The following discussion and analysis of our financial condition and results of operations should be read together with the financial statements and the related notes included elsewhere herein and our consolidated financial statements, accompanying notes and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended August 31, 2011. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in forward-looking statements. Factors that might cause a difference include, but are not limited to, those discussed under "Cautionary Note Regarding Forward-Looking Statements" below and in Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year ended August 31, 2011 and Item 1A "Risk Factors" in this report.

INTRODUCTION

Walgreens is principally a retail drugstore chain that sells prescription and non-prescription drugs and general merchandise. General merchandise includes, among other things, household items, convenience and fresh foods, personal care, beauty care, photofinishing and candy. Customers can have prescriptions filled in retail pharmacies as well as through the mail, and may also place orders by telephone and online. At May 31, 2012, we operated 8,343 locations in 50 states, the District of Columbia, Guam and Puerto Rico. Total locations do not include 363 Take Care Clinics that are operated primarily within other Walgreens locations.

                                                      Number of Locations
Location Type                                    May 31, 2012        May 31, 2011
Drugstores                                              7,890               7,715
Worksite Health and Wellness Centers                      362                 362
Infusion and Respiratory Services Facilities               78                  83
Specialty Pharmacies                                       11                   9
Mail Service Facilities                                     2                   2
Total                                                   8,343               8,171

The drugstore industry is highly competitive. In addition to other drugstore chains, independent drugstores and mail order prescription providers, we compete with various other retailers including grocery stores, convenience stores, mass merchants and dollar stores.

Our sales, gross profit margin and gross profit dollars are impacted by, among other things, both the percentage of prescriptions that we fill that are generic and the rate at which new generic drugs are introduced to the market. In general, generic versions of drugs generate lower total sales dollars per prescription, but higher gross profit margins and gross profit dollars, as compared with patent-protected brand name drugs. The positive impact on gross profit margins and gross profit dollars has been significant in the first several months after a generic version of a drug is first allowed to compete with the branded version, which is generally referred to as a "generic conversion." In any given year, the number of major brand name drugs that undergo a conversion from branded to generic status can increase or decrease, which can have a significant impact on our sales, gross profit margins and gross profit dollars. And, because any number of factors outside of our control or ability to foresee can affect timing for a generic conversion, we face substantial uncertainty in predicting when such conversions will occur and what effect they will have on particular future periods.

The long-term outlook for prescription utilization is strong due in part to the aging population, the increasing utilization of generic drugs, the continued development of innovative drugs that improve quality of life and control health care costs, and the expansion of health care insurance coverage under the Patient Protection and Affordable Care Act signed into law in 2010 (the ACA). The ACA seeks to reduce federal spending by altering the Medicaid reimbursement formula (AMP) for multi-source drugs, and when implemented, is expected to reduce Medicaid reimbursements. State Medicaid programs are also expected to continue to seek reductions in reimbursements independent of AMP. In addition, we continuously face reimbursement pressure from pharmacy benefit management (PBM) companies, health maintenance organizations, managed care organizations and other commercial third party payers, and our agreements with these payers are regularly subject to expiration, termination or renegotiation.

Following our June 21, 2011 announcement that contract renewal negotiations with pharmacy benefit manager Express Scripts, Inc. (Express Scripts) had been unsuccessful, Walgreens exited the Express Scripts pharmacy provider network as of January 1, 2012 and since that date, Express Scripts' network no longer includes Walgreens more than 7,800 pharmacies nationwide. Express Scripts, in its capacity as a pharmacy benefits manager, processed approximately 88 million prescriptions filled by Walgreens in fiscal 2011, representing approximately $5.3 billion of our fiscal 2011 net sales. In the first four months of fiscal 2012 ending December 31, 2011, Express Scripts, in its capacity as a pharmacy benefits manager, processed approximately 29.4 million prescriptions filled by Walgreens. In addition to the approximately $.02 net earnings per diluted share, $.07 net earnings per diluted share and $.06 net earnings per diluted share adverse impact in the first, second and third quarters of fiscal 2012, respectively, resulting from the loss of pharmacy sales from Express Scripts clients and the expenses related to our dispute with Express Scripts, this development is expected to adversely affect our net sales, net earnings and cash flows during the remainder of fiscal 2012 and subsequent periods. We have sought, and continue to seek, to moderate the impact of this development on our consolidated financial results by seeking to retain business from Express Scripts' clients (consistent with their contractual obligations to Express Scripts), expand our business with other payers and customers, and implement cost saving initiatives. As of the date of this filing, we estimate that these efforts have resulted, based on our experience through the end of the third fiscal quarter, in an annualized retention rate of approximately 15% of the prescriptions that we filled in fiscal 2011 that were processed by Express Scripts. While we cannot predict what percentage of business we may retain or regain from these and other entities and groups that were Express Scripts' clients in fiscal 2011 in any particular future period, over time, we believe that health plan sponsors, such as employers and others, will want to offer their beneficiaries pharmacy networks that include Walgreens. We seek to offset approximately 50 percent of the estimated reduction in fiscal 2012 gross profit resulting from the loss of business from Express Scripts' clients, primarily through implementation of plans designed to reduce our selling, general and administrative expenses and cost of goods sold. We expect a substantial majority of these reductions to be realized in the second half of fiscal 2012. We also expect that this development will have an adverse effect on our net earnings per diluted share in the remaining quarter of fiscal 2012 that is generally comparable to that experienced in the second and third fiscal quarters, taking into account our cost savings initiatives and our business growth initiatives relating to our Express Scripts transition. See "Cautionary Note Regarding Forward-Looking Statements."

