the last part first. On the new relos in terms of mix, we are definitely going to ship more to relocations because there are more opportunities to do them because of the just increased presence in key markets. In terms of the minor remodel program, we fully intend to immediately follow the minor remodel program of Brooks and Eckerd with completing any of the Rite Aids that haven't been done too. That is an investment that is absolutely worth doing and makes such a huge difference in the appearance and feel of the store and customers like it and associates like it. It's a modest investment for the benefit that you get and that's all factored into our cap plan for the next five years. Ed Kelly - Credit Suisse: Now, as you look at the core Rite Aid store base, it's probably kind of hard to say but what percentage of those stores do you think need a minor remodel?

Well, you've got a fair amount because if you think about what we've invested and we've done a number of remodels particularly on the West Coast, but a lot of the stores on the East Coast, the smaller ones in particular, need to be freshened up. So you have, I'd say a good quarter of those stores for sure and maybe a little bit more.

But we also, Ed, are very, very positive on the look and feel and the decor package associated with the new customer and we want to get that throughout the chain. Ed Kelly - Credit Suisse: Mary, you mentioned something about clinics an looking at ways to sort of accelerate that growth. Can you talk about that? Is that something you'd be interested buying in terms of being able to do that similar to Walgreen’s or CVS?

Well, our strategy is a little bit different than theirs in that we believe it's important to have that local connection so that you have credibility and really can address any staffing issues because that's going to be still one of the issues that a lot of these just massive rollouts of clinics have. But we are definitely entertaining and talking with a couple of alternatives relative to a bigger partnering initiative but ones that would still be unique in this space and I'd be able to talk about that more at a slightly later time. Ed Kelly - Credit Suisse: I would be interested Bob, on your perspective in terms of what the opportunities are at Rite Aid. I mean you obviously left a very good company which I think says something about what you see at Rite Aid but I was wondering if hopefully you could just talk about that a little bit? Bob Easley: Sure, Ed. One thing that I think in terms of opportunities of course is to continue the focus on the integration plan. In my view, the integration plan is very solid and is progressing very well and so to continue to focus on that and accelerate that program is going to be important. I think one of the key opportunities is to build on the keen focus that Rite Aid has on their customer, especially as it relates to the health and wellness positioning of the organization and looking at what we can do from a store operations perspective and in our marketing programs to strengthen the customer experience as it relates to that health and wellness piece. So that's something that I'll be working very hard on. Secondly, we'll have a very keen focus on our customer experience in our stores. We're really looking hard at what we can do to continue to improve our in-stock conditions and our associate service levels and overall presentation of the stores. So right now, our key focus would be on that store experience and that health and wellness positioning.

Your next question comes from Lisa Gill - JP Morgan. Lisa Gill - JP Morgan: I was wondering if you could talk about your updated revenue guidance. It looks like you've declined it to $800 million to $900 million on each side of the range. How should we be looking at that? Is that the slowing of Medicare Part D? Is it more from the front end? If you could probably just kind of walk us through what you're seeing overall on the revenue side?

Lisa, it's a combination of both parts of the business. The pharmacy script growth has been not as aggressive or strong as last year. A lot of that is attributed to cycling Medicare Part D. On the front end, I think our sales throughout the year have been weaker than we would have wanted them to be. I think we focused on the right things in terms of our core business but there are some things relative to just getting a little bit more of the balance in the promotional pricing which we've addressed on a go-forward basis, and we believe that's going to bring improvement in some of those front end categories. Lisa Gill - JP Morgan: Secondly, this morning obviously Wal-Mart has made another announcement about expanding their $4 drug program. Meredith, can you just give us your thoughts as far as the impact thus far to Rite Aid and any future impact that you think these kinds of initiatives by Wal-Mart have on your stores?

Well I think the industry in general weathered very well the impact of the original Wal-Mart program, and that's really because we already offer a great value in the generics we dispense, and the average co-pay on the majority of those generics too isn't much different than the Wal-Mart price so there's very little reason for a customer to drive that far to get them. I haven't really had time to estimate or assess what they've added in terms of any additional impact; but again, I believe we'll offer the value and convenience that will keep the customers coming to us. Lisa Gill - JP Morgan: So, when we think about Wal-Mart mass merchandiser versus Rite Aid, Rite Aid is more about the convenience for the customer and meeting those customer demands and therefore we don't really see a shift of your customers away from that centric model to a Wal-Mart to pick up a drug that potentially is a little bit cheaper. Is that the right way to think about it?

