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, 2012. 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, 2012.

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 customers may also place orders by telephone and online. At November 30, 2012, we operated 8,516 locations in 50 states, the District of Columbia, Guam and Puerto Rico. Total locations do not include 367 Take Care Clinics that are operated primarily within other Walgreens locations or locations of unconsolidated partially owned entities such as Alliance Boots GmbH.

                                                                  Number of Locations
                                                            November 30,        November 30,
Location Type                                                   2012                2011
Drugstores                                                          8,058              7,812
Worksite Health and Wellness Centers                                  369                363
Infusion and Respiratory Services Facilities                           80                 74
Specialty Pharmacies                                                    7                 10
Mail Service Facilities                                                 2                  2
Total                                                               8,516              8,261

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, online pharmacies, warehouse clubs 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 typically 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.

On July 19, 2012, Walgreens and Express Scripts announced their entry into a new multi-year agreement pursuant to which Walgreens began participating in the broadest Express Scripts retail pharmacy provider network available to Express Scripts clients as of September 15, 2012. From January 1, 2012, until September 14, 2012, however, Express Scripts' network did not include Walgreens pharmacies.

We expect the positive impact of our new agreement with Express Scripts will be incremental over time, particularly over the first several quarters after September 15, 2012. While we cannot predict with certainty which Express Scripts clients will choose to include us in their pharmacy networks in any particular future period, we expect that our pharmacies will participate in the pharmacy networks of most clients for which Express Scripts serves as pharmacy benefit manager. However, one substantial client of Express Scripts, the United States Department of Defense TRICARE program, has announced that Walgreens will continue to not be a part of its pharmacy network and will be designated as a non-network pharmacy provider for TRICARE beneficiaries. Most of the patients we served in calendar 2011 who participated in a plan for which Express Scripts served as pharmacy benefit manager transitioned to another pharmacy after we exited the Express Scripts network on January 1, 2012. We have incurred, and expect to continue to incur, marketing and other costs in connection with efforts to regain former patients and attract new patients covered by plans for which we become a network pharmacy provider as a result of our agreement with Express Scripts.

Ultimately, the magnitude and timing of the impact on our financial results of rejoining the Express Scripts retail pharmacy provider network will depend on our ability to regain former patients and attract new patients covered by existing and new Express Scripts clients; however, we cannot predict with certainty what level of business we will achieve as a result of rejoining the Express Scripts retail pharmacy provider network in any particular future time period. We also intend to continue to pursue initiatives seeking to align our costs with anticipated business levels and requirements over time. Rejoining the Express Scripts retail pharmacy provider network is expected to positively affect our net sales, net earnings and cash flows over time relative to the levels we would otherwise achieve if we were not in the Express Scripts network and to mitigate the adverse effects related to our non-participation in the Express Scripts retail pharmacy provider network during the period from January 1, 2012 through September 14, 2012. See "Cautionary Note Regarding Forward-Looking Statements."

Periodically, we make strategic acquisitions and investments that fit our long-term growth objectives. Consideration is given to retail, health and well-being enterprises and other potential acquisitions and investments that provide unique opportunities and fit our business objectives such as the acquisition of USA Drug, completed in first quarter of fiscal 2013, and key fiscal 2012 acquisitions including certain assets of BioScrip Inc.'s (BioScrip) community specialty pharmacies, centralized specialty and mail services pharmacy business and Crescent Pharmacy Holdings, LLC (Crescent).

In August 2012, we also acquired a 45% equity interest in Alliance Boots GmbH (Alliance Boots) and a call option that provides Walgreens the right, but not the obligation, to purchase the remaining 55% over a six month period beginning February 2, 2015. Additional information regarding our investment in Alliance Boots is available in our Current Reports on Form 8-K filed on June 19, 2012 and August 6, 2012 (as amended by the Form 8-K/A filed on September 10, 2012). The amendment to our August 6, 2012 Form 8-K filed on September 10, 2012, includes as exhibits thereto Alliance Boots audited consolidated financial statements for the years ended March 31, 2012, 2011 and 2010 (prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board) and unaudited pro forma consolidated financial information related to our 45% investment in Alliance Boots. Walgreens initial investment and the call option excludes the Alliance Boots minority interest in Galenica Ltd. (Galenica). The Alliance Boots investment in Galenica continues to be legally owned by Alliance Boots for the benefit of Alliance Boots shareholders other than Walgreens. We account for our 45% investment in Alliance Boots using the equity method of accounting. Investments accounted for under the equity method are recorded initially at cost and subsequently adjusted for our share of the net income or loss and cash contributions and distributions to or from these entities. We also expect that our investment in Alliance Boots typically will decrease our effective tax rate from the rate we otherwise would provide. See Note 5 to our unaudited consolidated financial statements for additional information regarding our equity method investments. We adopted a three-month lag in reporting equity income from our investment in Alliance Boots, reported as equity earnings in Alliance Boots on the Consolidated Condensed Statements of Comprehensive Income. The investment is recorded as Equity investment in Alliance Boots in the Consolidated Condensed Balance Sheet.

