SECURITIES AND EXCHANGE COMMISSION ~~WASHINGTON, D.C.~~

WASHINGTON, D.C.

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities and Exchange Act of 1934 ~~For the quarterly period ended September 29, 2001. Commission file number 333-41239~~

~~DUANE~~For ~~READE INC.~~the ~~(Exact~~quarterly ~~name~~period ofended ~~registrant~~September as28, ~~specified in its charter)~~2002.

DELAWARE	04-3164702
(State or other jurisdiction of incorporation or organization)	(IRS Employer ID Number)

Commission file number 333-41239

DRI I Inc.*	Delaware	04-3166107
Duane Reade*	New York	11-2731721
Duane Reade International, Inc*	Delaware	22-3672347
Duane Reade Realty, Inc *	Delaware	13-4074383

DUANE READE INC.

* Guarantors(Exact ~~with~~name ~~respect~~of toregistrant ~~the~~as ~~Company's~~specified ~~9¼%~~in ~~Senior~~its ~~Subordinated Notes due 2008~~charter)

440 Ninth Avenue New York, New York	10001
DELAWARE				04-3164702
(Address of principal executive offices)	(Zip Code)
(State or other jurisdiction of incorporation or organization)				(IRS Employer ID Number)
DRI I Inc.*		Delaware		04-3166107
Duane Reade*		New York		11-2731721
Duane Reade International, Inc*		Delaware		22-3672347
Duane Reade Realty, Inc *		Delaware		13-4074383
* Guarantors with respect to the Company’s 2.1478% Senior Convertible Notes due 2022 and the Company’s 9¼% Senior Subordinated Notes due 2008
440 Ninth Avenue New York, New York			10001
(Address of principal executive offices)			(Zip Code)
(212) 273-5700
(Registrant’s telephone number, including area code)

(212) 273-5700

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	~~Name of each exchange on which registered~~	Name of each exchange on which registered
Common Stock, $.01 par value per share	~~New York Stock Exchange. Inc.~~	New York Stock Exchange. Inc.
9¼% Senior Subordinated Notes due 2008	None

Securities registered pursuant to Section 12 (g) of the Act: ~~None.~~

None.

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

The number of shares of the Common Stock outstanding as of November 9 8, ~~2001~~2002: 23,~~328~~947,~~317~~742

INDEX

PART I	- FINANCIAL INFORMATION
PART I -
	ITEM 1. - FINANCIAL STATEMENTS
	Consolidated Statements of Operations (Unaudited) - For the 13 and 39 Weeks Ended September 29, 2001 and September 23, 2000
		Consolidated Statements of Operations (Unaudited) - For the 13 and 39 Weeks Ended September 28, 2002 and September 29, 2001
	Consolidated Balance Sheets - As of September 29, 2001 (Unaudited) and December 30, 2000
		Consolidated Balance Sheets As of September 28, 2002 (Unaudited) and December 29, 2001
	Consolidated Statements of Cash Flows (Unaudited) - For the 39 Weeks Ended September 29, 2001 and September 23, 2000
		Consolidated Statements of Cash Flows (Unaudited) - For the 39 Weeks Ended September 28, 2002 and September 29, 2001
	~~Notes to Consolidated Financial Statements (Unaudited)~~	Notes to Consolidated Financial Statements (Unaudited)
	ITEM 2. - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II	- OTHER INFORMATION
	ITEM 3. - MARKET RISK
	ITEM 4. - CONTROLS AND PROCEDURES
PART II -		OTHER INFORMATION
SIGNATURES
CERTIFICATIONS

~~PART I – FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS~~2

~~Duane~~PART ~~Reade~~I ~~Inc. Consolidated Statements~~- ofFINANCIAL ~~Operations (Unaudited) (In thousands, except per share amounts)~~INFORMATION

	For the 13 Weeks Ended				For the 39 Weeks Ended
	Sept 29, 2001		Sept 23, 2000		Sept 29, 2001		Sept 23, 2000
Net sales	$	279,433	$	242,978	$	843,460	$	712,803
Cost of sales	213,614		178,291		641,768		533,039
Gross profit	65,819		64,687		201,692		179,764
Selling, general & administrative expenses	42,974		38,227		130,870		111,772
Depreciation and amortization	6,685		6,167		19,745		18,161
Store pre-opening expenses	482		327		1,381		1,078
	50,141		44,721		151,996		131,011
Operating income	15,678		19,966		49,696		48,753
Interest expense, net	5,099		9,011		21,834		26,045
Income before income taxes	10,579		10,955		27,862		22,708
Income taxes	4,224		4,729		11,649		9,583
Income before extraordinary charge	6,355		6,226		16,213		13,125
Extraordinary charge, net of income taxes	-		-		1,491		-
Net income	$	6,355	$	6,226	$	14,722	$	13,125
Per Common Share – Basic
Income before extraordinary charge	$	0.28	$	0.35	$	0.80	$	0.75
Extraordinary charge, net of income taxes	-		-		0.07		-
Net income	$	0.28	$	0.35	$	0.73	$	0.75
Weighted Average Common Shares Outstanding	22,933		17,824		20,254		17,578
Per Common Share – Diluted
Income before extraordinary charge	$	0.27	$	0.34	$	0.77	$	0.72
Extraordinary charge, net of income taxes	-		-		0.07		-
Net income	$	0.27	$	0.34	$	0.70	$	0.72
Weighted Average Common Shares Outstanding	23,781		18,555		21,168		18,344

ITEM 1. FINANCIAL STATEMENTS

Duane Reade Inc.

Consolidated Statements of Operations (Unaudited)

(In thousands, except per share amounts)

	For the 13 Weeks Ended				For the 39 Weeks Ended
	Sept 28, 2002		Sept 29, 2001		Sept 28, 2002			Sept 29, 2001

Net sales	$	312,818	$	279,433	$	943,376		$	843,460
Cost of sales	240,047		213,614		732,669			641,768

Gross profit	72,771		65,819		210,707			201,692

Selling, general & administrative expenses	48,921		42,974		145,078			130,870
Insurance recovery	—		—		(9,378		)	—
Depreciation and amortization	6,874		6,685		20,377			19,745
Store pre-opening expenses	265		482		1,610			1,381
	56,060		50,141		157,687			151,996

Operating income	16,711		15,678		53,020			49,696
Interest expense, net	3,706		5,099		14,375			21,834

Income before income taxes	13,005		10,579		38,645			27,862
Income taxes	5,029		4,224		15,344			11,649
Income before extraordinary charges and cumulative effect of accounting change	7,976		6,355		23,301			16,213
Extraordinary charges, net of income taxes	192		—		7,925			1,491
Cumulative effect of accounting change, net of income taxes	—		—		9,262			—
Net income	$	7,784	$	6,355	$	6,114		$	14,722

Per common share – basic

Income before extraordinary charges and cumulative effect of accounting change	$	0.33	$	0.28	$	0.98		$	0.80
Extraordinary charges, net of income taxes	0.01		—		0.33			0.07
Cumulative effect of accounting change, net of income taxes	—		—		0.39			—
Net income	$	0.32	$	0.28	$	0.26		$	0.73

Weighted average common shares outstanding	23,948		22,933		23,816			20,254

Per common share – diluted

Income before extraordinary charges and cumulative effect of accounting change	$	0.33	$	0.27	$	0.95		$	0.77
Extraordinary charges, net of income taxes	0.01		—		0.32			0.07
Cumulative effect of accounting change, net of income taxes	—		—		0.38			—
Net income	$	0.32	$	0.27	$	0.25		$	0.70

Weighted average common shares outstanding	24,424		23,781		24,574			21,168

The accompanying notes are an integral part of these financial statements.

~~Duane Reade Inc. Consolidated Balance Sheets (In thousands, except share and per share data.)~~3

	Sept 29, 2001			December 30, 2000
	(Unaudited)
ASSETS
Current Assets
Cash	$	1,095		$	979
Receivables	69,782			48,953
Inventories	209,753			172,568
Deferred income taxes	8,831			13,023
Prepaid expenses and other current assets	7,425			8,770
TOTAL CURRENT ASSETS	296,886			244,293
Property and equipment, net	128,700			107,883
Goodwill, net of accumulated amortization of $34,327 and $31,020	156,819			152,951
Deferred income taxes	4,352			8,852
Other assets	69,797			56,951
TOTAL ASSETS	$	656,554		$	570,930
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable	$	51,235		$	47,575
Accrued interest	3,756			8,394
Other accrued expenses	24,101			19,830
Current portion of long-term debt	7,758			12,325
Current portion of capital lease obligations	458			1,703
TOTAL CURRENT LIABILITIES	87,308			89,827
Long-term debt, less current portion	253,840			337,913
Capital lease obligations, less current portion	843			1,060
Other non-current liabilities	38,655			27,633
TOTAL LIABILITIES	380,646			456,433
Stockholders' equity
Preferred stock, $0.01 par; authorized 5,000,000 shares; issued and outstanding: none	-			-
Common stock, $0.01 par; authorized 75,000,000 shares; issued and outstanding 23,102,641 and 18,232,339 shares	231			182
Paid-in capital	304,801			154,536
Accumulated other comprehensive loss	(3,623		)	-
Accumulated deficit	(25,501		)	(40,221		)
TOTAL STOCKHOLDERS' EQUITY	275,908			114,497
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	656,554		$	570,930

Duane Reade Inc.

Consolidated Balance Sheets

(In thousands, except share amounts)

	September 28, 2002			December 29, 2001
	(Unaudited)
ASSETS
Current Assets
Cash	$	12,123		$	4,972
Receivables	57,147			57,085
Inventories	223,184			220,707
Deferred income taxes	9,124			14,295
Prepaid expenses and other current assets	16,356			19,412
TOTAL CURRENT ASSETS	317,934			316,471

Property and equipment, net	162,419			135,835
Goodwill, net of accumulated amortization of $35,323	160,236			158,395
Deferred income taxes	—			1,082
Other assets	86,411			67,202
TOTAL ASSETS	$	727,000		$	678,985

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	54,507		$	69,088
Accrued interest	4,173			5,599
Other accrued expenses	19,290			19,097
Current portion of long-term debt	3,822			7,758
Current portion of capital lease obligations	530			820
TOTAL CURRENT LIABILITIES	82,322			102,362

Long-term debt, less current portion	282,242			238,401
Capital lease obligations, less current portion	1,625			176
Other noncurrent liabilities	41,540			42,839
TOTAL LIABILITIES	407,729			383,778

Commitments and Contingencies (Note 12)

Stockholders’ equity
Preferred stock, $0.01 par; authorized 5,000,000 shares; issued and outstanding: none	—			—
Series A Preferred stock, $0.01 par; authorized 75,000 shares; issued and outstanding: none	—			—
Common stock, $0.01 par; authorized 75,000,000 shares; issued and outstanding 23,947,742 and 23,423,422 shares	239			234
Paid-in capital	328,410			314,060
Accumulated other comprehensive income	—			(3,596		)
Accumulated deficit	(9,378		)	(15,491		)
TOTAL STOCKHOLDERS’ EQUITY	319,271			295,207

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	727,000		$	678,985

The accompanying notes are an integral part of these financial statements.

~~Duane Reade Inc. Consolidated Statements of Cash Flows (Unaudited) (In thousands)~~4

	For the 39 Weeks Ended
	Sept 29, 2001			Sept 23, 2000
Cash flows (used in) provided by operating activities:
Net income	$	14,722		$	13,125
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization of property and equipment	11,155			10,118
Amortization of goodwill and other intangibles	9,784			9,298
Deferred tax provision	11,974			9,493
Extraordinary charge	1,491			-
Non-cash rent expense	4,142			3,623
Changes in operating assets and liabilities (net of effect of acquisitions):
Receivables	(11,997		)	(7,194		)
Inventories	(37,192		)	(19,095		)
Accounts payable	3,660			932
Prepaid and accrued expenses	(6,750		)	(5,796		)
Increase in other (assets) liabilities, net	(5,235		)	(7,552		)
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES	(4,246		)	6,952
Cash flows used in investing activities:
Lease acquisition and other costs	(4,391		)	(1,640		)
Capital expenditures	(31,883		)	(19,210		)
NET CASH USED IN INVESTING ACTIVITIES	(36,274		)	(20,850		)
Cash flows from financing activities:
Proceeds from equity offering	130,446			-
Net borrowings (repayments) – term loans	(99,640		)	2,562
Net borrowings (repayments) – revolving credit facility	11,000			13,500
Exercise of stock options	2,181			582
Financing costs	(1,889		)	(1,177		)
Repayments of capital lease obligations	(1,462		)	(1,412		)
NET CASH PROVIDED BY FINANCING ACTIVITIES	40,636			14,055
Net increase in cash	116			157
Cash at beginning of period	979			1,013
Cash at end of period	$	1,095		$	1,170

Duane Reade Inc.

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

	For the 39 Weeks Ended
	September 28, 2002			September 29, 2001
Cash flows provided by (used in) operating activities:
Net income	$	6,114		$	14,722
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization of property and equipment	13,880			11,155
Amortization of goodwill and other intangibles	7,860			9,784
Deferred tax provision	15,754			11,974
Extraordinary charges, net of tax	(3,067		)	1,491
Cumulative effect of accounting change, net of tax	9,262			—
Non-cash rent expense	7,761			4,142
Changes in operating assets and liabilities (net of the effect of acquisitions):
Receivables	538			(11,997		)
Inventories	(16,558		)	(37,192		)
Accounts payable	(14,581		)	3,660
Prepaid and accrued expenses	299			(6,750		)
Other assets and liabilities, net	(7,597		)	(5,235		)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES	19,665			(4,246		)

Cash flows used in investing activities:
Capital expenditures	(36,400		)	(31,883		)
Lease, customer file and other acquisition costs	(8,159		)	(4,391		)
NET CASH USED IN INVESTING ACTIVITIES	(44,559		)	(36,274		)

Cash flows provided by financing activities:
Proceeds from convertible note offering	218,501			—
Proceeds from equity offering	—			130,446
Repayment of term loans	(90,217		)	(99,640		)
Net (repayment) borrowing of revolving credit facility	(10,000		)	11,000
Repayment of senior subordinated notes	(78,379		)	—
Exercise of stock options	1,157			2,181
Financing costs	(8,000		)	(1,889		)
Repayments of capital lease obligations	(1,017		)	(1,462		)
NET CASH PROVIDED BY FINANCING ACTIVITIES	32,045			40,636

Net increase in cash	7,151			116
Cash at beginning of period	4,972			979
Cash at end of period	$	12,123		$	1,095

The accompanying notes are an integral part of these financial statements.

~~Notes to Consolidated Financial Statements (Unaudited)~~5

Notes to Consolidated Financial Statements

1. Basis of Presentation

The Unaudited Consolidated Financial Statements included herein reflect all adjustments (consisting of normal recurring items) which, in the opinion of management, are necessary to present fairly the results of operations, financial position and cash flows of Duane Reade Inc. (the “Company”), and have been prepared, in all material respects, in accordance with the same accounting principles followed in the preparation of the Company’s annual financial statements for the year ended December 3029, ~~2000~~2001, except as disclosed herein. These financial statements should be read in conjunction with the Company’s financial statements included in its Annual Report on Form 10-K for the year ended December 3029, ~~2000~~2001. The Unaudited Consolidated Financial Statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and balances have been eliminated. ~~Certain~~ ~~prior~~Cost ~~year~~of ~~amounts~~sales ~~have~~includes ~~been~~all occupancy related costs ~~reclassified~~and toexpenses, ~~conform~~consisting toof ~~the~~lease ~~current~~and ~~year~~sublease ~~presentation. Cost~~related ofincome and expenses, other recurring real estate related income and expenses primarily from sales and ~~includes~~terminations ~~all~~of leases related to store ~~occupancy~~closings and relocations, income from sales of market related data, store utility costs and warehouse expenses, and ~~lease~~distribution ~~and~~costs. ~~sublease~~Other related real estate income, and income from sales ~~sales~~ of market related data amounted to $3.7 million in the quarter ended September 28, 2002 versus $5.4 million in the quarter ended September 29, 2001, and $4.8 million ~~warehouse~~in ~~expenses~~the nine months ended September 28, 2002 as compared to $8. ~~Earnings~~9 million in the nine months ended September 29, 2001. Earnings per share amounts are calculated based on the weighted average ~~shares~~number of shares outstanding during the period and may not add due to rounding. The results for ~~the~~ the interim periods presented are not necessarily indicative of the results ~~expected~~ expected for the full year.

The Company has no assets or operations other than its investment in its subsidiary guarantors. Accordingly, the Unaudited Consolidated Financial Statements present the combined assets and operations of the subsidiary guarantors.

