UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended ~~May~~November 3130, 2014

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______to _______

Commission File Number

1-604

WALGREEN CO.

(Exact name of registrant as specified in its charter)

Illinois		36-1924025
(State of Incorporation)		(I.R.S. Employer Identification No.)

108 Wilmot Road, Deerfield, Illinois		60015
(Address of principal executive offices)		(Zip Code)

(847) 315-2500

(Registrant's telephone number, including area code)

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  ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of "“large accelerated filer"”, "“accelerated filer"” and "“smaller reporting company"” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☑ Accelerated filer ☐ Non-accelerated filer ☐ (Do not check if a smaller reporting company) Smaller reporting company ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ☐ No ☑

The number of shares outstanding of the registrant's Common Stock, $.078125 par value, as of ~~May~~November 3130, 2014 was ~~956~~945,~~560~~642,~~612~~298.

WALGREEN CO.

FORM 10-Q FOR THE QUARTER ENDED ~~May~~NOVEMBER 3130, 2014

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

	Item 1.	Consolidated Condensed Financial Statements (Unaudited)
		a)	Balance Sheets	3
		b)	Statement of Equity	4
		c)	Statements of Earnings	5
		d)	Statements of Comprehensive Income	6
		e)	Statements of Cash Flows	7
		f)	Notes to Financial Statements	8
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		23
	Item 3.	Quantitative and Qualitative Disclosure about Market Risk		35
	Item 4.	Controls and Procedures		36

PART II. OTHER INFORMATION

	Item 1.	Legal Proceedings	37
	Item 1A.	Risk Factors	37
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37
	Item 6.	Exhibits	38

- 2 -

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1.	Consolidated Condensed Financial Statements (Unaudited)
	a)	Balance Sheets
	b)	Statement of Equity
	c)	Statements of Earnings
	d)	Statements of Comprehensive Income
	e)	Statements of Cash Flows
	f)	Notes to Financial Statements
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosure about Market Risk
Item 4.	Controls and Procedures

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings
Item 1A.	Risk Factors
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.	Exhibits

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Condensed Financial Statements (Unaudited)

WALGREEN CO. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(UNAUDITED)

(In millions, except per share amounts)

May 31, 2014

August 31, 2013

May 31, 2013

November 30, 2014

August 31, 2014

November 30, 2013

Assets

Current Assets:

Cash and cash equivalents

212,~~126~~861

2,~~106~~646

~~2,994~~969

Accounts receivable, net

3,~~029~~579

23,~~632~~218

2,~~418~~727

Inventories

6,~~439~~518

6,~~852~~076

67,~~881~~729

Other current assets

~~334~~322

~~284~~302

~~278~~297

Total Current Assets

1123,~~928~~280

1112,~~874~~242

1211,~~571~~722

Non-Current Assets:

Property and equipment, at cost, less accumulated depreciation and amortization

12,~~088~~103

12,~~138~~257

12,~~075~~351

Equity investment in Alliance Boots

7,~~035~~335

67,~~261~~248

6,~~205~~439

Alliance Boots call option

~~924~~-

~~839~~-

~~837~~856

Goodwill

2,~~365~~356

2,~~410~~359

2,~~400~~491

Other non-current assets

3,~~051~~538

13,~~959~~076

12,~~753~~622

Total Non-Current Assets

25,~~463~~332

2324,~~607~~940

2324,~~270~~759

Total Assets

3748,~~391~~612

3537,~~481~~182

3536,~~841~~481

Liabilities & Equity

Current Liabilities:

Short-term borrowings

~~780~~774

~~570~~774

~~1,865~~571

Trade accounts payable

45,~~235~~189

4,~~635~~315

4,~~530~~762

Accrued expenses and other liabilities

3,~~370~~596

3,~~577~~701

3,~~221~~210

Income taxes

24318

~~101~~105

74278

Total Current Liabilities

89,~~409~~877

8,~~883~~895

98,~~690~~821

Non-Current Liabilities:

Long-term debt

313,~~747~~756

43,~~477~~736

4,501

Deferred income taxes

1,~~010~~131

~~600~~1,048

~~577~~778

Other non-current liabilities

23,~~740~~081

2,~~067~~942

2,~~093~~325

Total Non-Current Liabilities

717,~~497~~968

7,~~144~~726

7,~~171~~604

Commitments and Contingencies (see Note 11)

Equity:

Preferred stock $0.0625 par value; authorized 32 million shares, none issued

Preferred stock $.0625 par value; authorized 32 million shares, none issued

Common stock $0.078125 par value; authorized 3.2 billion shares; issued 1,028,180,150 at May 31, 2014, August 31, 2013 and May 31, 2013

Common stock $.078125 par value; authorized 3.2 billion shares; issued 1,028,180,150 at November 30, 2014, August 31, 2014 and November 30, 2013

Paid-in capital

1,~~128~~179

1,~~074~~172

1,~~029~~053

Employee stock loan receivable

(74

)

(115

)

(1210

)

Retained earnings

22,~~790~~717

2122,~~523~~229

21,~~166~~918

Accumulated other comprehensive income (loss)

202

(98

)

(121

)

Accumulated other comprehensive income

222

178

Treasury stock, at cost; 71,619,538 shares at May 31, 2014, 81,584,572 at August 31, 2013 and 83,176,470 at May 31, 2013

(2,776

)

(3,114

)

(3,162

)

Treasury stock, at cost; 82,537,852 shares at November 30, 2014, 77,793,261 at August 31, 2014 and 78,008,865 at November 30, 2013

(3,558

)

(3,197

)

(3,042

)

Total Walgreen Co. Shareholders' Equity

21,417

19,454

18,980

Total Walgreen Co. Shareholders’ Equity

20,636

20,457

20,021

Noncontrolling interests

68131

-104

-35

Total Equity

2120,~~485~~767

1920,~~454~~561

1820,~~980~~056

Total Liabilities & Equity

3748,~~391~~612

3537,~~481~~182

3536,~~841~~481

The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of these Statements.

- 3 -

Table of Contents

WALGREEN CO. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENT OF EQUITY

(UNAUDITED)

For the ~~nine~~three month period ended ~~May~~November 3130, 2014

(In millions, except per share amounts)

	Equity attributable to Walgreen Co.
	Common Stock Shares			Common Stock Amount		Treasury Stock Amount			Paid-In Capital			Employee Stock Loan Receivable			Accumulated Other Comprehensive Income~~(Loss)~~			Retained Earnings			Noncontrolling Interests		Total Equity
Balance, August 31, 2013		946,595,578		$	80	$	(3,114	)	$	1,074		$	(11	)	$	(98	)	$	21,523		$	-	$	19,454
Balance, August 31, 2014		950,386,889		$	80	$	(3,197	)	$	1,172		$	(5	)	$	178		$	22,229		$	104	$	20,561
Net earnings		-			-		-			-			-			-			~~2,171~~809			6527		~~2,236~~836
Other comprehensive income, net of tax		-			-		-			-			-			~~300~~44			-			-		~~300~~44
Dividends declared ($.945 per share)		-			-		-			-			-			-			(904	)		-		(904	)
Dividends declared ($.3375 per share)		-			-		-			-			-			-			(321	)		-		(321	)
Treasury stock purchases		(38,~~703~~022,~~800~~588	)		-		(~~205~~500	)		-			-			-			-			-		(~~205~~500	)
Employee stock purchase and option plans		133,~~668~~277,~~834~~997			-		~~543~~139			(3124	)		-			-			-			-		~~512~~115
Stock-based compensation		-			-		-			8531			-			-			-			-		8531
Employee stock loan receivable		-			-		-			-			41			-			-			-		41
Other		-			-		-			-			-			-			-			3		3
Balance, November 30, 2014		945,642,298		$	80	$	(3,558	)	$	1,179		$	(4	)	$	222		$	22,717		$	131	$	20,767
Balance, May 31, 2014		956,560,612		$	80	$	(2,776	)	$	1,128		$	(7	)	$	202		$	22,790		$	68	$	21,485

The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of these Statements.