Additionally, on April 2, 2012, Express Scripts and Medco Health Solutions, Inc. (Medco), another large pharmacy benefit manager, completed the merger they announced in July 2011. We have an ongoing contract with Medco in place to serve its clients. However, such agreement is terminable by either party on relatively short notice. We filled approximately 125 million Medco prescriptions in 2011 representing approximately $7.1 billion of our fiscal 2011 net sales, and estimate that we are on a pace as of the end of this fiscal quarter which, if continued, would result in us filling approximately 108 million Medco prescriptions in 2012. Our current estimate is that as of January 1, 2013, approximately 40% of our 2011 prescription volume related to Medco customers will have migrated to other PBMs and health plan arrangements that include Walgreens as a network pharmacy, including significant clients such as United Healthcare Services, Inc. As a result of this client migration, we expect that the remaining number of Medco prescriptions potentially available to be filled by us will be substantially reduced as of the beginning of calendar 2013. The number of potentially available Medco prescriptions is expected to further change after the current PBM selling season is complete. The relative significance and impact of the Express Scripts/Medco merger to Walgreens ultimately will depend on a number of factors, including the timing and scope of any actions by Express Scripts/Medco and our response, decisions in the marketplace by Express Scripts/Medco clients with respect to their PBM relationships and their health plans, the number of direct contracting relationships we establish, and other actions by us such as initiatives seeking to align our costs with anticipated business levels. If Express Scripts/Medco were to terminate our agreement with them or seek to change the terms or financial arrangements relating to our participation in their network, our business, financial condition and results of operations could be adversely affected. See "Cautionary Note Regarding Forward-Looking Statements" and "Risk Factors" below.

To support our growth, we are investing in prime locations, technology and customer service initiatives along with reinvesting into our existing stores. We seek to expand our business through retail organic growth. We also complete strategic acquisitions and investments from time to time that meet our objectives; consideration is given to retail, health and well-being enterprises and other acquisitions and investments that provide unique opportunities and fit our business objectives, such as the pending Alliance Boots and USA Drug transactions described under "Recent Developments" below, our acquisition of drugstore.com, which enhanced our online presence, and the acquisition of certain assets of BioScrip, Inc.'s (BioScrip) community specialty pharmacies and centralized specialty and mail services pharmacy businesses which advances community pharmacy and brings additional specialty pharmacy products and services closer to patients. The BioScrip acquisition also is expected to help grow Walgreens centralized specialty and mail service pharmacy operations.