2. World Trade Center Disaster and Related Business Interruption and Property Losses

On September 11, 2001, as a result of the terrorist attack on the World Trade Center in lower Manhattan, the Company lost all of its inventory and other property and equipment in its World Trade Center location and lost a portion of its inventory and other property in several other locations. The Company also experienced substantial business disruption resulting from the permanent loss of two stores and temporary closings of 20 additional stores during the period immediately following the ~~attacks~~attack. The Company believes that it is fully insured for its property and business interruption losses in connection with this event, as well as the extra costs to return temporarily closed stores to normal operations. AsThe ofCompany ~~September~~has ~~29,~~collected ~~2001~~its ~~all~~property loss claim and a partial payment of ~~the~~$9.9 ~~temporarily~~million ~~closed~~toward ~~stores~~its ~~had~~business interruption ~~reopened.~~and Atextra ~~September~~expenses 29claim. On September 24, ~~2001~~2002, ~~the~~after ~~Company~~additional ~~had~~claim ~~recognized~~settlement andiscussions ~~insurance~~were ~~claim~~unsuccessful, the ~~receivable~~Company offiled ~~$4.2~~suit ~~million~~against ~~representing~~its insurance carrier to recover the ~~portion~~balance of its business ~~identified~~interruption ~~property~~claim ~~losses deemed~~related ~~fully~~to ~~recoverable~~these losses. Additional ~~Expected~~ insurance recoveries for the business interruption ~~interruption~~ portion of the Company’s insurance claim, ~~will~~which could be ~~recognized~~material, ~~when~~will be recognized when collection of such recoveries is assured.

3. ~~Completed~~Accounting ~~Follow-on Equity Offering~~Change

OnAs ~~May~~of 14December 30, 2001, the Company ~~filed~~adopted a change ~~Form~~in ~~S-3~~accounting ~~registration~~method ~~statement~~to ~~for~~convert afrom ~~public~~the ~~equity~~retail ~~offering~~dollar first-in, ~~(the~~first-out (“~~Offering~~FIFO”) ofmethod ~~4,000,000~~to ~~primary~~a ~~shares~~specific ofcost ~~its~~based ~~common~~last-in, ~~stock~~first-out (~~the~~ “~~Primary Shares~~LIFO”) ~~and 3,000,000 secondary shares of its common stock. The underwriting~~ ~~agreement~~method. ~~for~~Adoption ~~this~~of ~~offering also provided~~ the ~~underwriters~~specific ~~with~~cost aLIFO ~~30-day~~method ~~option to~~will ~~purchase~~more upaccurately ~~to an additional 1,050,000 secondary shares (“Additional~~value ~~Secondary~~inventory ~~Shares”~~by ~~and~~eliminating ~~collectively with~~ the ~~3,000,000~~averaging ~~secondary~~inherent ~~shares,~~in the ~~“Secondary~~ ~~Shares”)~~retail ~~to cover over-allotments of shares~~method. ~~The~~ ~~Offering was declared effective by the~~In ~~Securities and Exchange Commission on June 7~~addition, ~~2001~~the ~~and~~specific ~~was~~cost ~~priced~~LIFO atmethod ~~$34.50~~will ~~per share~~reflect to the ~~public~~impact ~~with underwriting discounts and commissions~~ of ~~$1.66~~inflation ~~per~~in ~~share~~the ~~that~~Company’s ~~resulted~~gross ~~in proceeds of $32~~margin.84 ~~per~~The ~~share~~effect toof ~~the~~changing ~~Company~~from ~~and~~ the ~~selling~~ ~~stockholders. The~~retail ~~Offering~~method ~~was~~to ~~closed~~the onspecific ~~June~~cost ~~13,~~method ~~2001~~was ~~and~~a ~~resulted~~reduction in ~~$130.4~~inventory ~~million~~of ~~net proceeds to the Company after deducting various expenses related to the Offering~~$16. In0 ~~addition~~million, ~~the Company received proceeds of~~ ~~$0.5~~resulting ~~million~~in ~~related to the exercise of stock options related to~~ a ~~portion~~cumulative ~~of the~~effect ~~shares~~ of ~~selling~~an ~~stockholders~~accounting ~~sold~~change as ~~Secondary~~of ~~Shares~~December ~~in the~~30, ~~Offering. The~~2001 ~~net proceeds to the Company from the sale~~ of ~~the~~approximately ~~Primary~~$9.3 ~~Shares~~million, ~~together~~net ~~with~~of ~~the~~an ~~proceeds~~income ~~it received~~tax ~~from~~benefit ~~the related exercise~~ of ~~stock options, were used to repay a~~$6.7 ~~portion~~million ~~of amounts outstanding under the Company’s credit agreement~~ (~~the “Senior~~$0.39 ~~Credit~~per ~~Agreement”),~~basic ascommon ~~amended,~~share by and ~~among~~$0.38 ~~Duane~~per ~~Reade~~diluted ~~(and~~common ~~its~~share, ~~affiliates~~respectively),. ~~Credit~~The ~~Suisse~~cumulative ~~First~~effect ~~Boston~~of ~~(“CSFB”),~~changing asfrom ~~syndication~~FIFO ~~agent~~to ~~for~~LIFO ~~the~~on periods ~~lenders~~prior ~~thereunder,~~to ~~and~~December ~~Fleet National Bank (“Fleet”)~~30, as2001 ~~administrative~~cannot ~~agent for~~be ~~the lenders thereunder~~determined. ~~The~~Pro ~~Secondary~~forma ~~Shares~~effects ~~were~~of ~~sold by certain selling~~the ~~stockholders~~change ~~primarily~~for ~~affiliated~~prior ~~with~~periods ~~private~~have ~~equity~~not ~~funds~~been ~~managed~~presented ~~by CSFB,~~ as ~~well~~ ascost byinformation ~~certain~~is ~~management investors~~not determinable.

4. ~~Extraordinary Charge~~ Inventory

InAt ~~the~~September ~~second~~28, ~~quarter~~2002, ~~in connection~~inventories ~~with~~would ~~the~~have ~~Offering~~been ~~and~~greater ~~the~~by ~~related refinancing of a portion of the Company’s outstanding term loans under its Senior Credit Agreement, the Company recorded a~~ $1.~~5 million extraordinary charge, net of an income tax benefit of~~3 ~~$1.1~~ million, ~~representing~~if ~~the~~they ~~accelerated~~had ~~amortization~~been ofvalued ~~deferred~~on ~~financing costs~~a ~~associated~~lower ~~with the portion~~ of ~~outstanding~~FIFO ~~term~~cost ~~loans retired~~ or ~~refinanced as~~market ~~a result of the completed Offering and related debt refinancing~~basis.

~~5. Net Income per Common Share~~6

~~Net income per common share is based on the weighted average shares outstanding during each period in accordance with the provisions of Financial Accounting Standards Board (“FASB”) Statement No~~5. ~~128 “Earnings Per~~ ~~Share.” Basic~~Convertible ~~earnings~~Notes ~~per~~Offering share is computed based on the weighted average number of common shares outstanding during the period. Diluted earnings per share gives effect to all dilutive potential common shares outstanding during the period. Dilutive potential common shares include shares issuable upon exercise of the Company’s "in-the-money" stock options. Of the options to purchase 2,286,143 and ~~2,367,101~~Tender shares of common stock outstanding at September 29, 2001 and September 23, 2000, respectively, options to purchase 45,156 shares at September 29, 2001 and 659,168 shares at September 23, 2000 were not included in the computation of diluted earnings per share because the exercise prices of such options were greater than the average market price of the common shares.Offer

On April 16, 2002, the Company completed an offering (the “Offering”) of $381.5 million aggregate principal amount of Senior Convertible Notes maturing on April 16, 2022 (the “Convertible Notes”). The Convertible Notes were issued at a price of $572.76 per note (57.276% of the principal amount at maturity) and pay cash interest at the rate of 2.1478% per year on the principal amount at maturity, payable semi-annually in arrears on April 16 and October 16 of each year beginning on October 16, 2002, until April 16, 2007. After that date, interest will accrue on the notes as amortization of the original issue discount representing a yield to maturity of 3.75% per year, computed on a semi-annual bond equivalent basis. After deducting commissions and expenses related to the offering, net proceeds of $210.5 million were realized by the Company. A portion of the proceeds was used to repay an aggregate of approximately $50.1 million in principal amount of Term A loans and Term B loans and $41.5 million in principal amount of revolving loans (which revolving loans may be reborrowed) under our Senior Credit Agreement. In addition, the Company terminated an interest rate swap agreement, which was set to expire in January 2003, at a cost of approximately $3.9 million.

Holders of the Convertible Notes may convert each $1,000 in principal amount of their convertible notes into 14.1265 shares of the Company’s common stock, subject to adjustment, only if (1) the sale price of the Company’s common stock reaches, or the trading price of the notes falls below, specified thresholds, (2) the notes are called for redemption, or (3) specified corporate transactions have occurred. Upon conversion, the Company has the right to deliver, in lieu of its common stock, cash or a combination of cash and common stock in an amount as described in the indenture.

Holders of the Convertible Notes may require the Company to purchase all or a portion of their notes on April 16, 2007 at a price of $572.76 per note plus accrued cash interest, if any; on April 16, 2012 at a price of $689.68 per note plus accrued cash interest, if any; and on April 16, 2017 at a price of $830.47 per note plus accrued cash interest, if any. The Company may choose to pay the purchase price of such notes in cash or common stock or a combination of cash and common stock. In addition, if the Company experiences a change in control, each holder may require the Company to purchase for cash all or a portion of such holder’s notes at a price equal to the sum of the issue price plus accrued original issue discount and accrued cash interest, if any, to the date of purchase.

The Company may redeem for cash all or a portion of the convertible notes at any time after April 16, 2007, at a price equal to the sum of the issue price plus accrued original issue discount and accrued cash interest, if any, to the redemption date.

On June 3, 2002, the Company completed a tender offer and consent solicitation (the “Tender Offer”) to purchase all of its $80 million of outstanding principal amount of 9¼% Senior Notes due 2008 (the “Senior Notes”). The Tender Offer was priced at $1,083.50 per each $1,000 principal amount of Senior Notes tendered to the Company on or before the consent deadline of May 20, 2002 (the “Consent Deadline”), and $1,063.50 per each $1,000 principal amount of Senior Notes tendered to the Company after the Consent Deadline but before the May 31, 2002 expiration date, plus accrued and unpaid interest on the principal amount thereof through the payment date. Of the total $80 million Senior Notes outstanding, $78.2 million were tendered on or before the Consent Deadline and an additional $0.2 million were tendered thereafter. On June 3, 2002, the Company paid a total of $87.1 million from the balance of the proceeds of the Offering in satisfying the Tender Offer. This payment was composed of principal value ($78.4 million), premium payments ($6.5 million) and accrued interest earned from February 16, 2002 through the payment date ($2.2 million).

On July 10, 2002, the Company, using the remaining proceeds from the Offering, repaid an aggregate of $36.0 million in principal amount of Term A loans and Term B loans under the Senior Credit Agreement. After giving effect to this repayment, the Company had a remaining outstanding balance of $66.8 million of Term A loans and Term B loans in the aggregate.

6. Extraordinary Charges

During the second quarter, the Company repaid an aggregate of approximately $50.1 million of Term A loans and Term B loans outstanding under the Senior Credit Agreement and $78.4 million of the $80 million aggregate principal amount of outstanding Senior Notes. In connection with these repayments, the Company recorded a $1.2 million extraordinary charge, net of an income tax benefit of $0.9 million, representing the accelerated amortization of deferred financing costs associated with the portion of outstanding term loans and Senior Notes retired. In addition, the Company recorded a $4.2 million extraordinary charge, net of an income tax benefit of $2.9 million, representing the consent premium paid to the holders of the Senior Notes tendered for retirement and certain related expenses. Finally, the Company recorded a $2.3 million extraordinary charge, net of an income tax benefit of $1.6 million, representing the cost to terminate the interest rate swap agreement that was tied to interest expenses on Term A loans, Term B loans and revolving loans that were repaid with the proceeds of the Offering.

During the third quarter, the Company repaid an aggregate of approximately $36.0 million of Term A loans and Term B loans outstanding under the Senior Credit Agreement. In connection with this repayment, the Company recorded an extraordinary charge of $0.2 million, net of an income tax benefit of $0.1 million, representing the accelerated amortization of that portion of deferred financing costs attributable to the Term A loans and Term B loans that were repaid.

7. Net Income per Common Share

Net income per common share is based on the weighted average shares outstanding during each period in accordance with the provisions of FASB Statement No. 128 “Earnings Per Share.” Basic earnings per share is computed based on the weighted average number of common shares outstanding during the period. Diluted earnings per share gives effect to all dilutive potential common shares outstanding during the period. Dilutive potential common shares include shares issuable upon exercise of the Company’s “in-the-money” stock options. Of the options to purchase 2,673,015 and 2,286,143 shares of common stock outstanding at September 28, 2002 and September 29, 2001, respectively, options to purchase 1,510,588 shares at September 28, 2002 and 45,156 shares at September 29, 2001 were not included in the computation of diluted earnings per share because the exercise prices of such options were greater than the average market price of the common shares and the impact of these shares would have been anti-dilutive.

The following table sets forth the computation of income per common share for the periods presented (in thousands, except per share amounts):

	For the 13 Weeks Ended				For the 39 Weeks Ended
	Sept 29, 2001		Sept 23, 2000		Sept 29, 2001		Sept 23, 2000
	Sept 28, 2002		Sept 29, 2001		Sept 28, 2002		Sept 29, 2001
Income before extraordinary charge	$	6,355	$	6,226	$	16,213	$	13,125
Income before extraordinary charges and cumulative effect of accounting change	$	7,976	$	6,355	$	23,301	$	16,213
Extraordinary charge, net of income taxes	-		-		1,491		-
Extraordinary charges, net of income taxes	192		—		7,925		1,491
Net Income	$	6,355	$	6,226	$	14,722	$	13,125
Cumulative effect of accounting change, net of income taxes	—		—		9,262		—
Weighted average number of common shares outstanding during the period – basic	22,933		17,824		20,254		17,578
Net income	$	7,784	$	6,355	$	6,114	$	14,722
Potential dilutive shares	848		731		914		766
Weighted average number of common shares outstanding during the period – basic	23,948		22,933		23,816		20,254
Weighted average number of shares outstanding – diluted	23,781		18,555		21,168		18,344
Potential dilutive shares	476		848		758		914
Weighted average number of shares outstanding – diluted	24,424		23,781		24,574		21,168
Per common share – basic
Income before extraordinary charge	$	0.28	$	0.35	$	0.80	$	0.75
Income before extraordinary charges and cumulative effect of accounting change	$	0.33	$	0.28	$	0.98	$	0.80
Extraordinary charge, net of income taxes	-		-		0.07		-
Extraordinary charges, net of income taxes	0.01		—		0.33		0.07
Net income	$	0.28	$	0.35	$	0.73	$	0.75
Cumulative effect of accounting change, net of income taxes	—		—		0.39		—
Net income	$	0.32	$	0.28	$	0.26	$	0.73
Per common share – diluted
Income before extraordinary charge	$	0.27	$	0.34	$	0.77	$	0.72
Income before extraordinary charges and cumulative effect of accounting change	$	0.33	$	0.27	$	0.95	$	0.77
Extraordinary charge, net of income taxes	-		-		0.07		-
Extraordinary charges, net of income taxes	0.01		—		0.32		0.07
Net income	$	0.27	$	0.34	$	0.70	$	0.72
Cumulative effect of accounting change, net of income taxes	—		—		0.38		—
Net income	$	0.32	$	0.27	$	0.25	$	0.70

~~6. Income Taxes~~8

~~Income taxes are recorded based on the estimated effective tax rate expected to be applicable for the full fiscal year less applicable employment related tax credits~~8. ~~The~~ ~~effective~~Income ~~tax rate is greater than the statutory rate, primarily reflecting the impact of non-deductible goodwill and state taxes.~~Taxes

7Income taxes are recorded based on the estimated combined statutory tax rates expected to be applicable for the full fiscal year less applicable employment related tax credits. ~~Acquisitions~~The effective tax rate is lower than the combined statutory rates, primarily reflecting the impact of these wage-related income tax credits.

~~During the first nine months of fiscal 2001, the Company acquired certain assets of sixteen separate independently owned pharmacy establishments~~9. ~~The total cost of these~~ acquisitions, which was principally paid for by the issuance of common stock, was $18.6 million and was allocated as follows: identified intangibles ($13.6 million), goodwill ($8.7 million), inventory ($2.3 million), property and equipment ($1.5 million) and other assets ($0.3 million), net of the current liability for the balance of a purchase price payable ($4.5 million) and accruals for expenses and liabilities assumed ($3.3 million). For the 13 weeks ended September 29, 2001, the Company acquired certain assets of six pharmacy establishments at a total cost of $10.7 million. Goodwill of $8.2 million related to acquisitions completed after June 30, 2001 has been recognized in accordance with Financial Accounting Standards Board Pronouncements Nos. 141 (FAS 141) and 142 (FAS 142), “Business Combinations” and “Goodwill and Other Intangible Assets” respectively. Under FAS 142, goodwill acquired in business combinations for which the acquisition date is after June 30, 2001 is not amortized. The operations of the acquired stores have been included in the consolidated financial statements from the dates of the acquisitions. The pro forma impact of these acquisitions was not material to sales or results of operations of the Company for the thirteen or thirty-nine week periods ended September 29, 2001.Acquisitions

During the first nine months of fiscal 2002, the Company acquired the customer files of nine pharmacies and the operations, including certain lease-related assets, of seven pharmacy establishments. The total cost of these acquisitions, of which $14.3 million was paid for by the issuance of common stock, was $19.1 million and was allocated as follows: Identified intangibles ($13.3 million), property and equipment ($2.5 million), inventory ($1.9 million), goodwill ($1.8 million) and other assets ($0.1 ~~Newly~~million), net of accruals for ~~Adopted~~expenses ~~Accounting~~and ~~Standards~~liabilities assumed ($0.5 million). For the 13 weeks ended September 28, 2002, the Company acquired the customer files of three pharmacies and the operation, including the lease-related asset, of one pharmacy establishment at a total cost of $1.8 million. The operations of the acquired stores have been included in the consolidated financial statements from the dates of the acquisitions. The pro forma impact of these acquisitions was not material to sales, results of operations or earnings per share of the Company for the thirteen or thirty-nine week periods ended September 28, 2002.