As previously disclosed, we estimate combined synergies across both companies to be between $100 million and $150 million in the first year following completion of our 45% investment in Alliance Boots. The adoption of a three-month lag, rather than the previously announced one-month lag, impacts the quarterly and fiscal year timing of when Alliance Boots results and synergies will be reflected in the equity income in Alliance Boots included in our financial statements. Because of the three-month lag and the timing of the closing of this investment, our financial statements for the fiscal quarter ended November 30, 2012 reflect three months of the dilutive effect of the incremental shares and interest expense associated with our Alliance Boots investment, but only the August 2012 results of Alliance Boots are reflected in the equity earnings in Alliance Boots included in our Consolidated Condensed Statements of Comprehensive Income for that fiscal quarter. Similarly, our financial statements for the fiscal year ended August 31, 2013 will reflect 12 months of the dilutive effect of the incremental shares and interest expense associated with our Alliance Boots investment, but only 10 months (August 1, 2012 through May 31, 2013) of Alliance Boots results will be reflected in the equity earnings in Alliance Boots included in our fiscal 2013 financial statements. The Alliance Boots business is seasonal in nature, typically generating a higher proportion of revenue and earnings in the winter holiday season. Because of the adoption of a three-month lag in reporting equity income from our investment in Alliance Boots, the results of Alliance Boots for December, January and February will be reflected in the equity income included in our financial statements for the fiscal quarter ending May 31. See "Cautionary Note Regarding Forward-Looking Statements" below.

CUSTOMER CENTRIC RETAILING INITIATIVE

As a part of our Customer Centric Retailing (CCR) initiative, we 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.

OPERATING STATISTICS

                                                                Percentage Increases/(Decreases)
                                                                       Three Months Ended
                                                                          November 30,
                                                                  2012                     2011
Net Sales                                                                (4.6 )                  4.7
Net Earnings                                                            (25.5 )                 (4.5 )
Comparable Drugstore Sales                                               (8.0 )                  2.5
Prescription Sales                                                       (7.2 )                  4.2
Comparable Drugstore Prescription Sales                                 (11.3 )                  2.6
Front-End Sales                                                           0.2                    5.6
Comparable Drugstore Front-End Sales                                     (2.0 )                  2.4
Gross Profit                                                             (0.1 )                  3.2
Selling, General and Administrative Expenses                              4.6                    5.0




                                                  Percent to Net Sales
                                                   Three Months Ended
                                                      November 30,
                                                  2012             2011
Gross Margin                                         29.4             28.1
Selling, General and Administrative Expenses         25.4             23.1




                                                                 Other Statistics
                                                                Three Months Ended
                                                                   November 30,
                                                                2012            2011
Prescription Sales as a % of Net Sales                              63.8           65.5
Third Party Sales as a % of Total Prescription Sales                95.7           95.8
Number of Prescriptions (in millions)                                169            179
Comparable Prescription % (Decrease)                                (7.4 )         (1.9 )
30 Day Equivalent Prescriptions (in millions) *                      201            208
Comparable 30 Day Equivalent Prescription %
Increase/(Decrease) *                                               (4.8 )          1.8
Total Number of Locations                                          8,516          8,261

* 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 first quarter ended November 30, 2012 were $413 million or $.43 per diluted share. This was a 25.5% 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, partially offset by improved gross margins. Included in the first quarter net earnings and net earnings per diluted share, respectively, was $59 million, or $.06 per diluted share, in acquisition-related amortization, $34 million, or $.04 per diluted share, from the quarter's LIFO provision, $24 million, or $.03 per diluted share, in costs related to Hurricane Sandy, $16 million, or $.02 per diluted share, of USA Drug acquisition related costs and $7 million in Alliance Boots synergy related and other transaction costs. Included in the first quarter ended November 30, 2011 net earnings and net earnings per diluted share, respectively, were $37 million, or $.05 per diluted share, in acquisition-related amortization and $28 million, or $.03 per diluted share, from the quarter's LIFO provision.