- 4 -

Table of Contents

WALGREEN CO. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS

(UNAUDITED)

(In millions, except per share amounts)

	Three Months Ended				Nine Months Ended
	Three Months Ended November 30,
	May 31, 2014		May 31, 2013		May 31, 2014		May 31, 2013
	2014		2013
Net sales	$	19,~~401~~554	$	18,~~313~~329	$	~~57,335~~	$	~~54,276~~
Cost of sales		1314,~~961~~258		13,~~091~~177		~~41,093~~		~~38,348~~
Gross Profit		5,~~440~~296		5,~~222~~152		~~16,242~~		~~15,928~~
Selling, general and administrative expenses		4,~~551~~456		4,~~362~~379		~~13,499~~		~~13,257~~
Gain on sale of business		-		-		-		20
Equity earnings in Alliance Boots		151		151
Equity earnings in Alliance Boots		137		131		482		220
Operating Income		991		924
Operating Income		1,026		991		3,225		2,911
Interest expense, net		55		41
Interest expense, net		35		50		113		110
Other income		199		225
Other income		124		77		290		77
Earnings Before Income Tax Provision		1,135		1,108
Earnings Before Income Tax Provision		1,115		1,018		3,402		2,878
Income tax provision		299		404
Income tax provision		351		394		1,166		1,085
Net Earnings		836		704
Net Earnings		764		624		2,236		1,793
Net earnings attributable to noncontrolling interests		27		9
Net earnings attributable to noncontrolling interests		42		-		65		-
Net Earnings Attributable to Walgreen Co.	$	809	$	695
Net Earnings Attributable to Walgreen Co.	$	722	$	624	$	2,171	$	1,793
Net earnings per common share attributable to Walgreen Co. – basic	$	.86	$	.73
Net earnings per common share attributable to Walgreen Co. – basic	$	0.76	$	0.66	$	2.28	$	1.90
Net earnings per common share attributable to Walgreen Co. – diluted		.85	$	.72
Net earnings per common share attributable to Walgreen Co. – diluted	$	0.75	$	0.65	$	2.25	$	1.88
Dividends declared	$	.3375	$	.3150
Dividends declared	$	0.315	$	0.275	$	0.945	$	0.825
Average shares outstanding		945.8		949.3
Average shares outstanding		955.3		947.7		952.2		946.1
Dilutive effect of stock options		10.2		12.2
Dilutive effect of stock options		12.3		11.3		12.1		8.4
Average diluted shares		956.0		961.5
Average diluted shares		967.6		959.0		964.3		954.5

The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of these Statements.

- 5 -

Table of Contents

WALGREEN CO. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(In millions)

	Three Months Ended May 31,						Nine Months Ended May 31,
	Three Months Ended November 30,
	2014			2013			~~2014~~			~~2013~~
Comprehensive Income
Net Earnings	$	~~764~~836		$	~~624~~704		$	~~2,236~~		$	~~1,793~~
Other comprehensive income (loss), net of tax:
Postretirement liability		(21	)		(28	)		4			(5	)
Changes in unrecognized gain on available-for-sale investments		4099			-84			75			-
Unrealized loss on cash flow hedges		(1312	)		-			~~(13~~	)		-
Share of other comprehensive income of Alliance Boots		(1910	)		~~104~~(34	)		~~(89~~	)		~~(14~~	)
Cumulative translation adjustments		69(32	)		~~(260~~62	)		~~323~~			~~(170~~	)
Total Other Comprehensive Income (Loss)		7544			~~(158~~120	)		~~300~~			~~(189~~	)
Total Comprehensive Income		~~839~~880			~~466~~824			~~2,536~~			~~1,604~~
Comprehensive income attributable to noncontrolling interests		4227			-9			65			-
Comprehensive income attributable to Walgreen Co.	$	~~797~~853		$	~~466~~815		$	~~2,471~~		$	~~1,604~~

The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of these Statements.

- 6 -

Table of Contents

WALGREEN CO. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In millions)

	Nine Months Ended May 31,
	Three Months Ended November 30,
	2014			2013
Cash Flows from Operating Activities:
Net earnings	$	~~2,236~~836		$	~~1,793~~704
Adjustments to reconcile net earnings to net cash provided by operating activities -
Depreciation and amortization		~~1,001~~319			~~958~~332
Change in fair value of warrants and related amortization		(~~290~~296	)		(77225	)
Deferred income taxes		~~218~~36			33129
Stock compensation expense		8531			7021
Equity earnings in Alliance Boots		(~~482~~151	)		(~~220~~151	)
Other		129			60
Unrealized loss from fair value adjustments		96			-
Other		(2	)		94
Changes in operating assets and liabilities -
Accounts receivable, net		(~~411~~353	)		(~~214~~74	)
Inventories		~~493~~(436	)		~~288~~(815	)
Other current assets		12(20	)		38(12	)
Trade accounts payable		~~(425~~874	)		7897
Accrued expenses and other liabilities		(4680	)		~~203~~(232	)
Income taxes		~~(103~~204	)		98190
Other non-current assets and liabilities		92(27	)		7075
Net cash provided by operating activities		21,~~509~~031			~~3,178~~133
Cash Flows from Investing Activities:
Additions to property and equipment		(~~821~~335	)		(~~874~~364	)
Proceeds from sale of assets		~~173~~294			2714
Proceeds related to sale of business		-			20
Business and intangible asset acquisitions, net of cash received		(13	)		(243	)
Business and intangible asset acquisitions, net of cash received		(323	)		(588	)
Purchases of short-term investments held to maturity		(17	)		(19	)
Purchases of short-term investments held to maturity		(41	)		(55	)
Proceeds from short-term investments held to maturity		16			19
Proceeds from short-term investments held to maturity		42			5
Investment in AmerisourceBergen		-			(290	)
Investment in AmerisourceBergen		(493	)		-
Other		-			(42	)
Other		(82	)		(40	)
Net cash used for investing activities		(55	)		(925	)
Net cash used for investing activities		(1,545	)		(1,505	)
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt		-10,020			~~4,000~~-
Payments of long-term debt		(550	)		(3,000	)
Stock purchases		(500	)		(205	)
Proceeds from financing leases		225			-
Proceeds related to employee stock plans		112			173
Stock purchases		(205	)		(567	)
Cash dividends paid		(322	)		(298	)
Proceeds related to employee stock plans		518			391
Other		(61	)		(15	)
Cash dividends paid		(898	)		(780	)
Net cash provided by (used for) financing activities		9,249			(345	)
Other		(34	)		(20	)
Effect of exchange rate changes on cash and cash equivalents		(10	)		-
Net cash (used for) provided by financing activities		(944	)		24
Changes in Cash and Cash Equivalents:
Net increase in cash and cash equivalents		20			1,697
Net increase (decrease) in cash and cash equivalents		10,215			(1,137	)
Cash and cash equivalents at beginning of period		2,~~106~~646			12,~~297~~106
Cash and cash equivalents at end of period	$	212,~~126~~861		$	~~2,994~~969

The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of these Statements.

- 7 -

Table of Contents

WALGREEN CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1. Basis of Presentation

The consolidated condensed financial statements of Walgreen Co. and subsidiaries (the Company) included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. The Consolidated Condensed Balance Sheets as of ~~May~~November 3130, 2014, August 31, ~~2013~~2014 and ~~May~~November 3130, 2013, the Consolidated Condensed Statement of Equity for the ~~nine~~three month period ended ~~May~~November 3130, 2014, the Consolidated Condensed Statements of Earnings, ~~and~~ Consolidated Condensed Statements of Comprehensive Income ~~for the three~~ and ~~nine months ended May 31, 2014 and 2013, and~~ the Consolidated Condensed Statements of Cash Flows for the ~~nine~~three months ended ~~May~~November 3130, 2014 and 2013, have been prepared without audit. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These unaudited consolidated condensed financial statements should be read in conjunction with the audited financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended August 31, ~~2013~~2014, as amended.