Well I think a drug store definitely being in the neighborhood is a lot more convenient plus the ability to really have a relationship with the pharmacist. Yeah, you'll lose a few scripts, I mean that's been the experience of everybody but it's minimal and if you're working on the right initiatives to keep growing your pharmacy customer base, again, you have a tremendous success in offsetting any impact from that. Lisa Gill - JP Morgan: You kept your EBITDA guidance the same even though you brought down your revenue so clearly, your expectation is that margins are going to be better than expected. Can you just give us a little color where that's going to come from? Is that front end or is that on the pharmacy side or is it both?

It's actually both and it's a combination of again things like growing our generics but also the positive impact from the cost saving synergies that we've developed as a result of the acquisition, which we also are forecasting to contribute to next year's results and improve our forecast there.

And a continuation of our broad-based expense control efforts.

Your next question comes from John Heinbockel - Goldman Sachs. John Heinbockel - Goldman Sachs: A couple of things, guys. Have you seen any impact or any early sign of consumer weakening? Is that any part of the front end softness or is it primarily the things you talked about with regard to promotional activity? In particular, have you seen anything in California that's worth noting on the consumer front?

Well, I think the customer just generally speaking is a little more cautious in terms of purchasing with everything going on out there from an economy point of view. California is a strong, important market for us and there's been a lot of activity out think because obviously we've got competitors that are also looking to gain market share, but we performed very well out there and we intend to be aggressive out there.

It's very difficult for us to isolate that consumer pull back which everybody kind of tries to isolate, but we're just not able to do it. John Heinbockel - Goldman Sachs: When you look at the promotional dial-back, how price elastic do you think the format is? Did you dial back too far or just not elastic and not worth chasing sales in an environment like this?

Well some of it; promotion is all about balance too and so you have to really make sure that where you need to be sharply priced, you are and we had pretty strong front end margins in the second quarter and they might have been, in my point of view, a little bit too healthy considering just the environment out there, and so what you really do is you strike a balance. You make sure that you focus on your core businesses, your health and wellness offering, the things that over the long term are going to make the most difference but where you need to be more sharply priced, you are. John Heinbockel - Goldman Sachs: Finally, how specifically have the Brooks stores done from the standpoint of they had a pretty strong franchise unlike Eckerd, I think the two are a bit different. What have you done to safeguard their performance? I guess was their performance as weak as Eckerd was going into the deal I would have expected they might have been a little stronger.

I think it was fairly broad based across the chain when we got it in terms of what was going on with their sales. I think probably the most important thing we do is spend a lot of time with the people, with the associates of Brooks, with the supervisors, with the field team, with our pharmacists. We also are hand-holding all the way through any of the conversion integration activities and I think that will make a huge difference in terms of how those associates continue to feel and do everything we can to make sure we keep customers and keep it growing.

The pilot stores included some Brooks, John, and basically the completion of that is still a work in progress and since we have not done any marketing but the minor remodeling and remerchandising is complete and the sales are turning the right way.

Your next question comes from Bryan Hunt - Wachovia. Bryan Hunt - Wachovia: I was wondering if you could expand on a comment you just made there, Kevin, and Mary made the same comment. Sales are trending in the right direction. Is it possible for you to quantify the sales improvements you've had on pilot stores and the stores that have received the signage changes at Eckerd with the Rite Aid signage?

Well, overall I think what we said on the sales is that the sales when we got the stores overall were trending negative and the trends have pretty much stayed about the same. As we go through integration and conversion you've got some initial disruption and then you really see the business begin to start an upward trend; and remember, our marketing program hasn't even started yet. It will begin to kick in in the next several weeks starting against actually each converted store in terms of messaging that goes to the customers in the neighborhoods and then we have a very aggressive plan in terms of the number of times each of those stores will get customer communications through marketing. Bryan Hunt - Wachovia: Kevin, you touched on this, your cost-savings initiatives don't include as of this moment any consolidation of your DCs yet. One, is it possible for you to give us an idea of what that might be at some point in time? Second, now you can distribute to all stores out of all distribution centers. Could you speak to any efficiency gains that you've had from the distribution changeover and the ability to distribute from all of your distribution centers to any store within the network?