~~Financial Accounting Standards Board Pronouncement No~~10. ~~133~~Shareholder ~~(FAS~~Rights 133), “Accounting for Derivative Instruments and Hedging Activities,” requires companies to disclose the nature and substance of derivative instrument transactions in which they may engage and to record in their financial statements the fair value of derivative assets and liabilities. At September 29, 2001, the Company has reflected a tax-affected loss on an interest rate swap transaction of $3.6 million in the “Accumulated other comprehensive loss” component of Shareholders’ Equity, in accordance with FAS 133’s provisions related to cash flow hedges.Plan

~~The~~On ~~Company~~September ~~maintains~~5, an2002, ~~interest rate risk management strategy that allows for~~ the ~~use of derivative instruments to minimize significant,~~ ~~unanticipated earnings fluctuations caused by interest rate volatility. The~~ Company’s ~~specific~~Board ~~goals~~of ~~are~~Directors ~~(1)~~adopted toa ~~manage~~Shareholder ~~interest~~Rights ~~rate~~Plan ~~sensitivity~~designed byto enhance ~~modifying~~ the ~~maturity~~Board’s ~~characteristics~~ability ~~of certain of its debt instruments and (2)~~ to ~~lower~~protect ~~(where~~shareholders ~~possible)~~against, ~~the~~among ~~cost~~other ~~of borrowed funds. The Company uses~~things, ~~interest~~unsolicited ~~rate~~attempts ~~swaps~~ to ~~convert~~acquire acontrol ~~portion~~ of ~~its~~the ~~variable~~Company ~~rate~~that ~~debt~~do tonot ~~fixed rates.~~offer ~~The resulting cost of funds is lower than it would have been had fixed~~an ~~rate~~adequate ~~borrowings~~price ~~been~~to ~~issued~~all ~~directly.~~shareholders Asor aare ~~result~~otherwise ofnot ~~applying~~in the ~~net~~best ~~proceeds~~interests of ~~$130.4 million from~~ the ~~completed~~Company ~~Offering~~and toits ~~retirement of outstanding~~shareholders. ~~variable~~The ~~rate~~Plan ~~debt,~~was ~~after~~not ~~the~~adopted ~~effects~~in ofresponse ~~the~~to ~~interest~~any ~~rate~~specific ~~swaps~~effort ~~have~~to ~~been~~acquire ~~considered,~~control ~~all but $8.1 million~~ of the ~~remaining $158~~Company.~~1 million of Senior Credit Agreement outstanding term loans at September 29, 2001 were effectively hedged to fixed rates.~~

~~Due~~Under to the ~~volatile nature of short-term interest rates~~Plan, ~~the Senior Credit Agreement allows for~~each ~~some~~common ~~latitude~~shareholder ~~with~~of ~~respect to~~ the Company’s ~~ability to engage in transactions aimed~~ at ~~minimizing~~the aclose ~~portion~~ of ~~the~~business ~~risk~~on ~~associated~~September ~~with the fluctuation in~~30, ~~short-term~~2002 ~~interest~~received ~~rates. In November 2000, the Company purchased~~ a ~~two-year interest~~dividend ~~rate~~of ~~swap~~one ~~agreement~~right ~~with~~for aeach ~~notional~~share ~~amount~~held of ~~$150.0~~the ~~million~~Common ofStock ~~floating~~of ~~rate~~the ~~term loan borrowings~~Company. ~~This~~ Each ~~swap~~right ~~agreement,~~entitles ~~which became effective on January 12, 2001,~~the ~~effectively~~holder ~~served~~ to ~~convert~~purchase ~~this~~from ~~floating~~the ~~rate~~Company, ~~component~~in ofcertain ~~the~~circumstances ~~Company’s~~described below, ~~debt~~one ~~structure~~one-thousandth toof a ~~fixed~~share ~~rate~~ of ~~5.8075%~~newly ~~plus~~created ~~the~~Series ~~applicable~~A ~~margins~~Preferred ~~as defined~~Stock inof the ~~Senior Credit Agreement.~~ ~~It is likely that the~~ Company ~~will~~for ~~continue~~an toinitial ~~engage~~purchase inprice ~~transactions involving swaps, hedges and other types~~ of ~~derivative instruments in a~~$130. ~~continuing~~The ~~effort~~rights todistribution ~~moderate~~is ~~and~~not ~~minimize~~taxable ~~the~~to ~~effects of changes in short-term interest rates~~shareholders.

~~During~~Initially the ~~third~~rights will ~~quarter,~~be represented by the Company’s ~~adopted~~Common ~~Financial~~Stock ~~Accounting~~certificates ~~Standards Board Pronouncements Nos. 141 (FAS 141)~~ and ~~142~~will ~~(FAS~~not ~~142) “Business Combinations” and~~be ~~“Goodwill~~exercisable. The ~~and~~rights ~~Other~~will ~~Intangible Assets”, respectively, for acquisitions~~become ~~completed~~exercisable 10 days after ~~June~~any ~~30,~~person ~~2001~~has ~~(See~~become ~~Note~~the ~~No.~~beneficial 7owner ~~“Acquisitions”).~~of ~~This~~15% ~~adoption~~or ~~did~~more ~~not~~of ~~have a material impact on~~ the Company’s ~~results~~Common ofStock ~~operations, financial position~~ or ~~cash~~has ~~flows. Beginning~~commenced ina ~~fiscal~~tender ~~2002,~~or ~~the~~exchange ~~Company expects that the annual goodwill~~offer ~~amortization~~which, ~~will~~if beconsummated, ~~reduced~~would byresult ~~approximately~~in ~~$4.4~~any ~~million~~person ~~upon~~becoming the ~~adoption~~beneficial ofowner ~~FAS~~of ~~142~~15% ~~for~~or ~~acquisitions~~more ~~completed~~of ~~prior~~the toCommon ~~July~~Stock 1,of ~~2001~~the Company.

9.If any person becomes the ~~Credit~~beneficial ~~Facility~~owner of 15% or more of the Company’s Common Stock, each right will entitle the holder, other than the acquiring person, to purchase for the purchase price of the right Company Common Stock or common stock of the acquiring person having a value of twice the purchase price.

OnThe ~~July~~Company ~~10,~~may ~~2001, The~~redeem ~~Company entered into~~ the ~~Fourth~~rights ~~Amended~~at ~~and Restated Credit Agreement. The Fourth Amended and Restated Credit Agreement resulted in~~ a ~~refinancing~~price of ~~our outstanding Term B and Term C loans into a new Term B loan with reduced LIBOR margins and an extended maturity date~~$.01 ~~The~~per ~~Fourth~~right ~~Amended~~at ~~and~~any ~~Restated~~time ~~Credit~~prior ~~Agreement~~to ~~was~~the ~~made~~tenth ~~possible as a~~day ~~result~~after ofany ~~the~~person ~~completed~~has ~~Offering~~become ~~and related improvement in~~ the ~~Company’s leverage~~beneficial ~~ratios. As~~owner of ~~September~~15% ~~29, 2001,~~or ~~the~~more ~~outstanding balances~~ of the ~~Term A and Term B loans were $18.9~~Common ~~million~~Stock ~~and~~of ~~$139.2~~the ~~million, respectively~~Company. The ~~LIBOR~~rights ~~margin on the new Term B~~will ~~loan~~expire ~~was reduced to 2.50% from 3.00%~~ on ~~the~~September ~~Term B and Term C loans in effect prior to the refinancing. Additionally~~30, ~~the~~2012 ~~Fourth~~unless ~~Amended~~earlier ~~and~~exchanged ~~Restated~~or ~~Credit Agreement provides for an increase in permitted revolver borrowings from $60~~redeemed.0 to $100.0 million of which $80.0 million was made available as of the date of the refinancing. Annual permitted capital expenditures were increased from $30.0 to $50.0 million and certain restrictive covenants were modified to provide the Company with additional flexibility.

1011. ~~Other~~Newly ~~Events~~Issued Accounting Standards

During the third quarter of 2001, the Company ~~concluded~~adopted Financial Accounting Standards Board Pronouncements Nos. 141 (FAS 141) and 142 (FAS 142) “Business Combinations” and “Goodwill and Other Intangible Assets”, respectively, for acquisitions completed after June 30, 2001 (See Note No. 9 “Acquisitions”). These adoptions did not have a material impact on the Company’s ~~settlement~~results of anoperations, financial position or cash flows. During the first quarter ended March 30, ~~arbitration~~2002, ~~proceeding~~the Company adopted these same standards for goodwill related to acquisitions completed prior to July 1, 2001. For the ~~1998~~thirteen ~~acquisition~~and ofthirty-nine weeks ~~Rock~~ended ~~Bottom~~September ~~Stores~~28, 2002, the Company’s goodwill amortization expense was ~~Inc~~reduced by $1.1 ~~The~~million ~~Company~~and ~~recorded~~$3.3 million, respectively, as a ~~current~~result ~~receivable~~of the adoption of these standards. Had these standards been adopted prior to the 2001 fiscal year, the Company’s net income for the thirteen and thirty-nine weeks ended September 29, 2001 would have been approximately $67.0 million ~~representing~~and $16.7 ~~proceeds~~million, torespectively. beIn ~~received~~addition, ~~under~~for ~~this~~the ~~settlement~~thirteen and thirty-nine weeks ended September 29, 2001, the Company’s net income per basic share outstanding would have been $0.31 ~~The~~and ~~settlement~~$0.83, ~~proceeds~~respectively, ~~were~~and the Company’s net income per ~~received~~diluted inshare ~~full~~outstanding would have been $0.30 and $0.79, respectively. At September 28, 2002, included within the “other assets” category on ~~October~~the Company’s 4balance sheet, ~~2001~~were intangible assets totaling $71.0 million, net of accumulated amortization of $51.2 million. The ~~settlement~~$71.0 ~~was~~million ~~allocated~~is primarily composed of costs related to ~~litigation~~the acquisition of store leases ($34.1 million) ~~related~~and ~~costs~~pharmacy customer files ($321.5 million), ~~goodwill~~deferred financing costs ($18.54 million) and all other net intangible assets ($7.0 million). Lease acquisition costs are generally amortized over the remaining lease life, pharmacy file acquisition costs are amortized over seven years, and ~~interest~~deferred ~~income~~financing costs are amortized over the (life of the financing agreement. Based on the net intangible asset values at September 28, 2002, the Company anticipates that it will incur expenses related to the amortization of existing intangible assets of $13.0 million) for the balance of fiscal 2002. For the 2003 through 2006 fiscal years, the Company expects to incur annual expenses related to the amortization of existing intangible assets of $11.6 million, $10.8 million, $9.7 million and $9.2 million, respectively.

During the third quarter, the Company ceased operations in one former Rock Bottom store located in Bellmore, Long Island. As a result of this transaction, we incurred a loss of $0.2 million on the transfer of inventory and other assets which was reflected in selling, general and administrative expenses.9

During the first quarter of 2002, the Company adopted Financial Accounting Standards Board Pronouncement No. 144 (FAS 144), “Accounting for the Impairment or Disposal of Long-Lived Assets.” FAS 144 supercedes FAS 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of.” The provisions of FAS 144 are effective for financial statements issued after December 15, 2001. This adoption did not have a material impact on the Company’s results of operations, financial position or cash flows.

In April 2002, FAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,” was issued. Under FAS No. 145, gains and losses related to the extinguishment of debt should no longer be segregated on the income statement as extraordinary items. Instead, such gains and losses should be included as a component of income from continuing operations. The provisions of FAS No. 145 are effective for fiscal years beginning after May 15, 2002 with early adoption encouraged. The Company is currently evaluating the impact of this statement.

In July 2002, FAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” was issued. This statement nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” FAS No. 146 requires that a liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. The provisions of FAS No. 146 are effective for exit or disposal activities initiated after December 31, 2002, with early adoption encouraged. The Company does not believe that this statement will have a material impact on its results of operations, financial position or cash flows.

12. Commitments and Contingencies

The Company is a party to legal actions arising in the ordinary course of business. Based on information presently available, the Company believes that it has adequate legal defenses or insurance coverage for these actions and that the ultimate outcome of these actions will not have a material adverse effect on the Company’s financial position, cash flows or results of operations.

On October 1, 2002, the Company completed a new three year agreement with the Drug, Chemical, Cosmetic, Plastics and Affiliated Industries Warehouse Employees Local 815, an affiliate of the International Brotherhood of Teamsters. This agreement covers most of the Company’s warehouse employees and replaced a previous labor agreement that expired on September 30, 2002. This new agreement will expire on September 30, 2005.

13. Executive Compensation

On August 12, 2002, Anthony J. Cuti, the Company’s Chairman, President and CEO and the Compensation Committee of the Board of Directors executed an amended and restated employment agreement (the “Employment Agreement”) extending the term of Mr. Cuti’s employment to December 31, 2004. The Employment Agreement provides for a continuation of his current salary of $750,000 per annum through December 31, 2002 and an increase to $850,000 per annum for calendar year 2003. Thereafter, the Board of Directors may increase, but not decrease, Mr. Cuti’s base salary. In addition, on each January 1 beginning with January 1, 2004, the rate of Mr. Cuti’s base salary will be increased by the percentage increase in the Consumer Price Index For All Urban Consumers respecting New York, New York, as published by the Bureau of Labor Statistics for the 12-month period preceding such date. The Employment Agreement also provides for a continuation of annual incentive bonuses of up to 200% of Mr. Cuti’s base salary if certain maximum performance targets are achieved. The Employment Agreement provides for an additional long-term cash target award of $975,000 if the targeted performance objectives for both 2003 and 2004 are achieved. Mr. Cuti will also receive an increase in his annual supplemental employment retirement benefit, to 50% of his maximum salary and annual incentive bonus, increased by 2% for each full or partial year after age 60 that Mr. Cuti provides services to the Company as an employee or in any other capacity in which he is actively engaged by the Company as a director or consultant. As a result, the Company has increased the previously existing split dollar life insurance policy in an amount sufficient to yield these annual retirement benefits to Mr. Cuti. Under terms more fully described in the Employment Agreement, upon Mr. Cuti’s termination of employment for reasons other than cause, Mr. Cuti would be entitled to severance benefits equal to five years of his maximum base salary and incentive bonus (the “Severance Amount”), plus an additional 60% of the Severance Amount.

At September 28, 2002, Mr. Cuti had approximately $1.2 million in notes payable to the Company, which are due on December 19, 2002, and $2.6 million in notes payable to the Company, which are due on November 9, 2003 (the “Cuti Notes”). Upon the occurrence of certain change of control and employment termination events (none of which has occurred as of the filing date) under Mr. Cuti’s previous employment agreement and the new Employment Agreement, all principal and interest on the Cuti Notes would be forgiven. Mr. Cuti has notified the Board of Directors that he has waived his right to receive the benefit of any forgiveness event related to the Cuti Notes.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The information contained herein includes certain forward-looking statements that involve a number of risks and uncertainties. A number of facts could cause our actual results, performance, achievements ~~of the Company~~, or industry results to be materially different from any future results, performance or achievements expressed or implied by such ~~such~~ forward-looking statements. These factors include, but are not limited to, the ~~the~~ competitive environment in the drugstore industry in general and in ~~the~~our ~~Company's~~ specific market area; inflation; changes in costs of goods and services; economic conditions in general and in ~~the~~our ~~Company's~~ specific market areas; demographic changes; changes in prevailing interest rates and the availability of and terms of financing to fund the anticipated growth of ~~the Company's~~our business; liability and other claims asserted against ~~the Company~~us; changes in operating strategy or development plans; the ability to attract and retain qualified personnel; ~~the~~our significant indebtedness; ofadditional ~~the~~regulatory ~~Company~~and legal requirements; labor disturbances; ~~disturbance;~~the ~~changes~~continued impact of, or new occurrences of, terrorist attacks in the ~~Company’s~~New York City metropolitan area; changes in our acquisition and capital expenditure plans; and other factors referenced herein. In addition, such forward looking statements are necessarily dependent upon assumptions, estimates and dates that may be incorrect or imprecise and involve known and unknown risks, uncertainties and other factors. Accordingly, any forward-looking statements included herein do not purport to be predictions of future events or circumstances and may not be realized. Forward-looking statements can be identified by, among other things, the use of forward-looking terminology such as "“believes,"” "“expects,"” "“may,"” "“will,” " “should,"” "“seeks,” "“pro forma,” ~~"anticipates,"~~ "“anticipates,” “intends"” or the negative of any thereof or other variations ~~thereon~~ thereon or comparable terminology, or by discussion of strategy or intentions. Given these uncertainties, investors are cautioned not to place undue reliance on such forward-looking statements. ~~The~~We ~~Company~~disclaim ~~disclaims~~ any obligations to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained ~~contained~~ herein to reflect future events or developments.