In the opinion of the Company, the consolidated condensed financial statements for the unaudited interim periods presented include all adjustments (consisting only of normal recurring adjustments) necessary to present a fair statement of the results for such interim periods. Because of the influence of certain holidays, seasonality, changes in vendor, payer and customer relationships and terms and other factors on the Company's operations, net earnings for any interim period may not be comparable to the same interim period in previous years or indicative of net earnings for the full fiscal year. In addition, the positive impact on gross profit margins and gross profit dollars typically have been significant in the first several months after a generic version of a drug is first allowed to compete with the branded version, which is generally referred to as a "“generic conversion." ” In any given year, the number of major brand name drugs that undergo a conversion from branded to generic status can increase or decrease, which can have a significant impact on the Company'’s sales, gross profit margins and gross profit dollars.

The Company'’s 45% proportionate share of earnings in the Alliance Boots GmbH (Alliance Boots) equity method investment is included in consolidated net earnings and reported on a three-month lag. The Company reports its share of equity earnings in Alliance Boots within the operating section in the Consolidated Condensed Statements of Earnings because operations of Alliance Boots are integral to Walgreens. The companies share common board of director members, recognize purchasing synergies through Walgreens Boots Alliance Development GmbH, a 50/50 joint venture, as well as engage in intercompany sales transactions on select front-end merchandise. Because of the three-month lag and the timing of the closing of this investment, only the seven months of August through February's results of operations are reflected in the equity earnings in Alliance Boots included in the Company's reported net earnings for the nine month period ended May 31, 2013 compared to nine months of June through February of operating results in the current fiscal year.

The Company directly owns a 50% interest in Walgreens Boots Alliance Development GmbH and indirectly owns an additional ownership interest through its 45% ownership in Alliance Boots, representing a direct and indirect economic interest of 72.5%. The financial results of the Walgreens Boots Alliance Development GmbH joint venture are fully consolidated into the Company'’s ~~operating~~consolidated ~~results~~financial statements and reported without a lag. As the joint venture is ~~consolidated~~included within the Company'’s operating results, Alliance Boots proportionate share of Walgreens Boots Alliance Development GmbH earnings is removed from equity earnings and presented as a component of noncontrolling interests.

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to use judgment in the application of accounting policies, including making estimates and assumptions. The Company bases its estimates on the information available at the time, its experience and on various other assumptions believed to be reasonable under the circumstances. Adjustments may be made in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain. Actual results may differ. For a discussion of the Company'’s significant accounting policies, please see the Company'’s ~~Annual Report on~~ Form 10-K for the fiscal year ended August 31, ~~2013~~2014, as amended.

Income Taxes

The effective tax rate for the three month periods ended November 30, 2014 and 2013 was 26.4% and 36.8%, respectively. The decrease in the current quarter’s effective tax rate, as compared to last year's rate is primarily attributed to the Company recognizing a discrete tax benefit of $86 million of previously unrecognized capital loss deferred tax assets due to the Company generating capital gain income from sale-leaseback transactions in the current period and its expectations of generating additional capital gain income in the second quarter of fiscal 2015. Additional factors contributing to the current quarter’s reduced tax rate include incremental foreign source earnings taxed at lower tax rates, partly offset by increased expenses for which no tax benefit will be realized. If future transactions occur which generate sufficient capital gain income, the Company may recognize additional discrete tax benefits for previously unrecognized capital loss deferred tax assets in future periods.

Subsidiary Issuer Information

Walgreens Boots Alliance, Inc. (WBA) is a new corporation incorporated on September 2, 2014 under the laws of Delaware and is currently a direct 100% owned finance subsidiary of the Company. In November 2014, Walgreens Boots Alliance, Inc. issued several series of unsecured, unsubordinated notes (WBA notes) in connection with the financing of a portion of the cash consideration payable in connection with the pending second step transaction, as described below, the refinancing of substantially all of Alliance Boots’ total borrowings in connection with the second step transaction and/or the payment of related fees and expenses. Following the completion of the second step transaction, a portion of the net proceeds from these notes may also be used for general corporate purposes, including the repayment and/or refinancing of existing Company obligations. Upon initial issuance, the Company issued a full and unconditional guarantee on an unsecured and unsubordinated basis with respect to the WBA notes. See Note 8 for additional disclosure regarding the Company’s debt issuance.

- 8 -

Table of Contents

The Company anticipates that neither the WBA notes nor any other potential Company or WBA financings in connection with the second step transaction will contain any significant restrictions on the ability of the Company’s subsidiaries to make dividend payments, loans or advances to the Company or WBA.

In addition, the Company is the issuer of five series of senior unsecured notes (Company Notes) and the borrower under two revolving credit facilities (Company Credit Facilities). Neither the Company Notes nor Company Credit Facilities are guaranteed by any of the Company’s subsidiaries. The Company Notes and Company Credit Facilities do not contain any significant restrictions on the ability of the Company’s subsidiaries to make dividend payments, loans or advances to the Company.

Reorganization

On October 17, 2014, Walgreens entered into an Agreement and Plan of Merger (the Reorganization Merger Agreement) by and among Walgreens, Ontario Merger Sub, Inc., an Illinois corporation and indirect wholly owned subsidiary of Walgreens (Merger Sub), and WBA. The Reorganization Merger Agreement provides that Merger Sub will merge with and into Walgreens (the Reorg Merger), with Walgreens surviving the Reorg Merger as a wholly owned subsidiary of WBA. At the effective time of the Reorg Merger, issued and outstanding shares of Walgreens common stock will be converted automatically into the right to receive shares of WBA common stock, on a one-for-one basis. Walgreens shareholders will own the same number of shares of WBA common stock as they own of Walgreens common stock immediately prior to the completion of the Reorg Merger, and, after taking into account the completion of the second step transaction, such shares will represent the same ownership percentage of WBA as they would have of Walgreens immediately following the completion of the second step transaction without the Reorg Merger. The completion of the Reorg Merger depends on the satisfaction or waiver of several conditions. Walgreens may terminate the Reorganization Merger Agreement at any time, even after adoption and approval by Walgreens shareholders, if Walgreens board of directors determines to do so. In addition, the Reorganization Merger Agreement will automatically terminate upon the termination of the Purchase and Option Agreement prior to the completion of the second step transaction.

Note 2. Inventories

Inventories are valued on a lower of last-in, first-out (LIFO) cost or market basis. At ~~May~~November 3130, 2014, August 31, ~~2013~~2014 and ~~May~~November 3130, 2013, inventories would have been greater by $2.3 billion, $2.13 billion and $2.12 billion, respectively, if they had been valued on a lower of first-in, first-out (FIFO) cost or market basis. LIFO inventory costs can only be determined annually when inflation rates and inventory levels are finalized; therefore, LIFO inventory costs for interim financial statements are estimated. Inventory includes product costs, inbound freight, warehousing costs and vendor allowances not classified as a reduction of advertising expense.

Note 3. Liability for Closed Locations

The Company provides for future costs related to closed locations. The liability is based on the present value of future rent obligations and other related costs (net of estimated sublease rent) to the first lease option date. During the three ~~and nine~~ month ~~periods~~period ended ~~May~~November 3130, 2014, the Company recorded charges of $4426 million ~~and $77 million, respectively,~~ for facilities that were relocated under long-term leases or closed, including those closed in conjunction with the Company'’s store optimization plan. This compares to $227 million ~~and $37 million~~ for the three ~~and nine~~ month ~~periods~~period ended ~~May~~November 3130, 2013~~, respectively~~. These charges are reported in selling, general and administrative expenses on the Consolidated Condensed Statements of Earnings.