Sure. The optimization of which DC should deliver to what store is in progress now, and that in fact is a part of one of the synergy numbers. There is a $35 million number down in our synergies number that's a grab bag of a lot of things and one of the components of that is making sure that the DC that's best to deliver to the stores is the one that's doing it. But remember the six DC's were just completing their conversion, or just starting that and it's a little early for us to really say how much and when is the appropriate time to demonstrate those savings. As far as we have 14 distribution centers, do we know how many we need and where they should be? We are still in the depths of evaluating that and are nowhere near knowing what that will look like, let alone when it will hit, but it's going to have like a three-year timeline at least.

Your next question comes from Carla Casella - JP Morgan. Carla Casella - JP Morgan: CapEx is a little bit lower than we expected and I'm wondering if there's some of your minor remodels run more through the SG&A line or operating expenses as opposed to CapEx?

No. The minor remodel costs are capitalized. Remember, we're just starting to ramp up on the minor remodel program. Also remember the new and relocated stores are very, very back end loaded. Over about 70% of the 125 stores are opening up in the third and fourth quarter, and then we're still ramping up on the file buy program. Carla Casella - JP Morgan: I missed the number. What did you say file buys were for the quarter?

We said that of our total capital expenditure guidance, depending on which number you grab on the range, it's between 7% and 10% is the amount of money for file buys.

We are significantly ahead of our original planned file buys in the first half of the year and we think that trend will continue through the balance of the year. Carla Casella - JP Morgan: Is there just a lot more availability?

Number one, we've put a lot of resources on it. They've been working pretty hard in getting the pipeline filled up as we cycle through last year, it just takes awhile to get them closed. There's a lot of competition for file buys, so we have a smart team of people on it and they've been delivering results and we're going to stay focused on it. Carla Casella - JP Morgan: The 150 pour over stores you were talking about, you had originally said there were 200 overlapped stores you were looking at to evaluate. Is the 150 the total amount or do you still think there are others you're evaluating for potential consolidation?

Carla, these are about 154 pairs of stores where we will make a decision and have made the decision which way we will pour, whether it will be a Rite Aid into a Brooks Eckerd or Brooks Eckerd into a Rite Aid. I mentioned, it's about half and half of which is which, and we will complete the pours, which is a Brooks Eckerd into a Rite Aid faster than we will the other way. These take a little bit longer, because if you're increasing the prescriptions that amount, you got to make sure your pharmacy is the right size and has the right technology to handle it so you can take care of customers so you have to do a little bit more extensive remodels than you do with a typical minor remodel. Carla Casella - JP Morgan: What I'm asking, are there more stores being evaluated for potential consolidation or pour overs beyond that 150?

No, not at this time because the trading area of a drug store is pretty small so you really can have stores in pretty close proximity that do a lot of business because they're neighborhood stores.

Your next question comes from Karru Martinson - Deutsche Bank. Karru Martinson - Deutsche Bank: Good morning. In terms of year-ago pro forma EBITDA, I remember looking at kind of a 220 number, so EBITDA up about 19% year-over-year, is that the right way to look at it?

I have no idea what you put in for your pro forma Brooks Eckerd for the prior year. Karru Martinson - Deutsche Bank: Do you have that number handy?

No. Karru Martinson - Deutsche Bank: No? In terms of the private label, you mentioned that you had converted that over. I was somewhat surprised at the strength of the gross margin. I was hearing that you were completely out of your Eckerd private label. Is that the case?

Yes, and that's one of the first categories you do try to clear out of because it's obviously got the old store name on it, so we've got Rite Aid private brand in good quantity in all of the stores, and it definitely is higher margin categories so that certainly is a piece of the margin improvement. Karru Martinson - Deutsche Bank: In terms of an earlier question on customer pressure, are you seeing a competitive response as the customer becomes a little bit more cautious from the other drug store chains?