Results of Operations

The following sets forth the results of operations as a percentage of sales for the periods indicated.

	13 Weeks Ended				39 Weeks Ended
	Sept 29, 2001		Sept 23, 2000		Sept 29, 2001		Sept 23, 2000
	Sept 28, 2002		Sept 29, 2001		Sept 28, 2002		Sept 29, 2001
Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	76.47		7376.4		7677.17		7476.81
Gross profit	23.63		2623.6		2322.93		2523.29
Selling, general and admin expenses	15.46		15.74		15.54		15.75
Depreciation & amortization	2.4		2.5		2.3		2.5
Insurance recovery	—		—		(1.0	)	—
Store pre-opening expense	0.2		0.1		0.2		0.2
Depreciation & amortization	2.2		2.4		2.1		2.3
Operating income	5.6		8.3		5.9		6.8
Store pre-opening expense	0.1		0.2		0.2		0.2
Interest expense, net	1.8		3.7		2.6		3.7
Operating income	5.4		5.6		5.6		5.9
Income before income taxes	3.8		4.6		3.3		3.1
Interest expense, net	1.2		1.8		1.5		2.6
Income taxes	1.5		1.9		1.4		1.3
Income before income taxes	4.2		3.8		4.1		3.3
Income before extraordinary charge	2.3		2.7		1.9		1.8
Income taxes	1.6		1.5		1.6		1.4
Extraordinary charge, net of income taxes	-		-		0.2		-
Income before extraordinary charges and cumulative effect of accounting change	2.6		2.3		2.5		1.9
Net income	2.3	%	2.7	%	1.7	%	1.8	%
Extraordinary charges, net of income taxes	0.1		—		0.8		0.2
Cumulative effect of accounting change, net of income taxes	—		—		1.0		—
Net income	2.5	%	2.3	%	0.7	%	1.7	%

Thirteen Weeks Ended September 2928, ~~2001~~2002 versus Thirteen Weeks Ended September 2329, ~~2000~~2001

OnNet ~~September~~sales ~~11,~~were ~~2001,~~$312.8 asmillion ~~a result of the terrorist attack on the World Trade Center~~ in ~~lower Manhattan,~~ the ~~Company~~third ~~lost~~quarter ~~all~~ of ~~its~~2002, ~~inventory~~an ~~and~~increase ~~other~~of ~~property~~11.9% ~~and~~over ~~equipment~~net insales ~~its~~of ~~World~~$279.4 ~~Trade~~million ~~Center~~for ~~location~~the ~~and~~third ~~lost~~quarter ~~a portion~~ of ~~its inventory and other property in several other locations~~2001. ~~The~~ ~~Company~~Pharmacy ~~also~~sales ~~experienced~~increased ~~substantial~~from ~~business~~$109.9 ~~disruption~~million ~~resulting~~in ~~from~~ the ~~permanent~~ ~~loss~~third ofquarter ~~two stores and temporary closings~~ of 202001 ~~additional stores~~to ~~during~~$131.0 ~~the~~million ~~period~~in ~~immediately following~~ the ~~attacks.~~third ~~The~~quarter ~~Company~~of ~~believes~~2002, ~~that it~~an isincrease ~~fully~~of ~~insured~~19.2%, ~~for its property~~ and ~~business interruption losses in~~ ~~connection~~represented ~~with~~41.9% ~~this~~of ~~event~~total assales, ~~well~~ as ~~the~~compared ~~extra~~with ~~costs to return temporarily closed stores to normal operations~~39.3% As of ~~September~~total ~~29,~~sales ~~2001~~in ~~all of~~ the ~~temporarily~~ ~~closed~~third ~~stores~~quarter ~~had~~of ~~reopened~~2001. AtFront-end ~~September~~sales ~~29,~~increased ~~2001,~~from ~~the~~$169.5 ~~Company~~million ~~had~~in ~~recognized~~the anthird ~~insurance~~quarter ~~claim~~of ~~receivable~~2001 ofto $4181.28 million ~~representing~~in the ~~portion~~third quarter of ~~its~~2002, an ~~identified~~increase ~~property~~of ~~losses~~7.3%, ~~deemed~~and ~~fully~~represented ~~recoverable~~58.1% ~~Business~~of ~~interruption losses~~total ~~related to lost~~ sales, ~~resultant~~as ~~lower~~compared ~~gross~~with ~~profit, and increased~~60.7% ~~expenses~~of ~~that~~total ~~primarily~~sales ~~resulted~~in ~~from~~ the ~~lost~~third ~~stores~~quarter ~~and temporary store closings during this period have been reflected in results~~ of ~~operations~~2001. ~~Expected insurance recoveries for the~~ ~~business~~For ~~interruption portion of~~ the ~~Company’s~~third ~~insurance~~quarter ~~claim will be recognized when collection~~ of ~~such~~2002, ~~recoveries~~third-party ~~is assured.~~reimbursed

Net sales were $279.4 million in the third quarter of 2001, an increase of 15.0% over net sales of $243.0 million for the third quarter of 2000. Pharmacy sales increased from $86.5 million in the third quarter of 2000 to $109.9 million in the third quarter of 2001, an increase of 27.1%, and represented 39.3% of total sales, while front-end sales increased from $156.5 million in the third quarter of 2000 to $169.5 million in the third quarter of 2001, an increase of 8.3%, and represented 60.7% of total sales. For the third quarter of 2001, third-party reimbursed pharmacy sales represented 86.9% of total pharmacy sales, as compared to 84.0% in the third quarter of 2000. The increase in total sales over last year was attributable to the full quarterly impact of seven stores opened during the third quarter of 2000 and sales from 27 net new stores opened since the third quarter of 2000, combined with increased comparable store sales, for the ten week period preceding the World Trade Center disaster, of 7.5%, including increases in pharmacy and front-end same store sales of 17.5% and 3.0%, respectively. For the three week period subsequent to the World Trade Center disaster, the two stores permanently lost and the large number of temporarily closed stores coupled with restricted access to other locations resulted in substantial declines in our normal sales trends. During the third quarter of 2001 we opened nine stores, compared to seven store openings in last year’s third quarter. In addition to the two stores lost as a result of the World Trade Center disaster, we closed one additional store, compared to one store closure during the third quarter of 2000. At September 29, 2001, we operated 193 stores, versus 166 at September 23, 2000.11

~~Cost~~pharmacy of sales asrepresented a90.0% ~~percentage~~ of ~~net~~total pharmacy sales, ~~increased~~as compared to 7686.49% ~~for~~in the third quarter of 2001. ~~from~~The ~~73.4%~~increase ~~for~~in ~~the~~total ~~third~~sales ~~quarter~~over last year was attributable to increased comparable store sales of ~~2000~~6.0%, ~~resulting~~including ~~in a~~an ~~decrease~~increase in ~~gross~~pharmacy ~~profit~~same ~~margin~~store tosales 23of 13.62% ~~for~~and an increase in front-end same store sales of 1.3%, combined with the ~~third~~full ~~quarter~~quarterly impact of ~~2001~~six ~~from~~net ~~26.6%~~new ~~for~~stores opened during the third quarter of ~~2000.~~ 2001 and sales from 28 net new ~~This~~stores ~~decrease~~opened ~~was~~since ~~attributable~~the tothird aquarter ~~variety~~ of ~~factors~~2001. ~~primarily~~During the third quarter of ~~resulting~~2002, ~~from~~we ~~the~~opened ~~World~~four ~~Trade~~stores ~~Center~~and ~~disaster~~closed one store, ~~including~~compared ~~reduced~~to ~~customer~~nine store ~~demand~~openings, ~~for~~one ~~higher~~store ~~margin~~closing ~~discretionary~~and ~~purchases~~the ~~and~~loss ~~lower~~of ~~levels~~two stores as a result of ~~vendor~~the World ~~income~~Trade ~~from~~Center ~~sales~~disaster ~~related~~during ~~rebates~~the ~~and~~third ~~allowances~~quarter of 2001. At September 28, ~~partially~~2002, ~~offset~~we byoperated ~~increased~~221 ~~income~~stores, ~~associated~~as ~~with~~compared ~~proceeds~~to ~~received~~193 ~~from~~at ~~sales~~September of29, ~~market~~2001. While ~~related~~pharmacy ~~data~~same store sales improved 13.2%, the increase was ~~Cost~~reduced ofby ~~sales~~approximately ~~also~~eight ~~reflects~~percentage points due to higher ~~estimates~~generic substitution ofrates, ~~inventory~~which ~~shrink~~nevertheless ~~losses.~~improved Inoverall pharmacy ~~addition,~~profitability. The ~~gross~~increase ~~margins~~in front-end ~~declined~~same ~~due~~store tosales ~~the~~reflects ~~impact~~a offavorable ancomparison ~~increased~~with ~~proportion~~post-September of11th ~~lower~~results, ~~margin~~partially ~~pharmacy~~offset ~~and~~by ~~third-party~~the ~~reimbursed~~impact ~~pharmacy~~of ~~sales~~the ingeneral ~~relation~~economic slowdown tosince ~~front-end~~the ~~sales~~September 11th World Trade Center disaster.

~~Selling,~~Cost ~~general~~of ~~and~~sales ~~administrative~~as ~~expenses~~a ~~were~~percentage ~~$43~~of net sales increased to 76.07% ~~million,~~for orthe 15third quarter of 2002 from 76.4% offor ~~net~~the ~~sales,~~third ~~and~~quarter ~~$38.2~~of ~~million~~2001, orresulting ~~15.7%~~in ofa decrease ~~net~~in ~~sales,~~gross inprofit margin to 23.3% for the third quarter of 2002 from ~~quarters~~23.6% offor ~~2001~~the ~~and~~third ~~2000,~~quarter ~~respectively~~of 2001. ~~The~~This decrease inwas ~~these~~primarily ~~expenses~~attributable asto a higher percentage of lower margin pharmacy and third party pharmacy sales isin ~~primarily~~the ~~due~~current year. In addition, gross margins declined due to ~~reductions~~increased levels of inventory shrinkage. Cost of sales also includes a $0.5 million LIFO charge in ~~earnings-based~~the ~~incentive~~current ~~compensation~~year, ~~and~~while ~~related~~the ~~benefit~~previous year’s cost ~~costs~~of sales was based on a retail FIFO inventory valuation method.

~~Depreciation~~Selling, general and ~~amortization~~administrative ofexpenses ~~intangibles~~were in$48.9 ~~the~~million, ~~third quarters of~~or ~~2001~~15.6% ~~and~~of ~~2000~~net ~~were~~sales, ~~$6.7 million~~ and $643.20 million, ~~respectively~~or 15. ~~This~~4% ~~increase~~of ~~resulted~~net ~~primarily~~sales ~~from increases~~ in the ~~amortization~~third quarters of ~~pharmacy~~2002 ~~customer lists~~ and ~~lease~~2001, ~~acquisition~~respectively. ~~costs~~The ~~for~~increase ~~pharmacy~~in ~~acquisitions~~these ~~completed~~expenses ~~since~~as ~~the~~a ~~third~~percentage ~~quarter~~ of ~~2000, combined~~sales ~~with~~is ~~incremental~~primarily ~~depreciation~~due to ~~expenses~~start-up costs related to ~~capital~~a ~~expenditures~~large number of one-hour photo departments inopened ~~2000~~during the current year and ~~2001~~increased insurance, maintenance and security service costs.

WeDepreciation ~~incurred~~and ~~store~~amortization ~~pre-opening~~of ~~expenses~~intangibles in the third quarters of 2002 and 2001 were $06.59 million ~~during~~and $6.7 million, respectively. This increase resulted primarily from increases in the ~~third~~amortization of identifiable intangibles resulting from pharmacy acquisitions completed since the third quarter of 2001, combined with incremental depreciation expenses related to ~~the~~capital ~~opening~~expenditures ofin ~~nine~~2001 ~~stores. During~~and 2002, partially offset by the ~~comparable~~elimination ~~period~~of ~~last~~goodwill ~~year,~~amortization weexpense ~~incurred~~resulting ~~pre-opening~~from ~~expenses~~the adoption of FAS 142. Included in the third quarter 2001 expense is $01.31 million related to the ~~opening~~amortization of ~~seven~~goodwill that would have ~~stores~~been eliminated if FAS 142 had been adopted at the beginning of the third quarter of 2001.

~~Net~~We ~~interest~~incurred ~~expense~~store ~~decreased~~pre-opening ~~43.4%~~expenses toof $50.13 million induring the third quarter of ~~2001~~2002 ~~from~~related ~~$9.0~~to ~~million in~~ the ~~third~~opening ~~quarter~~ of ~~2000~~four stores. ~~This~~During ~~decrease was primarily attributable to~~ the ~~second~~comparable ~~quarter~~period ~~repayment~~last ~~of $130.4 million of senior debt from the proceeds from sales of Primary Shares in the Offering~~year, ~~which is more fully described in~~we ~~the~~incurred ~~section~~pre-opening ~~entitled~~expenses ~~“Liquidity~~of ~~and Capital Resources” beginning on page 12. In addition, interest expense was reduced by~~ $1.0.5 million ~~in interest income associated with the settlement of an arbitration proceeding~~ related to the ~~1998~~opening ~~acquisition~~ of ~~Rock Bottom Stores~~nine stores.

~~Our~~Net ~~income~~interest ~~before~~expense ~~income~~decreased ~~taxes~~27.3% to $3.7 million in the third quarter of 2002 from $5.1 million in the third quarter of 2001. This ~~decreased~~decrease was primarily attributable to ~~3.4%~~lower tointerest ~~$10.6~~rates ~~million~~on ~~from~~the ~~$11~~2.01478% ~~million~~Convertible Note Offering that was completed in April, the ~~third~~proceeds ~~quarter~~ of ~~2000,~~which were used to retire $78.4 million of ~~reflecting~~9.25% ~~the~~Senior ~~factors~~Notes ~~discussed~~and ~~above~~higher cost term loan and revolver borrowings.

InOur ~~the~~income ~~third~~before ~~quarter~~income oftaxes ~~2001,~~in wethe ~~recorded~~third anquarter ~~income~~of ~~tax~~2002 ~~provision of~~increased $422.~~2 million, reflecting an estimated annual effective tax rate of 43.0~~9%~~, reduced~~ byto $013.30 million offrom ~~employment tax credits~~$10.6 Inmillion ~~the~~in ~~comparable period last year,~~ the ~~income~~third ~~tax~~quarter ~~provision~~ of ~~$4.7 million reflected an estimated~~2001, ~~effective~~reflecting ~~tax~~the ~~rate~~factors ofdiscussed 44above.~~0%, reduced by employment tax credits of $0.1 million.~~

~~Our~~In ~~net~~the third quarter of 2002, we recorded an income ~~was~~tax ~~$6.4~~provision of $5.0 million, inreflecting ~~the~~an ~~third~~estimated ~~quarter~~annual effective tax rate of ~~2001~~40.9%, reduced ~~compared~~by to $60.23 million inof employment tax credits. In the ~~third~~comparable period ~~quarter~~last ~~of 2000~~year, ~~reflecting~~ the ~~decline~~income ~~in pre-~~tax ~~income,~~provision ~~offset~~of by$4.2 ~~the~~million ~~tax~~reflected an estimated ~~provision~~effective ~~reduction~~tax rate of 43.0%, reduced by $0.53 million of employment tax credits.

~~Thirty-Nine~~During the third quarter of 2002, we recorded total extraordinary ~~Weeks~~charges, ~~Ended~~net ~~September~~of ~~29,~~a ~~2001~~40.9% ~~versus~~income ~~Thirty-Nine~~tax ~~Weeks~~benefit, ~~Ended~~of ~~September~~$0.2 23million, reflecting the ~~2000~~accelerated amortization of deferred financing costs related to $36.0 million of Term A and Term B loans under our Senior Credit Agreement that were repaid with a portion of the proceeds from our offering of Senior Convertible Notes.

Net sales were $843.5 million in the first nine months of 2001, an increase of 18.3% over net sales of $712.8 million for the first nine months of 2000. Pharmacy sales increased from $250.1 million in the first nine months of 2000 to $324.7 million in the first nine months of 2001, an increase of 29.8%, and represented 38.5% of total sales, while front-end sales increased from $462.7 million in the first nine months of 2000 to $518.8 million in the first nine months of 2001, an increase of 12.1%, and represented 61.5% of total sales. For the first nine months of 2001, third-party reimbursed pharmacy sales represented 86.5% of total pharmacy sales, as compared to 84.0% in the first nine months of 2000. The increase in total sales over last year was attributable to increased comparable store sales, for the thirty-six weeks preceding the World Trade Center disaster, of 7.9%, including increases in pharmacy and front-end same store sales of 17.2% and 2.8%, respectively, combined with the impact of sales from 27 net new stores opened since the third quarter of 2000, offset by lower sales volume after the September 11, 2001 terrorist attack. We opened twenty-four stores and closed three stores during the first nine months of 2001, compared to eighteen store openings and one store closure during the first nine months of 2000.