RECENT DEVELOPMENTS

Alliance Boots Transaction. On June 18, 2012, the Company, Alliance Boots GmbH ("Alliance Boots") and AB Acquisitions Holdings Limited, a private limited liability company (the "Seller") jointly controlled by affiliates of Stefano Pessina ("Mr. Pessina") and Kohlberg Kravis Roberts & Co. L.P. ("KKR"), entered into a Purchase and Option Agreement (the "Purchase and Option Agreement"), pursuant to which we will, subject to the terms and conditions thereof, acquire 45% of the issued and outstanding share capital of Alliance Boots in exchange for $4.025 billion in cash (the "Cash Consideration"), and approximately 83.4 million shares of Company common stock (collectively, the "First Step Transaction"). The Purchase and Option Agreement also provides, subject to the terms and conditions thereof, that we will have the right, but not the obligation, to acquire the remaining 55% interest in Alliance Boots (the "Call Option") in exchange for £3.133 billion in cash, payable in British pounds sterling (approximately $4.9 billion based on exchange rates as of the date of the Purchase and Option Agreement), and 144.3 million shares of common stock, with the amount and form of such consideration being subject to adjustment in certain circumstances (the "Second Step Transaction") including if the volume weighted average price of our common stock is below $31.18 per share during a period shortly before the closing of the Second Step Transaction. The Call Option is exercisable by us, in our sole discretion, at any time during the period beginning 30 months after the closing of the First Step Transaction and ending on the third anniversary of the closing of the First Step Transaction. See "Liquidity and Capital Resources" below for a discussion of our anticipated financing of this transaction.

Alliance Boots is a leading international, pharmacy-led health and beauty retailing and pharmaceutical wholesaling and distribution business. Together with its associates and joint ventures, Alliance Boots has pharmacy-led health and beauty retail businesses in 11 countries and operates more than 3,330 health and beauty retail stores, of which over 3,200 have a pharmacy. In addition, Alliance Boots, together with its associates and joint ventures, has approximately 625 optical practices, approximately 185 of which operate on a franchise basis. Its pharmaceutical wholesale businesses, including its associates and joint ventures, supply medicines, other healthcare products and related services to more than 170,000 pharmacies, doctors, health centers and hospitals from over 370 distribution centers in 21 countries. Walgreens strategic transaction with Alliance Boots does not include the benefit of Alliance Boots minority interest in Galenica A.G., a Swiss healthcare group, one of its associate investments.

At the closing of the First Step Transaction, the Company, Alliance Boots and the Seller will enter into a shareholders' agreement regarding, among other things, the ongoing governance of Alliance Boots following the closing of the First Step Transaction, and the Company, KKR (and certain of its affiliates), Mr. Pessina (and certain of his affiliates) and other shareholders of the Seller receiving Walgreens common stock in the transaction will enter into a shareholders' agreement regarding, among other things, certain rights and obligations of such persons as shareholders of the Company. Please refer to the Current Reports on Form 8-K we filed with the Securities and Exchange Commission on June 19, 2012 for more detailed information regarding this transaction and related matters.

The First Step Transaction is subject to customary conditions, including satisfaction of regulatory requirements, and is expected to close by September 1, 2012. Following completion of the First Step Transaction, we intend to account for our investment in Alliance Boots using the equity method of accounting. The transaction is expected to be accretive to our net earnings per diluted share in the first year following completion of the First Step Transaction by an estimated $0.23 to $0.27, giving effect to the issuance of 83.4 million shares in the First Step Transaction, assuming no share repurchases during such period and not including one-time transaction-related costs. We estimate combined synergies across both companies to be between $100 million and $150 million in the first year following completion of the First Step Transaction and have a goal of $1 billion in annual combined company synergies by the end of 2016 assuming the Second Step Transaction is completed. We also expect that completion of the First Step Transaction will marginally decrease our effective tax rate because Alliance Boots United Kingdom tax rate is expected to be lower than our U.S. tax rate. See "Cautionary Note Regarding Forward-Looking Statements" and "Risk Factors" below.

USA Drug Transaction. On July 5, 2012, we announced that we entered into an agreement to purchase a regional drugstore chain in the mid-South region of the United States from Stephen L. LaFrance Holdings, Inc. and members of the LaFrance family for $438 million, subject to adjustment in certain circumstances (the USA Drug transaction). The transaction includes 144 stores currently operated under the USA Drug, Super D Drug, May's, Med-X and Drug Warehouse names located in Arkansas, Kansas, Mississippi, Missouri, New Jersey, Oklahoma and Tennessee. The acquisition also includes corporate offices, a distribution center located in Pine Bluff, Ark. and a wholesale and private brand business. The transaction is subject to customary conditions, including satisfaction of regulatory requirements.

RESTRUCTURING CHARGES

In 2008, we announced a series of strategic initiatives, approved by the Board of Directors, to enhance shareholder value. One of these initiatives was a program known as "Rewiring for Growth," which was designed to reduce cost and improve productivity through strategic sourcing of indirect spend, reducing corporate overhead and work throughout our stores, rationalization of inventory categories, and realignment of pharmacy operations. These initiatives were completed in the fourth quarter of fiscal 2011.