I think really competitor activity just seems to vary by market. Some of our major competitors aren't doing a whole lot different than they've done in the past. Others are doing more, depending on parts of the country they're operating in. Karru Martinson - Deutsche Bank: In terms of the systems conversions for the pilot stores, what are you seeing in terms of the feedback coming from the pharmacist on that?

Overall feedback is good. We've invested a lot of money in the training piece of this, and we are keeping integration specialists with the stores after they've gone through the system conversion for at least a week post-conversion, and longer if we need to. We made some modifications to the training based on the input from the 23 pilot stores and added more what you'd call hands-on training and more training where stores are about to be converted could actually observe the work flow in process in a neighbor store where it was possible. So the system itself you're going to go through the learning curve that's going to normally be there and you see that in the very beginning but you also see improvement once you get a week down the road, two weeks down the road, three weeks down the road. Karru Martinson - Deutsche Bank: If you could refresh my memory in terms of the headquarters, you said you had let 50% of the associates go for the Brooks Eckerd headquarters. The plan is still to sell that facility; correct?

That's correct.

Your next question comes from Meredith Adler - Lehman Brothers. Meredith Adler - Lehman Brothers: Yes, I'd like to just sort of tie on to these questions about the integration. Is there anything that you've seen happen that makes you believe that the risk of integration is any higher, and can you say at what point you think that the most difficult period of the integration will be done, and so that the risk of accomplishing the integration will be behind you ?

I haven't seen anything, Meredith, that would tell me that we aren't going to very successfully complete what we've got started here. I think probably the first huge milestone is getting the systems converted in all of the stores, because the paint and powders follow them, even though the paint and powders can be more disruptive for a short two-week time period, once you get through that and get them done, the store looks and feels so much different and better, that customer and associate response is great. We believe that our plan is good. We've tweaked it where we need to tweak it. We'll keep watching it as we believe that it's important that we have a quality conversion and so whatever adjustments we need to make we'll make, but it's really on track to be complete in the timeframe we talked about.

The only thing that's not been validated, Meredith is that today as you would expect, we are not at that full run rate of systems conversions or full run rate of minor remodels and remerchandising but we're confident that we're going to get there.

One other area too, Meredith, that is worth mentioning, is the completion of planograms, because that's getting our merchandise mix in all of the stores, which really helps fuel the sales and you get your full assortment out there and we're just immersed in the process right now. I think I mentioned in my comments that about two-thirds of the planograms are out in the stores now in some stage of being done and then the balance of them will go out to the stores to be completed before the holidays. Even though that's not fully remerchandised, because that doesn't happen until you do the minor remodel, it does get a significant percentage of our mix in all of these stores and then you can really have a full blown ad and marketing program behind it. Meredith Adler - Lehman Brothers: Just to confirm, the systems integration, will that also be completed before the holidays?

No. That was targeted for the end of the fiscal year. Meredith Adler - Lehman Brothers: I would like to talk a little bit more about competition. I have heard that CVS has heated things up in Southern California because of the Save-On acquisition. I was just wondering if you could comment about whether that was one of the markets that you were seeing being hotter than usual.

Well again, I think when companies do acquisitions they do tend to heat things up for awhile, they're after customers and I said too that's an important market for us and we aren't going to sit there and lose any customers, so we're going to be as aggressive as we need to be.

Your next question comes from Keith Howlett - Desjardins Securities. Keith Howlett - Desjardins Securities: I had a question related to the planograms and the remerchandising and specifically it came from looking at some stores in the Charlotte area. They have the Rite Aid sign up but inside the store, it pretty much looks like an old Eckerd, except with the private label of Rite Aid. I'm just wondering the sequence of this as to whether this gives the right message to the customer as to what Rite Aid stands for when the sign is up before the planograms and everything else is set the way you'd like it to be. I guess the question is, is this what I saw the typical sequencing, and why would you put the sign up before the inside looks the way you want it to, I guess is the question.