The changes in reserve for facility closings and related lease termination charges include the following (In millions):

	May 31, 2014			August 31, 2013			May 31, 2013
	November 30, 2014			August 31, 2014			November 30, 2013
Balance – beginning of period	$	~~123~~257		$	~~117~~123		$	~~117~~123
Provision for present value of non-cancellable lease payments on closed facilities		708			34171			2623
Assumptions about future sublease income, terminations and changes in interest rates		(89	)		(68	)		(3	)
Interest accretion		159			1514			141
Cash payments, net of sublease income		(3018	)		(3743	)		(327	)
Balance – end of period	$	~~170~~265		$	~~123~~257		$	~~122~~143

- 9 -

Table of Contents

Note 4. Acquisitions

The aggregate purchase price of all business and intangible asset acquisitions was $~~323~~13 million for the ~~nine~~three months ended ~~May~~November 3130, 2014. In These ~~November~~acquisitions ~~2013~~added $10 million to intangible assets, ~~the~~primarily ~~Company~~prescription ~~completed~~files. The ~~its~~remaining ~~acquisition~~$3 ofmillion ~~certain~~in ~~assets~~fair values of ~~Kerr~~business ~~Drug~~acquisitions ~~and~~in ~~its~~the ~~affiliates~~period ~~for~~relate ~~$173~~to ~~million,~~immaterial ~~subject~~amounts toof ~~adjustment~~tangible inassets, ~~certain~~less ~~circumstances~~assumed liabilities. ~~This~~ Operating ~~acquisition~~results of the businesses acquired have been included 76in ~~retail~~the ~~locations~~Consolidated asCondensed ~~well~~Statements asof aEarnings ~~specialty~~from ~~pharmacy~~their ~~business~~respective acquisition dates forward and awere ~~distribution~~not ~~center~~material. The ~~preliminary~~Company finalized its purchase accounting ~~for~~of ~~the~~ Kerr Drug ~~acquisition~~in the first quarter of fiscal 2014, which added $4542 million to goodwill and $54 million to intangible assets, primarily prescription files and payer contracts, ~~with~~and the remaining $74 million allocated to net tangible assets. ~~This allocation is subject to change as the Company finalizes purchase accounting.~~

All other acquisitions added $19 million to goodwill and $101 million to intangible assets, primarily prescription files. The remaining $30 million in fair values of business acquisitions in the period relate to immaterial amounts of tangible assets, less liabilities assumed. Operating results of the businesses acquired have been included in the Consolidated Condensed Statements of Earnings from their respective acquisition dates forward. Pro forma results of the Company, assuming all of the acquisitions had occurred at the beginning of each period presented, would not be materially different from the results reported.

Note 5. Equity Method Investments

Equity method investments as of ~~May~~November 3130, 2014, August 31, ~~2013,~~2014 and ~~May~~November 3130, 2013 were as follows (In millions, except percentages):

	May 31, 2014							August 31, 2013							May 31, 2013
		November 30, 2014							August 31, 2014							November 30, 2013
	~~Carrying Value~~	Carrying Value		~~Ownership Percentage~~	Ownership Percentage			~~Carrying Value~~	Carrying Value		~~Ownership Percentage~~	Ownership Percentage			~~Carrying Value~~	Carrying Value		~~Ownership Percentage~~	Ownership Percentage
Alliance Boots		$	7,~~035~~335			45%	%		$	67,~~261~~248			45%	%		$	6,~~205~~439			45%	%
Other			771			30% - 50%	%			774			30% - 50%	%			67			30% - 50%	%
Total		$	7,~~042~~406						$	67,~~268~~322						$	6,~~211~~446

Alliance Boots

On August 2, 2012, pursuant to a Purchase and Option Agreement dated June 18, 2012, by and among the Company, Alliance Boots GmbH and AB Acquisitions Holdings Limited (as amended, the Purchase and Option Agreement), the Company acquired 45% of the issued and outstanding share capital of Alliance Boots in exchange for $4.025 billion in cash and approximately 83.4 million shares of ~~Company~~ common stock. The Purchase and Option Agreement ~~also provides~~provided, subject to the satisfaction or waiver of specified conditions, a call option that ~~gives~~gave the Company the right, but not the obligation, to acquire the remaining 55% of Alliance Boots (the second step transaction) in exchange for an additional £3.1 billion in cash (approximately $54.29 billion using ~~May~~November 3130, 2014 exchange rates) as well as an additional 144.3 million shares ~~of Company common stock~~, subject to certain adjustments~~. If~~ (the ~~Company exercises the~~ call option,). On inAugust ~~certain~~5, ~~limited circumstances~~2014, the ~~Company~~Purchase ~~may~~and beOption ~~required~~Agreement was amended to ~~make~~permit the ~~entire~~exercise ~~second~~of ~~step~~the ~~transaction payment in cash. The~~ call option ~~can~~beginning beon ~~exercised~~that bydate, ~~the~~and ~~Company~~Walgreens, ~~during~~through ~~the~~an ~~six~~indirectly wholly-~~month~~owned ~~period~~subsidiary ~~beginning~~to ~~February~~which 2,Walgreens ~~2015. In~~previously ~~addition,~~assigned inits ~~certain~~right ~~circumstances,~~to if the ~~Company~~call ~~does~~option, ~~not~~exercised ~~exercise~~ the call option, oron ~~the~~August ~~Company~~5, ~~has~~2014. In ~~exercised~~certain ~~the~~circumstances, ~~call~~if ~~option but~~ the second step transaction does not close, the Company'’s ownership of Alliance Boots ~~will~~would ~~reduce~~be reduced from 45% to 42% in exchange for nominal consideration. Because the acquisition of Alliance Boots excluded Alliance Boots’ minority interest in Galenica Ltd. (Galenica), the Company’s equity earnings, initial investment and the call option exclude Galenica. As contemplated by the Purchase and Option Agreement, Alliance Boots’ investment in Galenica was distributed to the Alliance Boots shareholders other than the Company in May 2013, which had no impact on the Company’s financial results.

The call option, prior to its amendment and subsequent exercise, was valued using a Monte Carlo simulation using assumptions surrounding Walgreens equity value as well as the potential impacts of certain provisions of the Purchase and Option Agreement ~~that are described in the Form 8-K filed by the Company on June 19, 2012~~. The call option iswas accounted for at cost and subsequently adjusted for foreign currency translation gains or losses. ~~The~~ Upon ~~final~~its ~~purchase~~exercise ~~price allocation resulted~~ in ~~$6.1~~August ~~billion~~2014, of the ~~total~~call ~~consideration~~option ~~being~~was ~~allocated~~valued toas an out-of-the-money ~~investment~~option and ~~$866~~a ~~million~~loss ~~being~~was ~~allocated~~recorded toon the ~~call~~Consolidated ~~option~~Statements ~~based~~of ~~on their relative fair values~~Earnings.

The Company accounts for its 45% investment in Alliance Boots using the equity method of accounting. Investments accounted for under the equity method are recorded initially at cost and subsequently adjusted for the Company'’s share of the net income or loss and cash contributions and distributions to or from these entities. Because the underlying net assets in Alliance Boots are denominated in a foreign currency, translation gains or losses impact the recorded value of the Company'’s investment. The Company utilizes a three-month lag in reporting equity income in Alliance Boots, reported as equity earnings in Alliance Boots in the Consolidated Condensed Statements of Earnings. The Company'’s investment is recorded as ~~equity~~“Equity investment in Alliance Boots” in the Consolidated Condensed Balance Sheets.