We recorded $10 million of pre-tax charges in selling, general and administrative expenses in the third quarter of fiscal 2011 associated with our Rewiring for Growth program and $23 million for the nine month period ended May 31, 2011. In addition, as a part of our restructuring efforts, we sold an incremental amount of inventory below traditional retail prices. The dilutive effect of these sales on gross profit for the three and nine month periods ended May 31, 2011 was $1 million and $2 million, respectively.

We realized total savings related to Rewiring for Growth of approximately $1.1 billion in fiscal 2011 compared to our base year of fiscal 2008. Selling, general and administrative expenses realized total savings of $953 million, while cost of sales benefited by approximately $122 million. The savings were primarily the result of reduced store labor and personnel and expense reductions.

Additionally, as a part of our Customer Centric Retailing (CCR) initiative, we have modified the store format to enhance category layouts and adjacencies, shelf heights and sight lines, and brand and private brand assortments, all of which were designed to positively impact the shopper experience. This initiative was completed in the first quarter of fiscal 2012. In total, we converted 5,843 stores and opened 559 new stores with the CCR format. In the first quarter of fiscal 2012, we incurred $33 million in total program costs, of which $15 million was included in selling, general and administrative expenses and $18 million in capital costs. In the third quarter of fiscal 2011, we incurred $46 million in total program costs, of which $33 million was included in selling, general and administrative expenses and $13 million in capital costs. In the prior year's nine month period, the Company incurred $63 million in total program costs, of which $43 million was included in selling, general and administrative expenses and $20 million in capital costs.

OPERATING STATISTICS

                                                     Percentage Increases/(Decreases)
                                           Three Months Ended                Nine Months Ended
                                                 May 31,                          May 31,
                                         2012              2011            2012              2011
Net Sales                                    (3.4 )             6.8             0.6              7.3
Net Earnings                                (10.8 )            30.3            (7.7 )           18.6
Comparable Drugstore Sales                   (6.6 )             4.1            (2.0 )            3.0
Prescription Sales                           (6.6 )             6.4            (1.5 )            6.5
Comparable Drugstore Prescription
Sales                                        (9.9 )             4.1            (3.8 )            3.0
Front-End Sales                               2.8               7.6             4.4              8.7
Comparable Drugstore Front-End
Sales                                        (0.9 )             3.9             1.2              2.9
Gross Profit                                 (2.7 )             8.5             0.5              8.7
Selling, General and Administrative
Expenses                                     (1.6 )             7.2             2.5              7.4




                                                           Percent to Net Sales
                                           Three Months Ended                Nine Months Ended
                                                 May 31,                          May 31,
                                         2012              2011            2012              2011
Gross Margin                                 28.2              28.1            28.4             28.4
Selling, General and Administrative
Expenses                                     23.3              22.9            23.1             22.7




                                                           Other Statistics
                                           Three Months Ended              Nine Months Ended
                                                May 31,                         May 31,
                                         2012              2011           2012            2011
Prescription Sales as a % of Net
Sales                                        62.9             65.1            63.1           64.5
Third Party Sales as a % of Total
Prescription Sales                           95.5             95.8            95.7           95.5
Number of Prescriptions (in
millions)                                     162              183             508            545
Comparable Prescription %
Increase/(Decrease)                         (12.3 )            2.2            (7.7 )          2.0
30 Day Equivalent Prescriptions (in
millions) *                                   192              210             596            617
Comparable 30 Day Equivalent
Prescription % Increase/(Decrease)
*                                            (9.1 )            4.6            (4.1 )          3.7
Total Number of Locations                                                    8,343          8,171

* Includes the adjustment to convert prescriptions greater than 84 days to the equivalent of three 30-day prescriptions. This adjustment reflects the fact that these prescriptions include approximately three times the amount of product days supplied compared to a normal prescription.

RESULTS OF OPERATIONS

Net earnings for the quarter ended May 31, 2012 were $537 million or $.62 per diluted share. This was a 10.8% decrease in net earnings over the same quarter last year. The net earnings decrease in the quarter was primarily attributable to lower sales and higher selling, general and administrative expenses as a percentage of sales. These decreases were partially offset by an increase in gross margins. Operations at drugstore.com, including costs associated with the acquisition and integration, reported a pre-tax loss of $8 million, $5 million after tax or $.01 per diluted share. The BioScrip asset acquisition was completed in May 2012 and had an immaterial effect on operations. Prior year earnings included pre-tax Rewiring for Growth expenses of $11 million, $7 million after tax.