Well you'd like to have everything happen all at one time but logistically and even from a people standpoint, it's just not plausible because you would create more problems than it's worth; and then you don't want to keep confusing customers because you're putting one ad out there that's really a Rite Aid ad, you've got Rite Aid private brand product in there, so we made the decision that we would get the exterior signs changed ahead of completing all of the activity that still needs to follow and we still believe over the long term that's the best decision. We will do extensive marketing to our customers once we complete the inside of the store too but we think it's less confusing to customers to make the name change on the outside of the stores more quickly. That will be completed before the holidays. Keith Howlett - Desjardins Securities: Does the General Motors-UAW agreement -- you're a big drug store in those areas -- does it have any impact as yet that you can identify on you?

Nothing that I can say at this particular point in time. We will do everything we can to participate in any scripts that are there to really get for our stores. It's an important area for us.

Your final question comes from Mark Husson - HSBC. Mark Husson - HSBC: I just want to take a step back and absorb what you said this morning. What you said basically is that sales are disappointing this year, that you've raised your synergy number for this year and next year, and yet the earnings number is the same or less than it was, or EBITDA is the same or less than it was before; and for next year, again, it's less accretive than you thought. When you take all of that into the round, it seems to me that what you're saying is that if the underlying Rite Aid business is what it was, that Eckerd has got weaker sales and is less profitable than you thought it was going to be.

No, I don't think that's what we said, Mark. I said that we believe that we have more potential in front end sales. I didn't say that they were necessarily that disappointing, maybe just from the standpoint that I think they could be stronger than they are and they need a balance between your promotional and your core business. I think we've got the things in place to do that. I think in terms of our forecast relative to the EBITDA guidance, we've talked about the improvement in the cost synergies and that's a real positive for us both this year and next year.

We've not changed the EBITDA guidance. We have changed the non-EBITDA net loss because of the increased interest expense and the amortization expense of the intangibles. Mark Husson - HSBC: Well let's just take that this year, for instance. You've kept your EBITDA guidance where it is, but you've increased the synergies to $200 million and the closed store expenses which will be hurting next year now have moved out of this year into next year and presumably they would have been in your EBITDA guidance for this year.

No, closed stores are not in EBITDA. If you look at the charts that we've attached, you can see that it's a reconciling item. Mark Husson - HSBC: Well my EBITDA, not yours, I guess.

They're in net loss, but not in EBITDA.

Those charges are non-cash and that's why we exclude it from the adjusted EBITDA calculation. Mark Husson - HSBC: So as far as the synergies are concerned, you have increased the synergies but you've kept EBITDA the same, which means the stuff that wasn't synergies must be worse?

Well, we changed our sales guidance, so if we lowered the sales guidance, there would have been expected benefit out of those higher sales in that original guidance. I think we've done a great job overall in terms of margin rate and expense control and still growing our business even in what could be described as a tougher economic environment and that we've got the right plans in place to continue to build our business as we move forward and really do a successful conversion and integration and deliver greater synergies.

We don't think there are any real fundamental things wrong, if you will, and that's our message. Mark Husson - HSBC: Well, you treated sales guidance reduction as if it was a good thing. It's obviously not a good thing, particularly when we are looking at the gross margin being as strong as it was in the quarter to see sales right at the bottom of industry at the Rite Aid level. Is it not a temptation to try and close the gap between CVS and Walgreen’s, which seems to be widening, not narrowing?

Well, remember one of the things that our competitors have going for them is they've had multiple years of new store openings that add to their comp sales, et cetera. So that's a factor that you got to stir into the equation too. We certainly are interested continuing to grow our sales and we're making, I believe, the right decisions on focusing on our core business, but stirring in a right balance of promotional pricing where you need to. Mark Husson - HSBC: Final technical question. When you clear out all of the Eckerd inventory, is that charged to the acquisition expense or is that in the P&L account somewhere?

It's part of the fair value of inventory. You value that inventory so as to recognize a normal gross margin rate. So therefore, when you take a markdown that is because of the fair value inventory, it's not in your cost of sales. Mark Husson - HSBC: Okay, but in terms of the sales from the stuff clearing out, are those sales in the quarter?

The sales are at the markdown price. That's correct.

Thank you.

Thanks, everybody.