In August 2014, Alliance Boots acquired the remaining 50% of the UniDrug Distribution Group joint venture. As part of the acquisition, the previously held equity interest was compared to its fair value resulting in a gain of £32 million. The noncash impact of $23 million was recorded during the first quarter of fiscal 2015 due to the three-month lag. In July 2013, the United Kingdom (UK) Government enacted a law to reduce the UK corporate tax rate ~~applicable~~effective ~~from~~ April 2014~~. The~~ ~~$71~~with ~~million~~a ~~impact~~further ofreduction ~~this~~scheduled ~~change~~to ~~from~~take ~~remeasuring~~effect ~~deferred~~in ~~taxes~~April 2015. The non-cash impact of $71 million was recorded in ~~the first~~ fiscal ~~quarter~~2014 due to the three-month lag.

The underlying net assets of the Company's equity method investment in Alliance Boots include goodwill. As of May 31, 2014, the Company continues to evaluate whether the fair value of one of the Alliance Boots wholesale reporting units is below its carrying value based on the Company's updated projections for that reporting unit. The Company utilizes a three-~~month~~ ~~lag~~10 in reporting its share of equity income in Alliance Boots, including for this reporting unit. Goodwill allocated to this reporting unit by Alliance Boots as of February 28, 2014 was £257 million, £116 million based on the Company's 45% ownership percentage (approximately $195 million using February 28, 2014 exchange rates). The Company will continue to monitor this reporting unit in accordance with Accounting Standards Codification 350, Intangibles - ~~Goodwill and Other.~~

Table of Contents

The underlying net assets of the Company’s equity method investment in Alliance Boots include goodwill. As of November 30, 2014, the Company continues to evaluate whether the fair value of one of the Alliance Boots wholesale reporting units is below its carrying value based on the Company’s updated projections for that reporting unit. The Company utilizes a three-month lag in reporting its share of equity income in Alliance Boots, including for this reporting unit. Goodwill allocated to this reporting unit by Alliance Boots as of August 31, 2014 was £248 million, £112 million based on the Company’s 45% ownership percentage (approximately $185 million using August 31, 2014 exchange rates). The Company will continue to monitor this reporting unit in accordance with Accounting Standards Codification 350, Intangibles - Goodwill and Other.

Other Equity Method Investments

Other equity method investments relate to joint ventures associated with the Company'’s equity method investment received through the sale of the Take Care Employer business in fiscal 2014 and its infusion and respiratory businesses. These investments are included within other non-current assets on the Consolidated Condensed Balance Sheets. The Company'’s share of equity income is reported within selling, general and administrative expenses in the Consolidated Condensed Statements of Earnings.

Summarized U.S. GAAP Financial Information

Summarized financial information for the Company'’s equity method investees is as follows:

Balance Sheet (In millions)

May 31, 2014(1)

August 31, 2013(1)

May 31, 2013(1)

November 30, 2014(1)

August 31, 2014(1)

November 30, 2013(1)

Current assets

89,~~550~~123

8,~~906~~768

98,~~314~~571

Noncurrent assets

2122,~~214~~320

1921,~~484~~525

19,~~387~~758

Current liabilities

79,~~494~~379

7,~~204~~791

7,~~570~~199

Noncurrent liabilities

1110,~~685~~618

1211,~~228~~285

1211,~~281~~751

Shareholders' equity (2)

10,585

8,958

8,850

Shareholders’ equity (2)

11,446

11,217

9,379

Income Statement (In millions)

Three Months Ended

Nine Months Ended

Three Months Ended November 30,

May 31, 2014(3)

May 31, 2013(3)

May 31, 2014(3)

May 31, 2013(3)

2014(3)

2013(3)

Net sales

9,~~688~~654

98,~~498~~859

~~27,918~~

~~21,455~~

Gross Profit

2,~~082~~053

21,~~032~~842

~~5,897~~

~~4,580~~

Net Income

~~323~~357

~~260~~348

~~1,126~~

~~610~~

Share of income from equity method investments(3)

~~137~~152

~~131~~151

~~483~~

~~220~~

(1) Net assets in Alliance Boots at ~~May~~November 3130, 2014, are translated at the ~~February~~August 2831, 2014 spot rate of $1.6766 to one British ~~pound~~Pound Sterling, corresponding to the three-month lag. Net assets at August 31, ~~2013~~2014 and ~~May~~November 3130, 2013 are translated at the spot rates of $1.5268 and $1.5255 to one British ~~pound~~Pound Sterling, respectively.

(2) Shareholders'’ equity at ~~May~~November 3130, 2014, August 31, ~~2013~~2014 and ~~May~~November 3130, 2013, includes $~~253~~283 million, $~~374~~257 million and $~~377~~378 million, respectively, related to noncontrolling interests.

(3) The Company utilizes a three-month lag in reporting its share of equity income in Alliance Boots. Earnings for the three and nine month periods ended May 31, 2014 reflect incremental acquisition-related amortization expense of $11 million ($8 million net of tax) and $31 million ($24 million net of tax), respectively. Incremental acquisition-related amortization for the three and seven month periods ended May 31, 2013 were $7 million ($3 million net of tax) and $47 million ($36 million net of tax), respectively. The prior year's nine month period ended May 31, 2013 included only seven month's results for Alliance Boots because of the three-month lag and the timing of the investment on August 2, 2012. Earnings in Alliance Boots are translated at the average exchange rates of $1.6468 and $1.5953 to one British ~~pound~~Pound Sterling for the ~~three~~quarters ~~and nine month periods~~ ended ~~May~~November 3130, 2014, ~~respectively. Prior year's earnings in Alliance Boots were translated at the average exchange rate of $1.60 to one British pound Sterling for the three~~ and ~~nine month periods ended May 31,~~ 2013, respectively. Walgreens Boots Alliance Development GmbH operations are excluded from these results as the Company consolidates the joint venture.

Note 6. Available-for-Sale Investments

In conjunction with its long-term relationship with AmerisourceBergen ~~Corporation (AmerisourceBergen)~~, the Company ~~acquired~~has ~~shares~~the ofright ~~AmerisourceBergen~~to ~~through~~acquire ~~open~~up ~~market~~to ~~transactions~~7% ~~totaling~~of ~~$493 million for~~ the ~~nine~~common ~~months~~shares ~~ended~~of ~~May 31, 2014. No~~ AmerisourceBergen ~~shares~~through ~~were~~open ~~purchased~~market ~~in the nine month period ended May 31, 2013~~transactions. The Company's ~~cumulative~~did ~~cost~~not ~~basis~~acquire ofany common shares ~~acquired, including shares purchased~~ in the ~~fourth~~three ~~quarter~~month ofperiod ~~last~~ended ~~fiscal~~November ~~year~~30, ~~was~~2014 compared to $~~717~~290 million atin ~~May~~the ~~31,~~comparable ~~2014.~~period last year. The available-for-sale investment ~~in AmerisourceBergen~~ is classified as a long-term ~~available-for-sale investment~~ and reported at fair value within other non-current assets in the Consolidated Condensed Balance Sheets.

~~The Company also holds other short~~-~~term~~ ~~investments~~11 ~~with maturities greater than 90 days that are reported at fair value within other current assets in the Consolidated Condensed Balance Sheets.~~-

~~Fair~~Table ~~value~~of adjustments are based on quoted stock prices with the unrealized holding gains and losses reported in other comprehensive income. Unrealized holding gains at May 31, 2014 and August 31, 2013, were $122 million and $1 million, respectively. See Note 10 for additional fair value disclosures. Available-for-sale investments reported at fair value at May 31, 2014 and August 31, 2013, were $839 million and $225 million, respectively.Contents

Fair value adjustments are based on quoted stock prices with the unrealized holding gains and losses reported in other comprehensive income. Unrealized holding gains at November 30, 2014, August 31, 2014 and November 30, 2013, were $327 million, $170 million and $85 million, respectively. See Note 10 for additional fair value disclosures. Available-for-sale investments reported at fair value at November 30, 2014 and August 31, 2014 and November 30, 2013 were $1.0 billion, $887 million and $599 million, respectively.