~~Cost of sales as a percentage of net sales increased to 76.1% for the~~Thirty-Nine ~~first~~Weeks ~~nine~~Ended ~~months~~September ~~of 2001 from 74.8% for the first nine months of 2000~~28, ~~resulting~~ in2002 aversus decrease in gross profit margin to 23.9% for the first nine months of 2001 from 25.2% for the first nine months of 2000. This decrease was primarily attributable to an increased proportion of lower margin pharmacy and thirdThirty-~~party~~Nine ~~reimbursed pharmacy~~Weeks ~~sales~~Ended inSeptember ~~relation to front-end sales~~29, ~~and was further affected by the~~ ~~impact of the factors described above relative to the third quarter.~~2001

~~Selling~~Net sales were $943.4 million in the first nine months of 2002, ~~general~~an increase ~~and~~of ~~administrative~~11.8% ~~expenses~~over ~~were~~net sales of $~~130~~843.95 million, orfor the first nine months of 152001. Pharmacy sales increased from $324.7 million in the first nine months of 2001 to $393.5 million in the first nine months of 2002, an increase of 21.2%, and represented 41.7% of ~~net~~total sales, ~~and~~as compared with 38.5% of total sales in the first nine months of 2001. Front-end sales increased from $~~111~~518.8 million in the first nine months of 2001 to $549.8 million in the first nine months of 2002, oran 15increase of 6.70%, and represented 58.3% of ~~net~~total sales, as compared with 61.5% of total sales in the first nine months of 2001. For the first nine months of 2002, third-party reimbursed pharmacy sales represented 89.7% of total pharmacy sales, as compared to 86.5% in the first nine months of 2001. ~~and~~The ~~2000~~increase in total sales over last year was attributable to increased comparable store sales of 5.1%, ~~respectively~~including an increase in pharmacy same store sales of 13. 8%, partially ~~The~~offset by a decrease in ~~these~~front-end ~~expenses~~same asstore asales ~~percentage~~of 0.4%, combined with the full nine-month impact of 24 stores opened during the first nine months of 2001 and sales ~~reflected~~from 28 net new stores opened since the third quarter of 2001. During ~~leveraging~~the first nine months of ~~expenses~~2002, ~~against~~we ~~maturing~~opened ~~and~~24 new stores and closed three stores, compared to 24 store ~~sales~~openings, ~~growth~~one asstore ~~well~~closing asand the loss of two stores due ~~reductions~~to inthe ~~earnings-based~~World ~~incentive~~Trade ~~compensation~~Center ~~and~~disaster ~~related~~during ~~benefits~~the ~~costs~~first nine months of 2001.

~~Depreciation~~Cost ~~and~~of ~~amortization~~sales as a percentage of ~~intangibles~~net insales increased to 77.7% for the first nine months of 2002 from 76.1% for the first nine months of 2001, resulting ~~and~~in ~~2000~~a ~~were~~decrease ~~$19~~in gross profit margin to 22.73% ~~million~~for ~~and~~the ~~$18~~first nine months of 2002 from 23.29% ~~million,~~for ~~respectively~~the first nine months of 2001. This ~~increase~~decrease ~~resulted~~was primarily ~~from~~attributable to ~~increases~~increased promotional activity and lower levels of sales related vendor rebates and allowances in the ~~amortization~~first half of ~~pharmacy~~2002, ~~customer~~combined ~~lists~~with ~~and~~an ~~lease~~increased ~~acquisition~~percentage ~~costs~~of ~~for~~lower margin pharmacy ~~acquisitions~~and ~~completed~~third ~~since~~party ~~the~~pharmacy ~~third~~sales ~~quarter~~and higher physical inventory shrink losses. Cost of ~~2000,~~sales ~~combined~~in ~~with~~the ~~incremental~~first ~~depreciation~~nine ~~expenses~~months ~~related~~of to2002 ~~capital~~also ~~expenditures in~~includes ~~2000~~a ~~and~~$1.3 ~~2001~~million LIFO charge.

WeSelling, ~~incurred~~general ~~store~~and ~~pre-opening~~administrative expenses ofwere $145.1 million, or 15.4% of net sales, and $130.9 million, ~~during~~or 15.5% of net sales, in the first nine months of ~~2001~~2002 ~~related~~and to2001, ~~the~~respectively. The ~~opening~~decrease ofin 24these ~~stores.~~expenses ~~Pre-opening~~as ~~costs~~a percentage of ~~$1.1~~ ~~million~~sales ~~were~~is ~~incurred~~primarily attributable ~~during~~to ~~the~~lower ~~first~~payroll ~~nine~~and ~~months~~related ofcosts ~~2000~~as ~~for~~a ~~the~~percentage ~~opening~~ of ~~eighteen stores~~sales.

~~Net~~During ~~interest expense decreased 16.2% to $21.8 million in~~ the first nine months of ~~2001~~2002, ~~from~~we ~~$26.0~~received ~~million~~a inpartial ~~the~~payment ~~first nine months~~ of ~~2000. This decrease was primarily attributable to~~ ~~the second quarter repayment of~~ $~~130~~9.49 million oftoward ~~senior~~our ~~debt~~business ~~from~~interruption ~~the~~insurance ~~proceeds from~~claim ~~sales~~originating ~~of the Primary Shares in the Offering, which is more fully described~~from in the ~~section~~September ~~entitled~~11th ~~“Liquidity~~World ~~and~~Trade ~~Capital~~Center ~~Resources~~disaster.~~” In~~ ~~addition,~~After ~~interest expense benefited from~~deducting ~~$1.0~~certain ~~million of interest income associated with the settlement of an arbitration proceeding~~ claims-related ~~to the 1998 acquisition of Rock Bottom Stores~~expenses, ~~Inc.~~ ~~and~~we recorded a ~~continuing~~net ~~decrease~~benefit inof ~~short-term interest rates that reduced the interest rates on~~ $89.14 million ~~of our floating rate term borrowings and all of~~in ~~our~~pre-tax ~~revolving loans under the Senior Credit Agreement~~income.

~~Our~~Depreciation ~~income~~and ~~before~~amortization ~~income~~of ~~taxes~~intangibles in the first nine months ~~of 2001~~ ~~increased~~of ~~22.7%~~2002 toand 2001 were $2720.94 million ~~from~~and $2219.7 million, respectively. This increase resulted primarily from increases in the ~~first~~amortization ~~nine~~of ~~months~~identifiable ofintangibles resulting from ~~2000,~~pharmacy ~~reflecting~~acquisitions ~~increased~~completed ~~sales~~since ~~and~~the ~~related~~third ~~gross~~quarter ~~profit~~of ~~dollars~~2001, ~~and~~combined ~~reduced~~with ~~interest~~incremental ~~costs,~~depreciation ~~partially~~expenses ~~offset~~related byto ~~increases~~capital expenditures in ~~selling,~~2001 ~~general~~ and 2002, ~~administrative~~partially ~~expenses~~offset ~~and~~by the ~~third~~elimination ~~quarter~~of ~~impact~~goodwill ofamortization ~~business~~expense ~~interruption~~resulting ~~associated~~from ~~with~~ the ~~World~~adoption ~~Trade~~of ~~Center~~FAS ~~disaster~~142. ~~(as~~Included ~~more~~in ~~fully~~the ~~described~~expense ~~under our~~for ~~Discussion~~the ~~and~~first ~~Analysis~~nine months of ~~Results~~2001 ofis ~~Operations~~$3.3 ~~for~~million related to the 13amortization ~~weeks~~of ~~ended~~goodwill that would have ~~September~~been ~~29,~~eliminated if FAS 142 had been adopted at the beginning of 2001).

InWe ~~the~~incurred ~~first~~store ~~nine~~pre-opening ~~months~~expenses of ~~2001, we recorded an income tax provision of~~ $111.6 million, ~~reflecting~~during anthe ~~estimated~~first nine ~~annual~~months ~~effective tax rate~~ of ~~43.0%, partially~~2002 ~~offset~~related byto ~~$0.3~~the ~~million~~opening of ~~employment-related~~24 ~~tax credits~~stores. During In the comparable period last year, ~~the~~we incurred ~~income~~pre-opening ~~tax~~expenses ~~provision~~ of $91.64 million ~~reflected an~~related ~~estimated~~to ~~effective~~the ~~tax~~opening ~~rate~~ of ~~44.0%, offset by $0.4 million of~~24 ~~employment-related tax credits~~stores.

~~During~~Net ~~the~~interest ~~first~~expense ~~nine months~~decreased of34.2% ~~2001,~~to ~~we recorded an extraordinary charge of~~ $114.54 million, ~~net~~in ofthe anfirst nine ~~income~~months ~~tax~~of ~~benefit~~2002 offrom $121.18 million, ~~reflecting~~in the ~~accelerated~~first ~~amortization~~nine months of ~~deferred~~ ~~financing~~2001. This ~~costs~~decrease ~~related~~was toprimarily ~~(a)~~attributable to the ~~portion~~second ofquarter ~~our~~2001 ~~Senior~~repayment ~~Credit Agreement~~of ~~which~~$130.4 ~~was~~million ~~repaid~~of ~~with~~senior ~~the~~debt from the proceeds of the ~~Primary~~follow-on ~~Shares~~equity ~~under the Offering~~offering, ~~and~~combined ~~(b)~~with the ~~remaining~~second ~~portion~~quarter 2002 repayment of ~~our~~higher ~~Term~~cost Bsenior ~~and~~subordinated ~~Term~~debt Cand term loans ~~that~~from the ~~were~~proceeds ~~refinanced as a result~~ of the ~~completed~~Convertible ~~Offering~~Note ~~and related debt refinancing~~Offering.

Our ~~net~~ income ~~was~~before ~~$14.7 million~~income taxes in the first nine months of ~~2001,~~2002 increased ~~compared~~38.7% to $1338.16 million, from $27.9 million in the first nine months of ~~2000~~2001, reflecting the ~~improvement~~factors indiscussed ~~pre-tax income, partially offset by the incremental tax provision of $2.0 million and the extraordinary charge of $1.5 million described~~ above.

In the first nine months of 2002, we recorded an income tax provision of $15.3 million, reflecting an estimated annual effective tax rate of 40.9%, reduced by $0.5 million of employment tax credits. In the comparable period last year, the income tax provision of $11.6 million reflected an estimated effective tax rate of 43.0%, partially offset by $0.3 million of employment tax credits.

During the first nine months of 2002, we recorded total extraordinary charges, net of a 40.9% income tax benefit, of $7.9 million, which were composed of the following: (1) $1.4 million, reflecting the accelerated amortization of deferred financing costs related to (a) loans under our Senior Credit Agreement that were repaid with the proceeds of our offering of Senior Convertible Notes and (b) our 9¼% Senior Notes due 2008 that were purchased pursuant to a tender offer completed in June 2002, (2) $4.2 million associated with the payment of consent premiums and other expenses related to the tender offer, and (3) $2.3 million related to the termination of the interest rate swap agreement tied to interest expenses on the loans under the Senior Credit Agreement that were retired with proceeds from the convertible notes offering. During the first nine months of 2001, we recorded total extraordinary charges, net of a 43.0% income tax benefit, of $1.5 million, reflecting the accelerated amortization of deferred financing costs related to (a) loans under our Senior Credit Agreement that were repaid with the proceeds of the primary shares issued in our June 2001 equity offering, and (b) the remaining Term B loans and Term C loans that were refinanced as a result of amending and restating our Senior Credit Agreement.

During the first nine months of 2002, as a result of the change in accounting method of inventory valuation from retail dollar FIFO to specific cost LIFO, we recorded a one-time, non-cash charge of $9.3 million, net of an income tax benefit of $6.7 million.

Liquidity and Capital Resources

On ~~June~~April 1316, ~~2001~~2002, we completed aan ~~public~~ offering (the “"Offering”") of ~~our~~of ~~common stock~~$381. A5 ~~total~~million aggregate principal amount of ~~8,050,000~~senior convertible notes ~~shares,~~maturing ~~including~~on 4April 16,~~000,000~~ ~~primary~~2022 ~~shares~~ (the ~~“Primary~~"Convertible ~~Shares”~~Notes"). ~~and~~The ~~4,050,000~~Convertible ~~secondary~~Notes ~~shares (the “Secondary Shares”),~~ were ~~sold~~issued at a ~~net~~ price, ~~after underwriting discounts and commissions,~~ of $32572.8476 per ~~share~~note (57.276% ~~Sales~~ of the principal ~~Primary~~amount ~~Shares~~at ~~resulted~~maturity) inand ~~net~~pay ~~proceeds~~cash interest at the rate of ~~$130~~2.41478% ~~million~~per toyear on the ~~Company,~~principal ~~after underwriting~~amount ~~discounts~~at maturity, ~~commissions~~payable ~~and~~semi-annually ~~expenses~~in ~~connected~~arrears ~~with~~on ~~the~~April 16 ~~Offering. The~~and ~~Secondary~~October ~~Shares~~16 ~~were composed~~ of ~~3,740,000~~each ~~shares~~year ~~owned~~beginning byon ~~private~~October ~~equity~~16, ~~funds~~2002, ~~managed~~until byApril ~~Credit~~16, ~~Suisse~~2007. ~~First~~After ~~Boston~~that ~~Corporation~~date, ~~228,000~~interest ~~shares~~will ~~representing~~accrue ~~options~~on ~~exercised by~~the ~~members~~notes as amortization of ~~our~~the original ~~management~~issue ~~team~~discount ~~and~~representing ~~82,000~~a ~~shares~~yield ~~owned~~to bymaturity ~~the~~of ~~same~~3.75% ~~members~~per year, ofcomputed ~~management.~~on ~~The~~a ~~exercise~~semi-annual ofbond ~~options~~equivalent bybasis. ~~selling~~After ~~stockholders~~deducting ~~generated~~commissions ~~additional~~and ~~proceeds~~expenses related to the ~~Company~~offering, we realized net proceeds of $0210.5 million. ~~The~~A ~~combined~~portion of the proceeds was used to repay an aggregate of ~~this~~approximately ~~transaction of~~ $~~130~~86.91 million ~~were~~in ~~used~~principal toamount ~~reduce~~of ~~the~~Term ~~outstanding~~A ~~balances~~loans and Term B ofloans ~~the~~and ~~term~~$41.5 ~~and~~million in principal amount of revolving loans (which revolving loans may be reborrowed) under ~~the~~our Senior Credit Agreement. byIn ~~$91.5~~addition, we ~~million~~terminated ~~and~~an interest rate swap agreement, which was set to expire in January 2003, at a cost of approximately $393.49 million ~~respectively~~.

~~Working~~Holders ~~capital~~of ~~was~~the ~~$209.6~~Convertible ~~million~~Notes asmay ofconvert ~~September~~each 29$1,000 ~~2001~~in ~~and $154.5~~principal ~~million~~amount as of ~~December~~their ~~30,~~Convertible ~~2000.~~Notes ~~The~~into ~~increase~~14.1265 ~~was~~shares ~~primarily~~of ~~due~~our tocommon ~~increases in~~stock, ~~inventory~~subject ~~related~~ to ~~the~~adjustment, ~~opening~~only ofif ~~twenty-four additional stores during~~ (1) the ~~first~~ ~~nine~~sale ~~months~~price of ~~2001~~our ~~and~~common ~~higher inventory levels attributable to the~~stock ~~business interruption associated with the World Trade Center disaster~~reaches, ~~combined with~~or ~~an increase in accounts receivable reflecting~~ the ~~settlement~~trading price of ~~an arbitration proceeding related to~~ the ~~1998~~notes ~~purchase~~falls ofbelow, ~~Rock~~specified ~~Bottom Stores~~thresholds, ~~Inc.,~~(2) the asnotes ~~well~~are ascalled ~~the~~for ~~anticipated~~redemption, ~~insurance~~or ~~recovery~~(3) specified ~~of property-related damages~~corporate ~~incurred~~transactions inhave ~~the World Trade Center disaster~~occurred. ~~Working~~Upon ~~capital~~conversion, ~~was~~we ~~also~~have ~~higher than~~the atright ~~December~~to 30deliver, ~~2000 due to a reduction~~ in ~~the current portion of~~ ~~outstanding~~lieu ~~term~~of ~~loans~~our ~~payable~~common ~~under~~stock, ~~the~~cash ~~Senior~~or ~~Credit Agreement resulting from the Offering. This was partially offset by~~ a ~~reduction~~combination ~~in the current portion~~ of ~~the~~cash ~~deferred~~and ~~tax~~common ~~asset~~stock ~~related~~in ~~to the current year’s tax provision and~~ an ~~increase~~amount inas ~~accounts~~described ~~payable~~in ~~related to~~ the ~~additional inventory purchased during the period~~indenture.

~~For~~Holders of the ~~first~~Convertible ~~nine~~Notes may require us to purchase all or a ~~months~~portion of ~~2001~~their notes on April 16, ~~net~~2007 at a price of $572.76 per note plus accrued cash ~~used~~interest, byif ~~operating~~any; ~~activities~~on ~~was~~April 16, 2012 at a price of $4689.268 ~~million~~per note plus accrued cash interest, asif any; and on April 16, 2017 ~~compared~~at a price of $830.47 per note plus accrued cash interest, if any. We may choose to ~~net~~pay the purchase price of such notes in cash ~~provided~~or bycommon ~~operating~~stock ~~activities~~or a combination of $7cash and common stock.0 ~~million~~In inaddition, ~~the~~if we experience a change in ~~first~~control, ~~nine~~each ~~months~~holder may require us to purchase for cash all or a portion of such ~~2000.~~holder’s ~~The~~notes ~~decrease~~at ~~was~~a ~~primarily~~price ~~due~~equal to the ~~higher~~sum of the issue price plus accrued ~~investment~~original inissue ~~working~~discount ~~capital~~and ~~described~~accrued ~~above~~cash interest, if any, to the date of purchase.