Net sales for the quarter ended November 30, 2012 decreased by 4.6% to $17.3 billion. The acquisition of USA Drug and BioScrip assets increased total sales by 1.5% in the current quarter. Sales were negatively impacted by the effects of our non-participation in the Express Scripts retail pharmacy provider network from January 1, 2012 through September 14, 2012. This was 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 8.0% in the quarter ended November 30, 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 8,516 locations (8,058 drugstores) as of November 30, 2012, compared to 8,261 locations (7,812 drugstores) a year earlier.

Prescription sales decreased by 7.2% and represented 63.8% of total net sales for the quarter ended November 30, 2012. In the prior year's quarter, prescription sales increased 4.2% and represented 65.5% of total net sales. Comparable drugstore prescription sales were down 11.3% for the quarter ended November 30, 2012. The effect of generic drugs, which have a lower retail price, replacing brand name drugs reduced prescription sales by 8.8% in the current quarter versus 1.9% in the prior year's quarter. The effect of generics on total net sales was a reduction of 4.9% in the current quarter compared to 1.1% in the prior year's quarter. Prescription sales were negatively impacted by the effects of our non-participation in the Express Scripts retail pharmacy provider network from January 1, 2012 through September 14, 2012. 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 2013. Third party sales, where reimbursement is received from managed care organizations, the government, employers or private insurers, were 95.7% of prescription sales for the quarter ended November 30, 2012, compared to 95.8% in the prior 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 169 million compared to 179 million for the same period last year. Prescriptions adjusted to 30 day equivalents were 201 million in the current quarter versus 208 million in last year's quarter.

Front-end sales increased 0.2% and were 36.2% of total net sales for the current quarter ended November 30, 2012. In comparison, prior year front end sales increased 5.6% for the quarter, and comprised 34.5% of total net sales. The increase in the current quarter's front-end sales is due in part to new store openings, partially offset by negative comparable drugstore front end sales. Comparable drugstore front-end sales decreased 2.0% for the current quarter compared to the prior year which increased 2.4%. The decrease in comparable front end sales in the quarter was primarily attributed to lower customer traffic partially offset by an increase in basket size.

Gross margin as a percent of sales was 29.4% in the current quarter compared to 28.1% 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 lower market driven reimbursements. Front-end gross margin percentages were flat in the quarter. Front end margins were positively impacted by the non-prescription drug, personal care and convenience and fresh foods categories, but offset by costs associated with points earned from our new loyalty program and our e-commerce business, which had increased sales but a negative shift in product mix. A higher provision for LIFO negatively impacted margins for the quarter. New generic introductions, including generic Lipitor, are expected to continue to positively contribute to pharmacy gross margins for the remainder of fiscal 2013.

Gross profit dollars decreased $5 million or 0.1% over the first quarter of the prior year. The decrease is attributed to lower sales volumes partially offset by an increase in retail pharmacy margins.

We use the LIFO method of inventory valuation, which can only be determined annually when inflation rates and inventory levels are finalized; therefore, LIFO inventory costs for the interim financial statements are estimated. Cost of sales included a LIFO provision of $55 million for the quarter ended November 30, 2012 versus $45 million a year ago. As of the first quarter, our estimated annual inflation rate for the current year was 2.5% compared to 2.0% last year.

Earnings in the 45% Alliance Boots equity method investment for the three month period ended November 30, 2012 were $4 million. Earnings included amortization expense of $12 million resulting from the step up of certain Alliance Boots assets, $8 million of which related to inventory. Alliance Boots earnings are reported on a three-month lag. As a result, only August's results of operations of Alliance Boots are reflected in the equity earnings in Alliance Boots included in our reported net earnings for the fiscal quarter ended November 30, 2012.

Selling, general and administrative expenses as a percentage of sales were 25.4% for the first quarter and 23.1% a year ago. As a percentage of sales, expenses in the current quarter were higher primarily due to store salaries, occupancy expense, USA Drug expenses which include operating, acquisition and store closing costs, store direct expenses, Hurricane Sandy expenses, advertising and investments in strategic initiatives and capabilities.