Note 7. Goodwill and Other Intangible Assets

Changes in the carrying amount of goodwill consist of the following activity (In millions):

Net book value - June 1, 2013	$	2,400
Net book value – December 1, 2013	$	2,491
Other		10
Sale of business		(92	)
Net book value - August 31, 2013		2,410
Other(1)		(40	)
Acquisitions		64
Net book value – August 31, 2014		2,359
Other		(109	)
Acquisitions		-
Net book value - May 31, 2014	$	2,365
Other(1)		(3	)
Net book value – November 30, 2014	$	2,356

(1) “Other” primarily represents immaterial purchase accounting adjustments for the Company’s acquisitions. In November ~~2013~~2014, the Company ~~purchased~~finalized ~~certain~~purchase ~~assets~~accounting for the acquisition of Kerr Drug ~~and~~which ~~its~~it ~~affiliates~~completed ~~for~~in ~~$173~~November ~~million,~~2013 ~~subject~~for to$170 ~~adjustment in certain circumstances~~million. The Company recorded $4542 million of goodwill and $54 million of intangible assets in conjunction with ~~the preliminary purchase accounting for~~ this acquisition.

In ~~April~~June 2014, the Company ~~announced~~completed ~~plans~~the tosale ~~sell~~of a majority ~~stake~~interest in its subsidiary, Take Care Employer ~~Solutions, LLC~~. ~~Goodwill~~As ~~allocated~~a toresult, ~~this business of~~ $92 million ~~was~~of ~~reclassified from~~ goodwill ~~and~~allocated ~~included~~to inthis ~~other~~business ~~non-current~~was ~~assets~~removed infrom ~~its~~goodwill ~~consolidated~~on ~~condensed balance sheet, consistent with reporting for assets classified as held for sale, for~~ the ~~period~~Consolidated ~~ended~~Condensed ~~May~~Balance ~~31, 2014~~Sheets. ~~See Note 18 Subsequent Events for a description of the transaction.~~

~~Other~~The ~~includes~~carrying ~~the~~amount ~~reclassification of goodwill described above~~ and ~~purchase~~accumulated ~~accounting~~amortization ~~adjustments~~of ~~subsequent~~intangible toassets ~~the~~consist ~~period~~of ~~in which~~ the ~~acquisition~~following ~~occurred.~~(In millions):

The carrying amount and accumulated amortization of intangible assets, excluding intangibles related to Alliance Boots that are recorded within the equity method investment, consist of the following (In millions):

	November 30, 2014			August 31, 2014			November 30, 2013
Gross Intangible Assets
Purchased prescription files	$	1,086		$	1,079		$	1,103
Favorable lease interests		382			382			381
Purchasing and payer contracts		301			301			348
Non-compete agreements		154			151			150
Trade names		199			199			199
Other amortizable intangible assets		4			4			4
Total gross intangible assets		2,126			2,116			2,185

Accumulated amortization
Purchased prescription files		(515	)		(474	)		(447	)
Favorable lease interests		(183	)		(174	)		(152	)
Purchasing and payer contracts		(151	)		(145	)		(154	)
Non-compete agreements		(78	)		(70	)		(67	)
Trade names		(74	)		(69	)		(54	)
Other amortizable intangible assets		(4	)		(4	)		(3	)
Total accumulated amortization		(1,005	)		(936	)		(877	)
Total intangible assets, net	$	1,121		$	1,180		$	1,308

	May 31, 2014			August 31, 2013			May 31, 2013
Gross Intangible Assets
Purchased prescription files	$	1,077		$	1,099		$	1,101
Favorable lease interests		388			381			383
Purchasing and payer contracts		302			347			344
Non-compete agreements		150			153			151
Trade names		199			199			186
Other amortizable intangible assets		4			4			4
Total gross intangible assets		2,120			2,183			2,169
Accumulated amortization
Purchased prescription files		(448	)		(467	)		(445	)
Favorable lease interests		(168	)		(143	)		(135	)
Purchasing and payer contracts		(139	)		(147	)		(140	)
Non-compete agreements		(66	)		(67	)		(62	)
Trade names		(64	)		(49	)		(45	)
Other amortizable intangible assets		(3	)		(3	)		(3	)
Total accumulated amortization		(888	)		(876	)		(830	)
Total intangible assets, net	$	1,232		$	1,307		$	1,339

Amortization expense for intangible assets was $69 million and $70 million for the three months ended November 30, 2014 and 2013, respectively. The estimated annual amortization expense related to intangible assets, not including amounts related to Alliance Boots that will be amortized through equity method income, is as follows (In millions):

Amortization expense for intangible assets was $214 million and $216 million for the nine months ended May 31, 2014 and 2013, respectively. The estimated annual amortization expense related to intangible assets, not including amounts related to Alliance Boots that will be amortized through equity method income, is as follows (In millions):

		2015				2016				2017				2018				2019
Estimated annual amortization expense:		$	244			$	205			$	163			$	127			$	104

	2014				2015				2016				2017				2018
Estimated annual amortization expense:		$	278			$	247			$	207			$	165			$	127

- 12 -

Table of Contents

Note 8. Short-Term Borrowings and Long-Term Debt

Short-term borrowings and long-term debt consist of the following at(all ~~May~~amounts ~~31,~~are ~~2014,~~presented ~~August~~in ~~31,~~millions ~~2013~~of ~~and~~U.S. ~~May~~Dollars. Debt 31issuances are denominated in U.S. Dollars, ~~2013~~unless ~~(In~~otherwise ~~millions~~noted):

	May 31, 2014			August 31, 2013			May 31, 2013
	November 30, 2014			August 31, 2014			November 30, 2013
Short-Term Borrowings -
Short-Term Borrowings(1)
Current maturities of loans assumed through the purchase of land and buildings; various interest rates from 5.000% to 8.750%; various maturities from 2015 to 2035	$	87		$	28		$	2
1.000% unsecured notes due 2015, net of unamortized discount		749			-			-
Unsecured variable rate notes due 2014		-			-			550
4.875% unsecured notes due 2013, net of unamortized discount and interest rate swap fair market value adjustment (see Note 9)		-			-			1,297
1.000% unsecured notes due 2015		750			750			-
Unsecured variable rate notes due 2014, net of unamortized discount		-			550			550
Other		17			16			19
Other		23			18			16
Total short-term borrowings	$	774		$	774		$	571
Total short-term borrowings	$	780		$	570		$	1,865
Long-Term Debt(1)
1.000% unsecured notes due 2015		-			-			750
Unsecured variable rate notes due 2016		750			-			-
1.800% unsecured notes due 2017		999			999			998
1.750% unsecured notes due 2017		749			-			-
5.250% unsecured notes due 2019(2)		1,019			1,010			1,018
2.700% unsecured notes due 2019		1,248			-			-
2.875% unsecured Pound Sterling notes due 2020(3)		624			-			-
3.300% unsecured notes due 2021		1,247			-			-
3.100% unsecured notes due 2022		1,199			1,199			1,199
3.800% unsecured notes due 2024		1,995			-			-
3.600% unsecured Pound Sterling notes due 2025(3)		469			-			-
2.125% unsecured Euro notes due 2026(4)		931			-			-
4.500% unsecured notes due 2034		497			-			-
4.400% unsecured notes due 2042		496			496			496
4.800% unsecured notes due 2044		1,500			-			-
Loans assumed through the purchase of land and buildings; various interest rates from 5.000% to 8.750%; various maturities from 2015 to 2035		40			40			42
		13,763			3,744			4,503
Less current maturities		(7	)		(8	)		(2	)
Total long-term debt	$	13,756		$	3,736		$	4,501

Long-Term Debt -
1.000% unsecured notes due 2015, net of unamortized discount	$	-		$	749		$	749
1.800% unsecured notes due 2017, net of unamortized discount		999			998			998
5.250% unsecured notes due 2019, net of unamortized discount and interest rate swap fair market value adjustment (see Note 9)		1,020			994			1,017
3.100% unsecured notes due 2022 net of unamortized discount		1,199			1,199			1,199
4.400% unsecured notes due 2042, net of unamortized discount		496			496			496
Loans assumed through the purchase of land and buildings; various interest rates from 5.000% to 8.750%; various maturities from 2015 to 2035		41			43			44
		3,755			4,479			4,503
Less current maturities		(8	)		(2	)		(2	)
Total long-term debt	$	3,747		$	4,477		$	4,501

(1)

All notes are presented net of unamortized discount, where applicable.