For the nine month period ended May 31, 2012, net earnings decreased 7.7% to $1,774 million or $2.03 per diluted share. The net earnings decrease for the nine month period was primarily attributable to lower sales growth and higher selling, general and administrative expenses as a percentage of sales. Operations at drugstore.com, including costs associated with the acquisition and integration, reported a pre-tax loss of $28 million, $18 million after tax, or $.02 per diluted share. Prior year earnings included pre-tax Rewiring for Growth expenses of $25 million, $16 million after tax, or $.02 per diluted share ($23 million of restructuring and restructuring related expenses and $2 million in margin dilution).

Net sales for the quarter ended May 31, 2012 decreased by 3.4% to $17.8 billion. For the nine month period ended May 31, 2012, net sales increased 0.6% to $54.6 billion. The acquisition of drugstore.com increased total sales by 0.8% in the current quarter and nine month periods. Year to date net sales were negatively impacted by our strategic decision to no longer be a part of the Express Scripts pharmacy provider network but partially offset by sales gains in existing stores and added sales from new stores, each of which include an indeterminate amount of market-driven price changes. Sales in comparable drugstores were down 6.6% in the quarter and 2.0% for the nine month period ended May 31, 2012. Comparable drugstores are defined as those that have been open for at least twelve consecutive months without closure for seven or more consecutive days and without a major remodel or a natural disaster in the past twelve months. Relocated and acquired stores are not included as comparable stores for the first twelve months after the relocation or acquisition. We operated 8,343 locations (7,890 drugstores) as of May 31, 2012, compared to 8,171 locations (7,715 drugstores) a year earlier.

Prescription sales decreased by 6.6% in the quarter and 1.5% for the first nine months and represented 62.9% and 63.1% of total sales, respectively. In the prior year, prescription sales increased 6.4% in the quarter and 6.5% year to date and represented 65.1% and 64.5% of total net sales. Comparable drugstore prescription sales decreased 9.9% in the current quarter and 3.8% for the nine month period. Prescription sales were negatively impacted by our strategic decision to no longer be a part of the Express Scripts pharmacy provider network. Additionally, the effect of generic drugs, which have a lower retail price, replacing brand name drugs reduced prescription sales by 3.2% in the current quarter and 2.4% for the first nine months versus 2.0% and 2.6% in the same periods last year. The effect of generics on total net sales was a reduction of 1.7% in the current quarter and 1.3% year to date compared to 1.2% and 1.5% in the quarter and nine month periods last year. New generic drug introductions have led to an increased effect of generics on total net sales during the quarter which is expected to continue for the remainder of fiscal 2012. Third party sales, where reimbursement is received from managed care organizations, the government, employers or private insurers, were 95.5% of prescription sales for the quarter and 95.7% for the first nine months compared to 95.8% for the quarter and 95.5% for the first nine months last year. We receive market driven reimbursements from third party payers, a number of which typically reset in January. The total number of prescriptions filled for the current quarter (including immunizations) was approximately 162 million compared to 183 million for the same period last year. Prescriptions adjusted to 30 day equivalents were 192 million in the current quarter versus 210 million in last year's quarter.

Front-end sales increased 2.8% for the current quarter and 4.4% for the first nine months and were 37.1% and 36.9% of total net sales. In comparison, prior year front end sales increased 7.6% and 8.7% and comprised 34.9% and 35.5% of total net sales. The increase in the current quarter's front-end sales is due in part to new store openings and improved sales dollars related to the non-prescription drugs, beer and wine, beauty, seasonal and photofinishing categories. These increases were partially offset by a decrease in the household items and personal care categories. Comparable drugstore front-end sales decreased 0.9% for the current quarter and increased 1.2% year to date compared to the prior year, which increased 3.9% and 2.9% in the quarter and year to date periods, respectively. The comparable front end sales decrease in the quarter was primarily attributed to the household items, personal care and convenience and fresh foods categories. The decrease was partially offset by improvements in the beer and wine, beauty and non-prescription drug categories.

Gross margin as a percent of sales was 28.2% in the current quarter and 28.4% for the first nine months compared to 28.1% and 28.4% last year. Gross margin in the current quarter was positively impacted by higher retail pharmacy margins where the impact of new generics including the generic Lipitor, more than offset . . .