~~For~~We ~~the~~may 39redeem ~~weeks~~for ~~ended September~~cash ~~29,~~all ~~2001,~~or ~~our~~a ~~EBITDA~~portion ~~(earnings~~of ~~before~~the ~~interest,~~Convertible ~~taxes,~~Notes ~~depreciation,~~at any ~~amortization~~time ~~and~~after ~~deferred~~April 16, ~~rent~~2007, ~~charges)~~at ~~increased~~a byprice ~~4.1%~~equal to ~~$73.4~~the ~~million,~~sum orof the issue price ~~8.7%~~plus ofaccrued ~~sales,~~original ~~compared~~issue todiscount ~~$70.5~~and ~~million,~~accrued orcash ~~9.9%~~interest, ofif ~~sales~~any, into the ~~first nine~~ ~~months~~redemption ~~of 2000~~date.

~~Net~~On ~~cash~~June ~~used~~3, in2002, we completed a tender offer and consent solicitation ~~investing~~(the ~~activities~~"Tender ~~was~~Offer") ~~$36.3~~to ~~million~~purchase ~~during~~our outstanding 9¼% Senior Notes due 2008 (the ~~first~~"Senior ~~nine~~Notes"). ~~months~~The ofTender ~~2001~~Offer was priced at $1,083.50 ~~compared~~per toeach $~~20.8~~1,000 ~~million~~principal ~~during~~amount ~~the~~of ~~first~~Senior ~~nine~~Notes ~~months~~tendered ofto ~~2000. In~~us ~~the~~on ~~first~~or ~~nine~~before the ~~months~~Consent Deadline of ~~2001~~May 20, ~~capital~~2002 (the "Consent Deadline"), and ~~expenditures~~$1,063.50 ~~primarily~~per ~~related~~each $1,000 principal amount of Senior Notes tendered to ~~new~~us ~~store~~after the ~~openings~~Consent ~~and~~Deadline but before the ~~remodeling~~May of31, 2002 expiration date. Of the total ~~existing~~$80 ~~locations,~~million ~~amounted~~Senior toNotes outstanding, $3178.92 million, ~~while~~were ~~lease~~tendered ~~and~~on ~~pharmacy~~or before ~~customer~~the ~~file~~Consent ~~acquisition~~Deadline ~~costs~~and ~~accounted~~an ~~for~~additional $40.42 million ofwere ~~cash~~tendered ~~used in~~thereafter. ~~investing~~On ~~activities~~June 3, 2002, we expended a total of $87. In1 million from the ~~first~~balance ~~nine~~of the ~~months~~proceeds of ~~2000,~~the ~~$19~~Convertible Notes Offering to pay our obligations under the Tender Offer.2 ~~million~~This payment was ~~spent~~composed onof ~~capital~~principal ~~expenditures~~value ~~and~~ ($178.64 million), premium ~~million~~payments on($6.5 ~~lease~~million) and ~~pharmacy~~accrued ~~customer~~interest ~~file~~earned ~~acquisition~~from ~~costs~~February 16, 2002 through the payment date ($2.2 million).

~~Net cash provided by financing activities was $40.6 million for the first nine months of 2001, compared to $~~14.1 million for the first nine months of 2000. The increase reflects the higher level of capital expenditures, higher cash acquisition related costs and the increase in working capital investment over the prior year.

~~Our~~At ~~capital~~September 28, ~~requirements~~2002, we had ~~primarily~~$5.5 million ~~result~~in ~~from~~Term ~~opening~~A and ~~stocking~~$60.4 million ~~new~~in ~~stores,~~Term ~~remodeling~~B ~~and~~loans outstanding ~~renovating~~under ~~existing~~our ~~retail~~Senior ~~locations~~Credit ~~and~~Agreement, ~~from~~$218.5 million ~~the continuing development~~ of outstanding ~~management~~Convertible ~~information~~Notes ~~systems~~and $1.6 million Weof ~~believe~~outstanding ~~that~~Senior ~~there~~Notes. ~~are~~We ~~significant~~had ~~opportunities~~no tooutstanding ~~open~~borrowings ~~additional~~under ~~stores. We~~our ~~currently~~$80 million revolving credit facility ~~plan~~(other tothan ~~open~~$0.7 million ~~approximately~~of 30outstanding ~~new~~standby ~~stores~~Letters ~~this~~of ~~year,~~Credit) ~~including~~and $12.1 million ~~the~~in 24cash. We ~~stores~~intend ~~opened~~to ~~during~~retire the ~~first~~remaining ~~nine~~$1.6 million ~~months,~~of ~~and~~outstanding 35Senior toNotes 40during the ~~new~~first ~~stores~~quarter inof ~~fiscal 2002~~2003. Any Weamounts ~~expect~~outstanding tounder ~~spend~~revolving ~~approximately~~loans ~~$37.0~~and ~~million~~Term inA ~~2001~~loans mature on ~~capital expenditures~~February 15, ~~primarily for new~~2004, ~~renovated~~ and ~~replacement~~the ~~stores,~~Term ~~and~~B anloans ~~additional~~mature ~~$6.0 million~~on ~~for~~February ~~lease~~15, ~~and pharmacy customer file acquisition costs~~2007. We ~~also~~expect ~~require~~that we will ~~working~~be ~~capital~~able to ~~support~~extend ~~inventory~~or ~~for~~replace ~~our~~the ~~existing~~revolving ~~stores.~~loan ~~Historically,~~and ~~we have~~Term ~~been~~A ~~able~~loan toportions ~~lease~~of ~~all~~the Senior ofCredit ~~our~~Agreement ~~store~~prior ~~locations~~to maturity.

WeWorking believe that, based on current levels of operations and anticipated growth, cash flow from operations, together with other available sources of funds, including revolving and term loan borrowings under our Senior Credit Agreement, will be adequate for at least the next two years to make required payments of principal and interest on our indebtedness, to fund anticipated capital ~~expenditures~~was ~~and working capital requirements, and to comply with the terms of our debt agreements. As of September 29, 2001, we had~~ $23235.56 million ofas ~~borrowings under the revolving portion~~ of ~~our~~September ~~Senior~~28, ~~Credit~~2002 ~~Agreement~~ and ~~had~~ $55214.~~7 million of~~1 ~~remaining availability, net of $0.8~~ million ofas ~~outstanding Letters~~ of ~~Credit. Our~~December ~~ability to meet our debt service obligations and reduce our total debt will be dependent upon our future performance~~29, ~~which,~~2001. inThe ~~turn,~~increase ~~will~~was beprimarily ~~subject~~due to ~~general economic, financial,~~additional ~~business,~~invested ~~competitive, legislative, regulatory, and other conditions, many of which are beyond our control. In addition, we cannot assure you that our operating results,~~ cash ~~flow and capital resources will be sufficient to repay our indebtedness in the future. Substantially all~~ of ~~our future revolving and outstanding term loan borrowings under our Senior Credit Agreement bear interest at floating rates. There was approximately~~ $~~181~~7.60 million ~~of floating rate debt outstanding on September 29~~, ~~2001;~~a ~~therefore,~~reduction ~~our financial condition will be affected by changes~~ in ~~prevailing~~short-term ~~interest~~borrowings ~~rates. On December 20, 2000,~~resulting wefrom ~~entered into a two-year interest rate swap in~~ the ~~notional~~issuance ~~amount~~ of ~~$150.0 million.~~the ~~This~~convertible ~~swap,~~notes ~~which~~and ~~had~~the anpayment ~~effective date~~ of ~~January 12, 2001, represented~~ a ~~hedging~~liability ~~transaction whereby we would receive interest at a floating rate and pay interest at a fixed LIBOR rate. The effect of this swap was~~ to ~~fix our interest obligations on $150.0 million of floating rate debt for two years at~~ a ~~LIBOR rate of 5.8075%~~ ~~plus~~former ~~the~~pharmacy ~~applicable margins as defined in the Senior Credit Agreement~~supplier. ~~See “Market Risk.”~~

~~The~~For ~~Senior Credit Agreement and~~ the ~~indenture~~first ~~relating~~nine tomonths ~~our~~of ~~senior subordinated notes contain various covenants that limit or restrict~~2002, ~~among~~net ~~other~~cash ~~things,~~provided ~~subject~~by tooperating ~~specified~~activities ~~exceptions,~~was ~~our~~$19.7 ~~ability to make capital expenditures~~million, ~~incur indebtedness,~~as ~~permit~~compared ~~liens~~to onnet ~~our~~cash ~~property,~~used ~~enter~~in ~~into transactions with~~operating ~~affiliates,~~activities ~~make~~of ~~restricted~~$4.2 ~~payments,~~million ~~investments~~in orthe ~~acquisitions,~~first ~~enter~~nine ~~into mergers,~~months ~~consolidations~~of or2001. ~~dissolutions,~~The ~~conduct~~increase ~~assets sales, pay dividends or~~was ~~distributions~~primarily ~~and~~due ~~enter~~to ~~into~~a ~~other~~reduced ~~specified~~level ~~transactions~~of ~~and~~inventory ~~business activities. Financial~~growth ~~performance covenants included~~ in ~~our~~2002 ~~Senior~~compared ~~Credit~~to ~~Agreement include interest coverage,~~the ~~leverage~~prior ~~ratios,~~year ~~minimum~~and ~~net~~collection ~~worth~~of ~~requirements~~amounts ~~and~~due ~~fixed~~for ~~charge~~our ~~coverage requirements. At~~ September ~~29,~~11 ~~2001,~~property weloss ~~were~~insurance ~~in compliance with all financial performance covenants~~claim.

~~Tax~~Net ~~Benefits~~cash ~~from~~used ~~Net~~in ~~Operating~~investing activities was $44.6 million during the ~~Losses~~first nine months of 2002, compared to $36.3 million during the first nine months of 2001. In the first nine months of 2002, capital expenditures, primarily related to new store openings and the remodeling of existing locations, amounted to $36.4 million, while lease, pharmacy customer file and other acquisition costs accounted for $8.2 million of cash used in investing activities. In the first nine months of 2001, we spent $31.9 million on capital expenditures and $4.4 million on lease, pharmacy customer file and other acquisition costs.

AtNet ~~December~~cash ~~30,~~provided ~~2000,~~by ~~we had~~financing ~~net~~activities ~~operating~~was ~~loss carryforwards, or NOLs, of approximately~~ $2332.0 million~~, which~~ ~~are~~for ~~due to expire in~~ the ~~years 2007 through 2018. These NOLs may be used~~ tofirst ~~offset~~nine ~~future~~months ~~taxable income through 2018 and thereby reduce or eliminate our federal income taxes otherwise payable. The Internal Revenue Code~~ of ~~1986~~2002, as ~~amended,~~compared imposes significant limitations on the utilization of NOLs in the event of an "ownership change," as defined in Section 382 of the Code. This Section 382 limitation is an annual limitation on the amount of pre-ownership change NOLs that a corporation may use to offset its post-ownership change income. The Section 382 limitation is calculated by multiplying the value of a corporation's stock immediately before an ownership change by the long-term tax-exempt rate (as published by the Internal Revenue Service). Generally, an ownership change occurs with respect to a corporation if the aggregate increase in the percentage of stock ownership by value of that corporation by one or more 5% shareholders, including specified groups of shareholders who in the aggregate own at least 5% of that corporation's stock, exceeds 50 percentage points over a three-year testing period. Our recapitalization in 1997 caused us to experience an ownership change. As a result, we are currently subject to an annual Section 382 limitation of approximately $840.56 million infor ~~2001 and approximately $5.1 million from 2002 to 2007 on~~ the ~~amount~~first ofnine ~~NOLs generated prior to the recapitalization that we may~~months ~~use to offset future taxable income. All~~ of ~~the NOL's existing as of December 30, 2000 were generated prior to the 1997 recapitalization and accordingly, were subject to this limitation~~2001. It ~~is possible~~The ~~that~~decrease asreflects ~~a result of~~ the ~~sale~~higher oflevels ~~common stock in our June 2001 offering, combined with future issuance~~ of ~~new~~cash ~~shares~~provided orby ~~sales, we may incur a~~operations ~~further~~partially ~~ownership~~offset ~~change. Any additional~~by ~~limitation~~increased ~~due to a further ownership change could be more restrictive than the current limitations. We cannot assure you that we will be able to~~ use ~~any~~of ~~NOLs~~cash tofor ~~offset~~capital ~~future~~expenditures ~~taxable income. Based on our recent~~ and ~~projected performance, however,~~ ~~management believes that it is more likely than not that the full value of the NOLs will be realized~~acquisitions.

Our capital requirements primarily result from opening and stocking new stores, remodeling and renovating existing stores and from the continuing development of management information systems. We believe that there are significant opportunities to open additional stores, and currently plan to open approximately 11 to 13 additional new stores during the remainder of this year (a total of 35 to 37 for all of 2002), and 35 to 40 new stores in fiscal 2003. We expect to spend approximately $48.0 million in 2002 on capital expenditures, primarily for new, renovated and replacement stores and an additional $10.0 million to $12.0 million for lease, pharmacy customer file and other acquisition costs. We also require working capital to support inventory for our existing stores. Historically, we have been able to lease our store locations.

We believe that, based on current levels of operations and anticipated growth, cash flow from operations, together with other available sources of funds, including revolving loan borrowings with an extension, refinancing or replacement of our Senior Credit Agreement, will be adequate for at least the next two years to make required payments of principal and interest on our indebtedness, to fund anticipated capital expenditures and working capital requirements, and to comply with the terms of our debt agreements. As of September 28, 2002, we had no borrowings under the revolving portion of our Senior Credit Agreement and had $79.3 million of remaining availability, net of $0.7 million of outstanding standby letters of credit. Our ability to meet our debt service obligations and reduce our total debt will be dependent upon our future performance, which, in turn, will be subject to general economic, financial, business, competitive, legislative, regulatory, and other conditions, many of which are beyond our control. In addition, we cannot assure you that our operating results, cash flow and capital resources will be sufficient to repay our indebtedness in the future. Substantially all of our future revolving and outstanding term loan borrowings under our Senior Credit Agreement bear interest at floating rates. There was approximately $65.9 million of floating rate debt outstanding on September 28, 2002. Therefore, our financial condition will be affected by changes in prevailing interest rates.

The Senior Credit Agreement contains various covenants that limit or restrict, among other things, subject to specified exceptions, our ability to make capital expenditures, incur indebtedness, permit liens on our property, enter into transactions with affiliates, make restricted payments, investments or acquisitions, enter into mergers, consolidations or dissolutions, conduct assets sales, pay dividends or distributions and enter into other specified transactions and business activities. Financial performance covenants included in our Senior Credit Agreement include interest coverage, leverage ratios, minimum net worth requirements and fixed charge coverage requirements. At September 28, 2002, we were in compliance with all financial performance covenants. There are no credit ratings related triggers in either our Senior Credit Agreement or the indentures related to either our Convertible Notes or our remaining Senior Notes that would impact cost of borrowing, annual amortization of principal or related debt maturities.

Critical Accounting Policies

Our discussion of results of operations and financial condition relies on our consolidated financial statements that are prepared based on certain critical accounting policies that require management to make judgments and estimates that are subject to varying degrees of uncertainty. We believe that investors need to be aware of these policies and how they impact our financial reporting to gain a more complete understanding of our consolidated financial statements as a whole, as well as our related discussion and analysis presented herein. While we believe that these accounting policies are grounded on sound measurement criteria, actual future events can and often do result in outcomes that can be materially different from these estimates or forecasts. The accounting policies and related risks described in our Annual Report on Form 10-K for the year ended December 29, 2001 are those that depend most heavily on these judgments and estimates. At September 28, 2002, there have been no material changes to any of the Critical Accounting Policies contained therein.

Seasonality

In general, sales of drugstore items such as prescription drugs, over-the-counter drugs and health and beauty care products exhibit limited seasonality in the aggregate, but do vary by product category. Quarterly results are primarily affected by the timing of new store openings and the sale of seasonal products, with the Christmas holiday season generating a higher proportion of sales and earnings than other periods.

Recently Issued Accounting Pronouncements

~~FASB~~In ~~Statement~~April 2002, FAS No. ~~133 "Accounting~~145, ~~for~~“Rescission ~~Derivative~~of ~~Instruments~~FASB ~~and~~Statements ~~Hedging~~No. ~~Activities"~~4, 44, ~~requires~~and ~~that~~64, ~~derivative~~Amendment ~~instruments~~of ~~such~~FASB asStatement ~~interest~~No. ~~rate~~13, ~~swaps~~and beTechnical ~~recorded~~Corrections,” aswas ~~assets~~issued. ~~and~~Under ~~liabilities~~FAS atNo. ~~fair~~145, ~~value~~gains and ~~provides~~losses ~~guidance~~related ~~for~~to ~~recognition~~the extinguishment of ~~changes~~debt inshould ~~fair~~no ~~value~~longer ~~depending~~be segregated on the ~~reason~~income ~~for~~statement ~~holding~~as ~~the derivative. As~~extraordinary ~~discussed~~items. inInstead, ~~Note~~such ~~No.~~gains 8,and ~~“Newly~~losses ~~Adopted~~should ~~Accounting~~be ~~Standards,”~~included weas ~~adopted~~a component of ~~Statement~~income ~~No.~~from ~~133~~continuing ~~during~~operations. ~~the~~The ~~first~~provisions ~~quarter~~ of ~~2001,~~FAS ~~but~~No. ~~this~~145 ~~action~~are ~~did not~~effective ~~have~~for afiscal ~~material~~years ~~impact~~beginning onafter ~~our~~May ~~consolidated~~15, ~~financial~~2002 ~~statements~~with early adoption encouraged.