~~The~~(2) ~~Company~~Also ~~issued~~includes ~~commercial paper in the current fiscal year to support its working capital needs. Average daily short-term borrowings under the program were $5 million at the weighted average~~ interest rate ofswap ~~0.23%~~fair atmarket ~~May~~value 31adjustments, ~~2014.~~see ~~There~~Note ~~were~~10 no borrowings outstanding under the program at May 31, 2014. In connection with the commercial paper program, the Company maintains two unsecured backup syndicated lines of credit that total $1.35 billion. The first $500 million facility expires on July 20, 2015, and allows for ~~the~~additional ~~issuance~~fair ofvalue ~~up to $250 million in letters of credit~~disclosures. The second $850 million facility expires on July 23, 2017, and allows for the issuance of up to $200 million in letters of credit. The issuance of letters of credit under either of these facilities reduces available borrowings. The Company's ability to access these facilities is subject to compliance with the terms and conditions of the credit facilities, including financial covenants. The covenants require the Company to maintain certain financial ratios related to the proportion of consolidated debt to total capitalization and priority debt, along with limitations on the sale of assets and purchases of investments. At May 31, 2014, the Company was in compliance with all such covenants. The Company pays a facility fee to the financing banks to keep these lines of credit active. At May 31, 2014, there were no letters of credit issued against these credit facilities.

On(3) ~~September~~Pound ~~13,~~Sterling ~~2012,~~denominated ~~the Company obtained net proceeds from a public offering of $4.0 billion of~~ notes ~~with~~are ~~varying~~translated ~~maturities~~at ~~and~~the ~~interest~~November ~~rates~~30, ~~the~~2014 ~~majority~~spot rate of ~~which are fixed rate~~$1. ~~The~~56 ~~following~~to ~~table~~one ~~details~~British ~~each~~Pound ~~tranche of notes issued:~~Sterling.

Notes Issued (In millions)		Maturity Date	Interest Rate	Interest Payment Dates
$	550	March 13, 2014	Variable; three-month U.S. Dollar LIBOR, reset quarterly, plus 50 basis points	March 13, June 13, September 13 and December 13; commencing on December 13, 2012
	750	March 13, 2015	Fixed 1.000%	March 13 and September 13; commencing on March 13, 2013
	1,000	September 15, 2017	Fixed 1.800%	March 15 and September 15; commencing on March 15, 2013
	1,200	September 15, 2022	Fixed 3.100%	March 15 and September 15; commencing on March 15, 2013
	500	September 15, 2042	Fixed 4.400%	March 15 and September 15; commencing on March 15, 2013
$	4,000

(4)

Euro denominated notes are translated at the November 30, 2014 spot rate of $1.24 to one Euro.

~~The Company paid in full its~~ $~~550 million obligation that matured in March 2014~~8. The Company may redeem the fixed rate notes at its option, at any time in whole, or from time to time in part, at a redemption price equal to the greater of: (1) 100% of the principal amount of the notes being redeemed; and (2) the sum of the present values of the remaining scheduled payments of principal and interest thereon (not including any portion of such payments of interest accrued as of the date of redemption), discounted to the date of redemption on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate (as defined), plus 12 basis points for the notes due 2015, 20 basis points for the notes due 2017, 22 basis points for the notes due 2022 and 25 basis points for the notes due 2042. If a change of control triggering event occurs, the Company will be required, unless it has exercised its right to redeem the notes, to offer to purchase the notes at a purchase price equal to 101% of their principal amount, plus accrued and unpaid interest, if any, on the notes repurchased to the date of repurchase. The notes are unsecured senior debt obligations and rank equally with all other unsecured and unsubordinated indebtedness of the Company. Total issuance costs relating to the notes, including underwriting discounts and fees, were $26 million. The fair value of the notes as of May 31, 2014, August 31, 2013 and May 31, 2013, was $3.4 billion, $3.9 billion and $4.0 ~~billion,~~Billion ~~respectively. Fair~~Note ~~value for these notes was determined based upon quoted market prices.~~Issuance

On ~~January~~November 1318, ~~2009~~2014, ~~the~~WBA ~~Company~~received ~~issued~~net ~~notes~~proceeds ~~totaling~~from ~~$1.0~~a ~~billion~~public ~~bearing~~offering anof ~~interest~~$7.9 ~~rate~~billion of 5U.~~250%~~S. ~~paid~~denominated ~~semiannually~~notes inwith ~~arrears~~varying onmaturities ~~January 15~~ and ~~July~~interest ~~15 of each year~~rates, ~~beginning~~the onmajority ~~July~~of ~~15,~~which ~~2009.~~are ~~The~~fixed ~~notes will mature on January 15, 2019~~rate. The ~~Company may redeem the~~ notes, atare ~~any time in whole or from time to time in part~~unsecured, atunsubordinated ~~its~~debt ~~option~~obligations ~~at a redemption price equal to the greater~~ of: ~~(1)~~WBA ~~100%~~and ofrank ~~the~~equally ~~principal~~in ~~amount~~right of ~~the~~payment ~~notes~~with toall beother ~~redeemed;~~unsecured orand ~~(2)~~unsubordinated ~~the~~indebtedness ~~sum~~ of ~~the~~WBA ~~present~~from ~~values~~time ofto ~~the~~time ~~remaining~~outstanding. The ~~scheduled~~notes ~~payments~~are offully ~~principal~~ and ~~interest,~~unconditionally ~~discounted~~guaranteed ~~to the date of redemption~~ on aan ~~semiannual~~unsecured ~~basis~~and atunsubordinated ~~the Treasury Rate, plus 45~~ basis ~~points,~~by ~~plus~~Walgreen ~~accrued~~Co. ~~interest~~and onits ~~the notes to be redeemed to, but excluding, the date of redemption~~successors. If This aguarantee (for ~~change~~so oflong ~~control~~as ~~triggering~~it ~~event~~is ~~occurs,~~in ~~unless~~place) ~~the Company has exercised its option to redeem the notes, it~~ will be ~~required~~an tounsecured, ~~offer~~unsubordinated todebt ~~repurchase~~obligation ~~the notes at a purchase price equal to 101%~~ of the ~~principal~~Company ~~amount of the notes plus accrued~~ and ~~unpaid~~will ~~interest~~rank toequally ~~the~~in ~~date~~right of ~~redemption. The~~payment ~~notes are unsecured senior debt obligations and rank equally~~ with all other unsecured ~~senior~~and unsubordinated indebtedness of the Company. ~~The~~from ~~notes~~time ~~are~~to ~~not~~time ~~convertible or exchangeable~~outstanding. Total issuance costs relating to ~~this~~the ~~offering~~notes, ~~were~~including $8underwriting ~~million,~~discounts ~~which~~and ~~included~~fees, were $744 million ~~in underwriting fees~~. The fair value of the notes as of ~~May~~November 3130, 2014, ~~August 31, 2013 and May 31, 2013~~ was $18.~~1 billion, $1.1 billion and $1.~~2 billion~~, respectively~~. Fair value for these notes was determined based upon quoted market prices.