Selling, general and administrative expense dollars increased $194 million, or 4.6% over the first quarter of the prior year. Costs associated with Hurricane Sandy contributed 0.9%, while USA Drug operations accounted for 1.2% of the increase (0.6% from operations and 0.6% in acquisition related costs). The remaining increase was primarily attributed to new stores.

Interest was a net expense of $37 million and $17 million for the periods ending November 30, 2012 and 2011, respectively. The increase in interest expense for the three month period is primarily attributed to the $4.0 billion note issuance which occurred in September 2012. Interest expense for the periods ending November 30, 2012 and 2011 is net of $2 million and $3 million, respectively, that was capitalized to construction projects.

The effective tax rate was 38.2% compared to 37.2% in the prior year's quarter. The increase in the current year's effective tax rate, as compared to last year's rate is primarily attributed to a decrease in expected favorable permanent differences in fiscal 2013 compared to the prior year.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents were $1.8 billion at November 30, 2012, compared to $1.1 billion at November 30, 2011. Short-term investment objectives are to minimize risk, maintain liquidity and maximize after-tax yields. To attain these objectives, investment limits are placed on the amount, type and issuer of securities. Investments are principally in U.S. Treasury market funds.

Our Board of Directors has approved a long-term capital policy: to maintain a strong balance sheet and financial flexibility; reinvest in our core strategies; invest in strategic opportunities that reinforce our core strategies and meet return requirements; and return surplus cash flow to shareholders in the form of dividends and share repurchases over the long term.

Net cash provided by operating activities for the three months ended November 30, 2012 was $601 million compared to $809 million a year ago. When compared to the prior year, cash from operating activities decreased primarily as a result of lower net earnings and changes in working capital balances. For the three months ended November 30, 2012, working capital was a cash use of $214 million as compared to the prior year where working capital used $133 million. Cash provided by operations is the principal source of funds for expansion, acquisitions, remodeling programs, dividends to shareholders and stock repurchases.

Net cash used for investing activities was $809 million for the three months ended November 30, 2012 compared to $497 million a year ago. Additions to property and equipment were $336 million compared to $419 million last year primarily due to decreased investments in existing stores. During the first three months, we added a total of 231 locations (131 net) compared to 86 last year (51 net). The USA Drug acquisition contributed 141 locations (70 net). There were 16 owned locations added during the first three months and 46 under construction at November 30, 2012 versus 14 owned locations added and 47 under construction last year.

                                                            Infusion and
                                                             Respiratory         Specialty
                            Drugstores       Worksites        Services          Pharmacies         Mail Service        Total
August 31, 2012                   7,930             366                76                  11                  2         8,385
  New/Relocated                      76               5                 7                   1                  -            89
  Acquired                          142               -                 -                   -                  -           142
  Closed/Replaced                   (90 )            (2 )              (3 )                (5 )                -          (100 )
November 30, 2012                 8,058             369                80                   7                  2         8,516

Business acquisitions this year were $471 million versus $70 million in the prior year. Business acquisitions in the current year include the purchase of the regional drugstore chain USA Drug from Stephen L. LaFrance Holdings, Inc. and members of the LaFrance family for $416 million net of assumed cash, and selected other assets (primarily prescription files). The prior year acquisitions primarily include the purchase of prescription files. Additionally, in the prior year, we paid $29 million to Catalyst Health Solutions, Inc. which was the result of a working capital adjustment in accordance with the June 2011 sales agreement of our pharmacy benefit management business, Walgreens Health Initiatives, Inc.

Capital expenditures for fiscal 2013 are expected to be between $1.6 billion and $1.8 billion, excluding business acquisitions, joint ventures and prescription file purchases, although the actual amount may vary depending upon a variety of factors, including, among other things, the timing of implementation of certain capital projects. We expect new drugstore organic growth of approximately 1.5 to 2.5 percent in fiscal 2013. In the first quarter, we added a total of 231 locations, of which 76 were new or relocated drugstores. We are continuing to relocate stores to more convenient and profitable freestanding locations.

Net cash provided by financing activities was $740 million compared to the prior year's net cash use of $774 million. In September 2012, we received proceeds from a public offering of $4.0 billion of notes with varying interest rates (see . . .