~~During~~In ~~the~~July ~~third quarter~~2002, ~~the~~FAS ~~Company~~No. ~~adopted~~146, ~~Financial~~ “Accounting ~~Standards~~for ~~Board Pronouncements~~Costs ~~Nos.~~Associated ~~141~~with ~~(FAS~~Exit or ~~141)~~Disposal ~~and~~Activities,” ~~142~~was ~~(FAS~~issued. ~~142)~~This ~~“Business~~statement ~~Combinations”~~nullifies ~~and~~Emerging Issues ~~“Goodwill~~Task ~~and~~Force ~~Other~~(EITF) ~~Intangible~~Issue ~~Assets”,~~No. ~~respectively~~94-3, “Liability Recognition for ~~acquisitions~~Certain Employee ~~completed~~Termination ~~after~~Benefits ~~June~~and ~~30,~~Other ~~2001~~Costs ~~(See~~to ~~Note~~Exit ~~No.~~an 7Activity ~~“Acquisitions”).~~(including ~~This adoption~~Certain ~~did~~Costs ~~not~~Incurred ~~have~~in a ~~material~~Restructuring).” ~~impact~~FAS onNo. ~~the~~146 ~~Company’s~~requires ~~results~~that ofa ~~operations,~~liability for ~~financial~~costs ~~position~~associated orwith ~~cash~~an ~~flows. Beginning~~exit inor ~~fiscal~~disposal ~~2002,~~activity ~~the~~be ~~Company~~recognized ~~expects~~when ~~that~~ the ~~annual goodwill~~ ~~amortization~~liability ~~will~~is beincurred. ~~reduced~~The byprovisions ~~approximately~~of $4FAS No.4 ~~million~~146 ~~upon~~are ~~the~~effective ~~adoption~~for ofexit or ~~FAS~~disposal ~~142~~activities ~~for~~initiated ~~acquisitions~~after ~~completed~~December ~~prior~~31, to2002, ~~July~~with 1,early ~~2001~~adoption encouraged.

~~Market~~ITEM ~~Risk~~3. MARKET RISK

Our financial results are subject to risk from interest rate fluctuations on debt, which carries variable interest rates. Variable rate debt outstanding under our Senior Credit Agreement was approximately $~~181~~65.69 million at September 2928, ~~2001~~2002. On December 20, 2000, we purchased a two-year interest rate swap in the notional amount of $150.0 million. This swap, which had an effective date of January 12, 2001, represented a hedging transaction to effectively convert $150.0 million of floating rate debt to a fixed rate. This fixed rate is equivalent to a LIBOR rate of 5.8075% plus the applicable margins described in our Senior Credit Agreement. At September 2928, ~~2001~~2002, the weighted average ~~prime,~~combined ~~30-day~~interest rate ~~and 90-day LIBOR rates~~ in effect on ~~the~~all ~~$31.6 million~~borrowings ~~balance~~under of the ~~floating~~Senior ~~rate~~Credit ~~term~~Agreement ~~and revolving debt~~ was 34.5131%. A 0.50% change in interest rates applied to the $3165.69 million balance of floating ~~rate~~ rate debt existing at September 28, 2002 would affect pre-tax annual results of operations by approximately $0.23 million. WeIn addition, we also have $218.5 ~~have~~million of Senior Convertible Notes and $801.06 million of ~~senior~~Senior ~~subordinated~~Subordinated Notes ~~notes~~ outstanding at September 2928, ~~2001,~~ ~~which~~2002. These notes bear interest payable semi-annually at a fixed ~~rate~~rates of 3.75% and 9.25%, respectively, and are ~~are~~ therefore not subject to risk from interest rate fluctuations.

The principal objective of our investment management activities is to maintain acceptable levels of interest rate and liquidity risk to facilitate our funding needs. As part of our risk management, we may use additional derivative financial products such as interest rate hedges and interest rate swaps in the future.16

The principal objective of our investment management activities is to maintain acceptable levels of interest rate and liquidity risk to facilitate our funding needs. As part of our risk management, we may consider using additional derivative financial products such as interest rate hedges and interest rate swaps in the future.

ITEM 4. CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Within 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and the Company's Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on the foregoing, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective.

There have been no significant changes in the Company's internal controls or in other factors that could significantly affect the internal controls subsequent to the date the Company completed its evaluation.

PART II

OTHER INFORMATION

ITEM 1. Legal Proceedings

WeFrom August 14 through October ~~are~~2002, aseveral ~~party~~class toaction ~~legal~~complaints ~~actions~~for ~~arising~~violations of securities laws were filed against the Company and Anthony J. Cuti, its Chairman, President and CEO. These complaints were filed in the ~~ordinary~~Federal ~~course~~Court for the Southern District of New ~~business. Based~~York on ~~information~~behalf ~~presently~~of ~~available~~shareholders towho acquired Duane Reade, Inc. securities usbetween April 25, we2002 ~~believe~~and ~~that~~July we24, ~~have~~2002, ~~adequate~~inclusive ~~legal~~(the ~~defenses~~“Class orPeriod”). Recently, ~~insurance~~the ~~coverage~~plaintiffs ~~for~~in these actions filed a request to consolidate these ~~these~~actions into one proceeding. These actions ~~and~~allege that the ~~ultimate~~Company ~~outcome~~violated federal securities laws by issuing a series of materially false and misleading statements. The Company believes that these actions ~~will~~are ~~not~~completely ~~have~~baseless aand ~~material~~without ~~adverse~~merit. ~~effect~~The onCompany uswill vigorously defend these actions in court.

~~During~~We ~~the~~are ~~third~~a ~~quarter,~~party weto ~~entered~~other ~~into~~legal aactions ~~settlement~~arising ~~agreement~~in ~~related~~the toordinary ancourse of ~~arbitration~~business. Based ~~proceeding~~on ~~associated~~information presently ~~with~~available ato ~~dispute~~us, ~~arising~~we ~~from~~believe ~~our~~that ~~1998~~we have adequate legal defenses or ~~acquisition~~insurance ofcoverage ~~Rock~~for ~~Bottom~~these ~~Stores.~~actions ~~Under~~and ~~this~~that ~~agreement,~~the ~~both~~ultimate ~~parties~~outcome ~~have~~of these ~~released~~actions ~~each~~will ~~other~~not ~~from~~have ~~any~~a ~~and~~material ~~all~~adverse ~~outstanding~~effect ~~claims~~on inour ~~connection~~financial ~~with~~position, ~~this~~cash ~~acquisition~~flows or results of operations.

	ITEM 2. Changes in Securities and Use of Proceeds Not applicable
	ITEM 3. Defaults Upon Senior Securities Not applicable
	ITEM 4. Submission of Matters to a Vote of Security Holders Not applicable
	ITEM 5. Other Information On August 31, 2001, Duane Reade’s collective bargaining agreement with the Allied Trades Council, covering employees at approximately 140 stores, expired pursuant to its terms. Leading up to that date and continuing thereafter, the parties have continued negotiating terms for a successor collective bargaining agreement.
	ITEM 6. Exhibits, Financial Statement Schedules and Reports on Form 8-K
	(a)	The following documents are filed as a part of this report:
		(i) Financial Statements
		(ii) Exhibits

ITEM 2. Changes in Securities and Use of Proceeds

3.1(i)		Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1(i) to the Company’s Registration Statement No. 333-41239 (the “Common Stock S-1”)).
3.1(ii)		Certificate of Amendment of Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to Amendment No. 1 to the Company’s Registration Statement on Form S-3 dated July 22, 2001).
3.1(iii)		Amended and Restated By-laws of the Company (incorporated by reference to Exhibit 3.1(ii) to the Common Stock S-1).
3.2(i)		Certificate of Incorporation of DRI I Inc. (incorporated by reference to Exhibit 3.2(i) to the S-1 Registration Statement No. 333-43313 with respect to the Company’s 9 ¼% Senior Subordinated Notes due 2008 (the “Notes S-1”)).
3.2(ii)		By-laws of DRI I Inc. (incorporated by reference to Exhibit 3.2(ii) to the Notes S-1).
3.3		Second Amended and Restated Partnership Agreement of Duane Reade (incorporated by reference to Exhibit 3.3 to the Notes S-1).
3.4(i)		Certificate of Incorporation of Duane Reade International, Inc. (incorporated by reference to Exhibit 3.4(i) to the Company’s Annual Report on Form 10-K for the year ended December 26, 1999 (the “1999 10-K”)).

Not applicable

3.4(ii)		By-laws of Duane Reade International, Inc. (incorporated by reference to exhibit 3.4(ii) to the 1999 10-K).
3.5(i)		Certificate of Incorporation of Duane Reade Realty, Inc. (incorporated by reference to Exhibit 3.5(i) to the 1999 10-K).
3.5(ii)		By-laws of Duane Reade Realty, Inc. (incorporated by reference to Exhibit 3.5(ii) to the 1999 10-K).
4.1		Form of Indenture (incorporated by reference to Exhibit 4.1 to the Notes S-1).
10.1		Duane Reade Inc. 1997 Equity Participation Plan (incorporated by reference to Exhibit 10.1 to the Common Stock S-1).
10.2		Duane Reade Inc. Holding Corp. 1992 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Common Stock S-1).
10.3		Employment Agreement, dated as of October 27, 1997, between the Company and Anthony J. Cuti (incorporated by reference to Exhibit 10.3 to the Common Stock S-1).
10.4		Employment Agreement, dated as of February 22, 1993, as amended, between the Company and Gary Charboneau (incorporated by reference to Exhibit 10.4 to the Common Stock S-1).
10.5		Employment Agreement, dated as of April 10, 1995, as amended, between Duane Reade and Jerry M. Ray (incorporated by reference to Exhibit 10.5 to the Common Stock S-1).
10.6		Employment Letter Agreement, dated as of October 9, 1996, between Duane Reade and Joseph Lacko (incorporated by reference to Exhibit 10.6 to the Common Stock S-1).
10.7		Employment Letter Agreement, dated as of February 12, 1997, between the Company and William Tennant (incorporated by reference to Exhibit 10.7 to the Common Stock S-1).
10.8		Agreement, dated as of November 22, 1996, as amended, between Duane Reade and Drug, Chemical, Cosmetic, Plastics and Affiliated Industries Warehouse Employees Local 815 (incorporated by reference to Exhibit 10.8 to the Common Stock S-1).
10.9		Agreement, dated July 16, 1992, as amended, between Duane Reade and Allied Trades Council (incorporated by reference to Exhibit 10.9 to the Common Stock S-1).
10.10		Stockholders and Registration Rights Agreement, dated as of June 18, 1997, among the Company, DLJMB Funding II, Inc., DLJ Merchant Banking Partners II, L.P., DLJ Diversified Partners, L.P., DLJ First ESC L.L.C., DLJ Offshore Partners, II, C.V., DLJ EAB Partners, L.P., UK Investment Plan 1997 Partners, Bankers Trust New York Corporation, Conac & Co., Muico & Co., Roton & Co., Putnam High Yield Trust, PaineWebber Managed Investment Trust on behalf of PaineWebber High Income Fund, USL Capital Corporation, Pearlman Family Partners, The Marion Trust, Bruce L. Weitz, BCIP Associates, BCIP Trust Associates, L.P., Tyler Capital Fund L.P., Tyler International, L.P.-II, and Tyler Massachusetts, L.P. (incorporated by reference to Exhibit 10.13 to the Common Stock S-1).
10.11		Amended and Restated Partnership Security Agreement, dated as of September 11, 1998, among Duane Reade Inc. and DRI I Inc. and Fleet National Bank, as Administrative Agent (incorporated by reference to Exhibit 10.15 to the Company’s Current Report on Form 8-K dated September 24, 1998).
10.12		Amended and Restated Borrower Security Agreement, dated as of September 11, 1998, between Duane Reade and Fleet National Bank as Administrative Agent (incorporated by reference to Exhibit 10.16 to the Company’s Current Report on Form 8-K dated September 24, 1998).
10.13		Amended and Restated Holdings Pledge Agreement, dated as of September 11, 1998, among Duane Reade Inc. and Fleet National Bank, as Administrative Agent (incorporated by reference to Exhibit 10.17 to the Company’s Current Report on Form 8-K dated September 24, 1998).
10.14		Promissory Note, dated as of November 9, 1998, between the Company and Anthony J. Cuti (incorporated by reference to Exhibit 10.16 to the Company’s 1998 Annual Report on Form 10-K).
10.15		Employment Letter, dated June 10, 1999, between the Company and John K. Henry (incorporated by reference to Exhibit 10.18 to the 1999 10-K).
10.16		Promissory Note, dated as of June 7, 1999, between the Company and Anthony J. Cuti (incorporated by reference to Exhibit 10.19 to the 1999 10-K).
10.17		Promissory Note, dated as of December 30, 1999, between the Company and Anthony J. Cuti (incorporated by reference to Exhibit 10.20 to the 1999 10-K).
10.18		Fourth Amended and Restated Credit Agreement, dated as of July 10, 2001, among Duane Reade, as the Borrower, Duane Reade Inc. and DRI I Inc., as the Parent Guarantors, Various Financial Institutions set forth therein, as the Lenders, Credit Suisse First Boston, as the Syndication Agent for the Lenders, and Credit Lyonnais New York Branch, as the Documentation Agent for the Lenders (incorporated by reference to Exhibit 10.29 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2001).
10.19		First Amendment to Employment Agreement, dated March 13, 2000, between the Company and Anthony J. Cuti (incorporated by reference to Exhibit 10.23 to the 1999 10-K).
10.20		Agreement, dated April 1, 1999, between Duane Reade and Local 340A/340B, New York (incorporated by reference to Exhibit 10.21 to the Company’s Quarterly Report on Form 10-Q for the period ended September 23, 2000).
10.21		Promissory Note, dated as of January 10, 2001, between the Company and Anthony J. Cuti (incorporated by reference to Exhibit 10.24 to the 2000 10-K).
10.22		Second Amendment to Employment Agreement, dated May 1, 2001, between the Company and Anthony J. Cuti (incorporated by reference to Exhibit 10.25 to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2001).
10.23		Second Amendment to Employment Agreement, as amended, dated May 21, 2001, between the Company, Credit Suisse First Boston Ltd. and Anthony J. Cuti (incorporated by reference to Exhibit 10.1 to Amendment No. 1 to the Company’s Registration Statement on Form S-3 dated July 22, 2001).
10.24		Employment Letter, dated June 14, 2001, between the Company and Bruce E. Schwallie (incorporated by reference to Exhibit 10.28 to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2001).
21.1		Subsidiaries of the Company (incorporated by reference to Exhibit 21.1 to the 1999 10-K).

ITEM 3. Defaults Upon Senior Securities

	(b)	Reports on Form 8-K:	None
	(c)	Financial Statement Schedules:	None

Not applicable

~~Schedules~~ITEM ~~for~~4. ~~which~~Submission ~~provision~~of isMatters ~~made~~to ina ~~the applicable~~Vote ~~accounting regulations~~ of ~~the~~Security Commission are either not required under the related instructions, are inapplicable or not material, or the information called for thereby is otherwise included in the financial statements and therefore has been omitted.Holders

~~SIGNATURES~~Not applicable

~~Pursuant~~ITEM to5. ~~the~~Other ~~requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.~~Information

~~Dated: November 13, 2001~~Not applicable

~~DUANE~~ITEM ~~READE, Inc~~6. ~~(Registrant)~~Exhibits, ~~By:~~Financial ~~/s/~~Statement ~~John~~Schedules K.and ~~Henry~~Reports ~~Name:~~on ~~John~~Form 8-K~~. Henry Title: Senior Vice President and Chief Financial Officer~~

~~Pursuant~~(a) The tofollowing ~~the~~documents ~~requirements~~are offiled ~~the~~as ~~Securities Exchange~~a ~~Act~~part of ~~1934,~~ this report ~~has been signed below by the following persons on behalf of the registrant in the capacities indicated on November 13, 2001.~~:

~~SIGNATURES TITLES /s/ Anthony J. Cuti President and Chief Executive Officer and Director Anthony J. Cuti~~ (~~Principal Executive Officer~~i) ~~/s/ John K. Henry Senior Vice President and Chief~~ Financial ~~Officer John K. Henry (Principal Accounting and Financial Officer)~~Statements

~~SIGNATURES~~(ii) Exhibits:

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.17

Dated: November 13, 2001

3.1(i)	Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1(i) to the Company’s Registration Statement No. 333-41239 (the “Common Stock S-1”)).
3.1(ii)	Certificate of Amendment of Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to Amendment No. 1 to the Company’s Registration Statement on Form S-3 dated July 22, 2001).
3.1(iii)	Amended and Restated By-laws of the Company (incorporated by reference to Exhibit 3.1(ii) to the Common Stock S-1).
3.2(i)	Certificate of Incorporation of DRI I Inc. (incorporated by reference to Exhibit 3.2(i) to the S-1 Registration Statement No. 333-43313 with respect to the Company’s 9¼% Senior Subordinated Notes due 2008 (the “Notes S-1”)).
3.2(ii)	By-laws of DRI I Inc. (incorporated by reference to Exhibit 3.2(ii) of the Notes S-1).
3.3	Second Amended and Restated Partnership Agreement of Duane Reade (incorporated by reference to Exhibit 3.3 of the Notes S-1).
3.4(i)	Certificate of Incorporation of Duane Reade International, Inc. (incorporated by reference to Exhibit 3.4(i) to the Company’s Annual Report on Form 10-K for the year ended December 25, 1999 (the “1999 10-K”)).
3.4(ii)	By-laws of Duane Reade International, Inc. (incorporated by reference to exhibit 3.4(ii) to the 1999 10-K).
3.5(i)	Certificate of Incorporation of Duane Reade Realty, Inc. (incorporated by reference to Exhibit 3.5(i) to the 1999 10-K).
3.5(ii)	By-laws of Duane Reade Realty, Inc. (incorporated by reference to Exhibit 3.5(ii) to the 1999 10-K).
4.1	Form of Indenture (incorporated by reference to Exhibit 4.1 of the Notes S-1).
4.2*	Second Supplemental Indenture, dated as of May 20, 2002, between Duane Reade Inc., the Subsidiary Guarantors, and State Street Bank, as trustee.
4.3	Indenture, dated as of April 16, 2002, between Duane Reade Inc., as issuer, the guarantors named therein and State Street Bank and Trust Company, as trustee (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-3 dated June 21, 2002 (“the Convertible Notes S-3”)).
4.4	Form of Senior Convertible Notes due 2022 (incorporated by reference to Exhibit 4.2 to the Convertible Notes S-3).
10.1	Duane Reade Inc. 1997 Equity Participation Plan (incorporated by reference to Exhibit 10.1 to the Common Stock S-1).
10.2	Duane Reade Inc. Holding Corp. 1992 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Common Stock S-1).
10.3	Employment Agreement, dated as of October 27, 1997, between the Company and Anthony J. Cuti (incorporated by reference to Exhibit 10.3 to the Common Stock S-1).
10.4	Employment Agreement, dated as of February 22, 1993, as amended, between the Company and Gary Charboneau (incorporated by reference to Exhibit 10.4 to the Common Stock S-1).
10.5	Employment Agreement, dated as of April 10, 1995, as amended, between Duane Reade and Jerry M. Ray (incorporated by reference to Exhibit 10.5 to the Common Stock S-1).
10.6	Employment Letter Agreement, dated as of October 9, 1996, between Duane Reade and Joseph Lacko (incorporated by reference to Exhibit 10.6 to the Common Stock S-1).
10.7	Agreement, dated as of November 22, 1996, as amended, between Duane Reade and Drug, Chemical, Cosmetic, Plastics and Affiliated Industries Warehouse Employees Local 815 (incorporated by reference to Exhibit 10.8 to the Common Stock S-1).
10.8	Agreement, dated December 6, 2001, between Duane Reade and Allied Trades Council (incorporated by reference to Exhibit 10.8 to the Company’s Annual Report on Form 10-K for the year ended December 29, 2001 (the “2001 10-K”)).
10.9	Stockholders and Registration Rights Agreement, dated as of June 18, 1997, among the Company, DLJMB Funding II, Inc., DLJ Merchant Banking Partners II, L.P., DLJ Diversified Partners, L.P., DLJ First ESC L.L.C., DLJ Offshore Partners, II, C.V., DLJ EAB Partners, L.P., UK Investment Plan 1997 Partners, Bankers Trust New York Corporation, Conac & Co., Muico & Co., Roton & Co., Putnam High Yield Trust, PaineWebber Managed Investment Trust on behalf of PaineWebber High Income Fund, USL Capital Corporation, Pearlman Family Partners, The Marion Trust, Bruce L. Weitz, BCIP Associates, BCIP Trust Associates, L.P., Tyler Capital Fund L.P., Tyler International, L.P.—II, and Tyler Massachusetts, L.P. (incorporated by reference to Exhibit 10.13 to the Common Stock S-1).
10.10	Amended and Restated Partnership Security Agreement, dated as of September 11, 1998, among Duane Reade Inc. and DRI I Inc. and Fleet National Bank, as Administrative Agent (incorporated by reference to Exhibit 10.15 to the Company’s Current Report on Form 8-K dated September 24, 1998).
10.11	Amended and Restated Borrower Security Agreement, dated as of September 11, 1998, between Duane Reade and Fleet National Bank as Administrative Agent (incorporated by reference to Exhibit 10.16 to the Company’s Current Report on Form 8-K dated September 24, 1998).
10.12	Amended and Restated Holdings Pledge Agreement, dated as of September 11, 1998, among Duane Reade Inc. and Fleet National Bank, as Administrative Agent (incorporated by reference to Exhibit 10.17 to the Company’s Current Report on Form 8-K dated September 24, 1998).
10.13	Promissory Note, dated as of November 9, 1998, between the Company and Anthony J. Cuti (incorporated by reference to Exhibit 10.16 to the Company’s Annual Report on Form 10-K for the year ended December 26, 1998 (the “1998 10-K”)).
10.14	Employment Letter, dated June 10, 1999, between the Company and John K. Henry (incorporated by reference to Exhibit 10.18 to the 1999 10-K).
10.15	Promissory Note, dated as of June 7, 1999, between the Company and Anthony J. Cuti (incorporated by reference to Exhibit 10.19 to the 1999 10-K).
10.16	Promissory Note, dated as of December 30, 1999, between the Company and Anthony J. Cuti (incorporated by reference to Exhibit 10.20 to the 1999 10-K).
10.17	Fourth Amended and Restated Credit Agreement, dated as of July 10, 2001, among Duane Reade, as the Borrower, Duane Reade Inc. and DRI I Inc., as the Parent Guarantors, Various Financial Institutions set forth therein, as the Lenders, Credit Suisse First Boston, as the Syndication Agent for the Lenders, and Credit Lyonnais New York Branch, as the Documentation Agent for the Lenders (incorporated by reference to Exhibit 10.29 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2001).
10.18	First Amendment to Employment Agreement, dated March 13, 2000, between the Company and Anthony J. Cuti (incorporated by reference to Exhibit 10.23 to the 1999 10-K).
10.19	Agreement, dated April 1, 2001, between Duane Reade and Local 340A New York Joint Board, UNITE AFL-CIO (incorporated by reference to Exhibit 10.19 to the 2001 10-K).
10.20	Promissory Note, dated as of January 10, 2001, between the Company and Anthony J. Cuti (incorporated by reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K for the year ended December 30, 2000 (the “2000 10-K”)).
10.21	Second Amendment to Employment Agreement, dated May 1, 2001, between the Company and Anthony J. Cuti (incorporated by reference to Exhibit 10.25 to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2001).
10.22	Second Amendment to Employment Agreement, as amended, dated May 21, 2001, between the Company, Credit Suisse First Boston Ltd. And Anthony J. Cuti (incorporated by reference to Exhibit 10.1 to Amendment No. 1 to the Company’s Registration Statement on Form S-3 dated July 22, 2001).
10.23	Promissory Note, dated as of January 2, 2002, between the Company and Anthony J. Cuti (incorporated by reference to Exhibit 10.23 to the 2001 10-K).
10.24	First Amendment to Stockholders and Registration Rights Agreement, dated as of January 16, 2002, by and among Duane Reade Inc. and the stockholders party thereto (incorporated by reference to Exhibit 4.9 to the Convertible Notes S-3).
10.25	Preferability Letter, dated as of May 13, 2002, issued by PricewaterhouseCoopers LLP, with respect to the Company’s change in accounting method of inventory valuation (incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended March 30, 2002).
10.26	Third Amendment to Employment Agreement, effective June 16, 2002, between the Company and Anthony J. Cuti (incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 29, 2002).
10.27	Amended and Restated Employment Agreement, dated August 12, 2002, between the Company and Anthony J. Cuti (incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 29, 2002).
10.28 *	First Amendment to the Fourth Amended and Restated Credit Agreement, dated as of April 9, 2002, among Duane Reade, as the Borrower, Duane Reade Inc. and DRI I Inc., as the Parent Guarantors, Various Financial Institutions set forth therein, as the Lenders, Credit Suisse First Boston, as the Syndication Agent for the Lenders, and Credit Lyonnais New York Branch, as the Documentation Agent for the Lenders.
10.29 *	Second Amendment to the Fourth Amended and Restated Credit Agreement, dated as of September 25, 2002, among Duane Reade, as the Borrower, Duane Reade Inc. and DRI I Inc., as the Parent Guarantors, Various Financial Institutions set forth therein, as the Lenders, Credit Suisse First Boston, as the Syndication Agent for the Lenders, and Credit Lyonnais New York Branch, as the Documentation Agent for the Lenders.
10.30	Shareholder Rights Agreement, dated as of September 12, 2002, between the Company and EquiServe Trust Company, N.A., as Rights Agent (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K, dated September 12, 2002).
21.1	Subsidiaries of the Company (incorporated by reference to Exhibit 21.1 to the 1999 10-K).


* filed herewith

~~DRI I Inc. By: /s/ John K. Henry Name: John K. Henry Title: Senior Vice President and Chief Financial Officer~~18

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on November 13, 2001 by:

(b)	Reports on Form 8-K:

On August 13, 2002, the Company filed a Current Report on Form 8-K which contained, in response to item 9, the Officer’s Certifications attesting to the completeness and accuracy of the information contained within the Company’s Quarterly Report on Form 10-Q for the period ended June 29, 2002, filed concurrently on August 13, 2002.

On September 12, 2002, the Company filed a Current Report on Form 8-K which contained information related to the Company’s adoption of a Shareholder Rights Agreement effective September 5, 2002.

(c)	Financial Statement Schedules: None

Schedules for which provision is made in the applicable accounting regulations of the Commission are either not required under the related instructions, are inapplicable or not material, or the information called for thereby is otherwise included in the financial statements and therefore has been omitted.

SIGNATURES TITLES /s/ Anthony J. Cuti President and Chief Executive Officer and Director Anthony J. Cuti (Principal Executive Officer) /s/ John K. Henry Senior Vice President and Chief Financial Officer John K. Henry (Principal Accounting and Financial Officer)19

SIGNATURES

Dated: November 13, 2001

Dated:	November 12, 2002
		DUANE READE, Inc.
		(Registrant)

		By:	/s/ John K. Henry
			Name:	John K. Henry
			Title:	Senior Vice President and Chief Financial Officer

~~DUANE~~Pursuant ~~READE~~to ~~By:~~the ~~DRI~~requirements Iof ~~Inc.,~~the aSecurities Exchange ~~general~~Act ~~partner~~of ~~By: Duane Reade Inc.~~1934, athis ~~general~~report ~~partner~~has ~~By:~~been ~~/s/~~signed ~~John~~below K.by ~~Henry~~the ~~By:~~following persons ~~/s/~~on ~~John~~behalf K.of ~~Henry~~the ~~Name:~~registrant ~~John~~in K.the ~~Henry~~capacities ~~Name:~~indicated ~~John~~on K.November ~~Henry Title: Senior Vice President and Chief Financial Officer Title: Senior Vice President and Chief Financial Officer~~12, 2002.

~~Pursuant~~SIGNATURES toTITLES ~~the requirements~~/s/ ofAnthony ~~the~~J. ~~Securities~~Cuti ~~Exchange~~President ~~Act~~and ofChief ~~1934,~~Executive ~~this~~Officer ~~report~~and ~~has~~Director ~~been signed~~Anthony ~~below~~J. onCuti ~~November~~(Principal ~~13,~~Executive ~~2001~~Officer) by/s/ ~~the~~John ~~following~~K. ~~persons~~Henry inSenior ~~the~~Vice ~~capacities indicated~~President ~~with~~and ~~respect~~Chief toFinancial ~~Duane~~Officer ~~Reade~~John ~~Inc~~K. ~~and~~Henry ~~DRI I Inc., the general partners of Duane Reade, on behalf of Duane Reade~~ (~~except~~Principal asAccounting ~~otherwise~~and ~~indicated~~Financial Officer):

Pursuant to the requirements of Section 13 or 15(d) of ~~SIGNATURES~~the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated:	November 12, 2002
		DRI I Inc.

		By:	/s/ John K. Henry
			Name:	John K. Henry
			Title:	Senior Vice President and Chief Financial Officer

~~Dated:~~ Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on November 1312, ~~2001~~2002 by:

~~DUANE~~SIGNATURES ~~READE~~TITLES ~~REALTY,~~/s/ ~~Inc~~Anthony J. ~~By:~~Cuti ~~/s/~~President ~~John~~and KChief Executive Officer and Director Anthony J. ~~Henry~~Cuti ~~Name:~~(Principal Executive Officer) /s/ John K. Henry ~~Title:~~ Senior Vice President and Chief Financial Officer John K. Henry (Principal Accounting and Financial Officer)

~~Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on November 13, 2001 by:~~21

~~SIGNATURES~~Pursuant ~~TITLES~~to ~~/s/~~the ~~Anthony~~requirements J.of ~~Cuti~~Section ~~President~~13 ~~and~~or ~~Chief~~15(d) ~~Executive~~of the ~~Officer~~Securities ~~and~~Exchange ~~Director~~Act ~~Anthony~~of J.1934, ~~Cuti~~the ~~(Principal~~registrant ~~Executive~~has ~~Officer)~~duly ~~/s/~~caused ~~John~~this K.report to ~~Henry~~be ~~Senior~~signed ~~Vice~~on ~~President~~its ~~and~~behalf ~~Chief~~by ~~Financial~~the ~~Officer~~undersigned, ~~John~~thereunto K.duly ~~Henry (Principal Accounting and Financial Officer)~~authorized.

SIGNATURES

Dated: November 12, 2002
			DUANE READE

By: DRI I Inc., a general partner			By: Duane Reade Inc., a general partner


By:	/s/ John K. Henry		By:	/s/ John K. Henry
Name:		John K. Henry	Name:		John K. Henry
Title:		Senior Vice President and Chief Financial Officer	Title:		Senior Vice President and Chief Financial Officer

Pursuant to the requirements of ~~Section 13 or 15(d) of~~ the Securities Exchange Act of 1934, ~~the~~this ~~registrant~~report has ~~duly~~been ~~caused~~signed ~~this~~below ~~report~~on November 12, 2002 by the following persons in the capacities indicated with respect to beDuane ~~signed~~Reade Inc. onand ~~its~~DRI ~~behalf~~I byInc., the ~~undersigned~~general partners of Duane Reade, ~~thereunto~~on ~~duly~~behalf ~~authorized.~~of Duane Reade (except as otherwise indicated):

~~Dated: November~~SIGNATURES ~~13,~~TITLES ~~2001~~/s/ Anthony J. Cuti President and Chief Executive Officer and Director Anthony J. Cuti (Principal Executive Officer) /s/ John K. Henry Senior Vice President and Chief Financial Officer John K. Henry (Principal Accounting and Financial Officer)

~~DUANE READE INTERNATIONAL, Inc. By: /s/ John K. Henry Name: John K. Henry Title: Senior Vice President and Chief Financial Officer~~22

Pursuant to the requirements of ~~the~~Section ~~Securities~~13 or 15(d) of the Securities Exchange Act of 1934, ~~this~~the ~~report~~registrant has ~~been~~duly caused this report to be signed on ~~November~~its 13behalf by the undersigned, ~~2001~~thereunto ~~by:~~duly authorized.

Dated: November 12, 2002
	DUANE READE REALTY, Inc.

	By:	/s/ John K. Henry
		Name:	John K. Henry
		Title:	Senior Vice President and Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on November 12, 2002 by:

SIGNATURES			TITLES

/s/ Anthony J. Cuti			President and Chief Executive Officer and Director
Anthony J. Cuti			(Principal Executive Officer)

/s/ John K. Henry			Senior Vice President and Chief Financial Officer
John K. Henry			(Principal Accounting and Financial Officer)

Dated: November 12, 2002

	DUANE READE INTERNATIONAL, Inc.

	By:	/s/ John K. Henry
		Name:	John K. Henry
		Title:	Senior Vice President and Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on November 12, 2002 by:

SIGNATURES			TITLES

/s/ Anthony J. Cuti			President and Chief Executive Officer and Director
Anthony J. Cuti			(Principal Executive Officer)

/s/ John K. Henry			Senior Vice President and Chief Financial Officer
John K. Henry			(Principal Accounting and Financial Officer)

CERTIFICATIONS

I, Anthony J. Cuti, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Duane Reade Inc;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:	November 12, 2002


By:	/s/ Anthony J. Cuti	President and Chief Executive Officer and Director
	Anthony J. Cuti	(Principal Executive Officer)

I, John K. Henry, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Duane Reade Inc;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

Date:	November 12, 2002


By:	/s/ John K. Henry	Senior Vice President and Chief Financial Officer
	John K. Henry	(Principal Accounting Officer)

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