- 13 -

Table of Contents

The following table details each tranche of notes issued:

Notes Issued (In millions)		Maturity Date	Interest Rate	Interest Payment Dates
$	750	May 18, 2016	Variable; three-month U.S. Dollar LIBOR, reset quarterly, plus 45 basis points	February 18, May 18, August 18, and November 18; commencing on February 18, 2015.
	750	November 17, 2017	Fixed 1.750%	May 17 and November 17; commencing on May 17, 2015
	1,250	November 18, 2019	Fixed 2.700%	May 18 and November 18; commencing on May 18, 2015
	1,250	November 18, 2021	Fixed 3.300%	May 18 and November 18; commencing on May 18, 2015
	2,000	November 18, 2024	Fixed 3.800%	May 18 and November 18; commencing on May 18, 2015
	500	November 18, 2034	Fixed 4.500%	May 18 and November 18; commencing on May 18, 2015
	1,500	November 18, 2044	Fixed 4.800%	May 18 and November 18; commencing on May 18, 2015
$	8,000

Redemption Option

WBA may redeem (i) the notes due 2017, at any time in whole or from time to time in part, (ii) the notes due 2019, at any time prior to October 18, 2019 in whole or from time to time prior to October 18, 2019 in part, (iii) the notes due 2021, at any time prior to September 18, 2021 in whole or from time to time prior to September 18, 2021 in part, (iv) the notes due 2024, at any time prior to August 18, 2024 in whole or from time to time prior to August 18, 2024 in part, (v) the notes due 2034, at any time prior to May 18, 2034 in whole or from time to time prior to May 18, 2034 in part, and (vi) the notes due 2044, at any time prior to May 18, 2044 in whole or from time to time prior to May 18, 2044 in part, in each case, at WBA’s option, for an amount equal to the sum of accrued and unpaid interest plus a redemption price equal to the greater of :

(1) 100% of the principal amount of the fixed rate notes being redeemed; and

(2) the sum of the present values of the remaining scheduled payments of principal and interest thereon (not including any portion of such payments of interest accrued as of the redemption date), discounted to the redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate (as defined in the applicable series of notes), plus 15 basis points for the notes due 2017, 15 basis points for the notes due 2019, 20 basis points for the notes due 2021, 20 basis points for the notes due 2024, 20 basis points for the notes due 2034 and 25 basis points for the notes due 2044.

In addition, at any time on or after October 18, 2019 with respect to the notes due 2019, September 18, 2021 with respect to the notes due 2021, August 18, 2024 with respect to the notes due 2024, May 18, 2034 with respect to the notes due 2034, or May 18, 2044 with respect to the notes due 2044, WBA may redeem some or all of the applicable series of fixed rate notes at its option, at a redemption price equal to 100% of the principal amount of the applicable fixed rate notes being redeemed, plus accrued and unpaid interest on the fixed rate notes being redeemed to, but excluding, the redemption date.

Special Mandatory Redemption and Change in Control

The terms of the notes will require WBA to retain the proceeds of the notes until the date on which the second step transaction is consummated (the Second Step Closing Date). In the event that the Second Step Closing Date does not occur on or prior to August 19, 2015 or if the Purchase and Option Agreement is terminated at any time on or prior to August 19, 2015 (each of such events being a Special Mandatory Redemption Trigger), then WBA will redeem in whole and not in part the aggregate principal amount of the notes outstanding at a redemption price equal to 101% of the aggregate principal amount of the notes, plus accrued and unpaid interest from and including the date of the initial issuance, or the most recent date to which interest has been paid, whichever is later. Upon the occurrence of the Second Step Closing Date, the provisions described in this paragraph will cease to apply.

If WBA experiences a change of control triggering event, unless WBA has exercised its option to redeem the fixed rate notes or has defeased the notes as described in the indenture, WBA will be required to offer payment of cash equal to 101% of the aggregate principal amount of the notes plus accrued and unpaid interest.

£700 Million and €750 Million Notes Issuance

On November 20, 2014, WBA issued three series of debt securities denominated in Euros and Pounds Sterling, each with varying maturities and interest rates. Interest on all notes is payable annually on November 20, commencing on November 20, 2015. The notes are unsecured, unsubordinated debt obligations of WBA and rank equally in right of payment with all other unsecured and unsubordinated indebtedness of WBA from time to time outstanding. The notes are fully and unconditionally guaranteed on an unsecured and unsubordinated basis by Walgreen Co. and its successors. This guarantee (for so long as it is in place) will be an unsecured, unsubordinated debt obligation of the Company and will rank equally in right of payment with all other unsecured and unsubordinated indebtedness of the Company from time to time outstanding. Total issuance costs relating to the notes, including underwriting discounts and fees, were $11 million. The fair value of the notes as of November 30, 2014 was $2.0 billion. Fair value for these notes was determined based upon quoted market prices.

- 14 -

Table of Contents

The following table details each tranche of Euro and Pound Sterling notes issued:

Notes Issued (In millions)			Maturity Date	Interest Rate
Euro Notes:

	€	750	November 20, 2026	Fixed 2.125%

Pound Sterling Notes:

	£	400	November 20, 2020	Fixed 2.875%
		300	November 20, 2025	Fixed 3.600%
	£	700

Redemption Option

WBA may redeem (i) the Euro notes, at any time prior to August 20, 2026 in whole or from time to time prior to August 20, 2026 in part, (ii) the Pound Sterling notes due 2020, at any time prior to October 20, 2020 in whole or from time to time prior to October 20, 2020 in part, and (iii) the Pound Sterling notes due 2025, at any time prior to August 20, 2025 in whole or from time to time prior to August 20, 2025 in part, in each case, at WBA’s option, for an amount equal to the sum of accrued and unpaid interest plus at a redemption price equal to the greater of:

(1) 100% of the principal amount of the notes to be redeemed; and

(2) the sum of the present values of the remaining scheduled payments of principal and interest thereon (not including any portion of such payments of interest accrued as of the redemption date), discounted to the redemption date on an annual basis at the applicable Comparable Government Bond Rate (as defined in the applicable series of notes), plus 20 basis points for the Euro notes, 20 basis points for the Pound Sterling notes due 2020 and 20 basis points for Pound Sterling the notes due 2025.

In addition, at any time on or after August 20, 2026 with respect to the Euro notes, October 20, 2020 with respect to the Pound Sterling notes due 2020, or August 20, 2025 with respect to the Pound Sterling notes due 2025, WBA may redeem some or all of the applicable series of notes at its option, at a redemption price equal to 100% of the principal amount of the applicable notes to be redeemed, plus, in every case, accrued and unpaid interest on the notes to be redeemed to, but excluding, the redemption date.

Special Mandatory Redemption and Change in Control

The terms of the notes will require WBA to retain the proceeds of the notes until the Second Step Closing Date. In the event that the Second Step Closing Date does not occur on or prior to August 19, 2015 or if the Purchase and Option Agreement is terminated at any time on or prior to August 19, 2015 (each of such events being a Special Mandatory Redemption Trigger), then WBA will redeem in whole and not in part the aggregate principal amount of the notes outstanding at a redemption price equal to 101% of the aggregate principal amount of the notes, plus accrued and unpaid interest from and including the date of the initial issuance, or the most recent date to which interest has been paid , whichever is later. Upon the occurrence of the Second Step Closing Date, the provisions described in this paragraph will cease to apply.

$4.0 Billion Note Issuance

On September 13, 2012, the Company obtained net proceeds from a public offering of $4.0 billion of U.S. denominated notes with varying maturities and interest rates, the majority of which, at issuance, were fixed rate. The notes are unsecured senior debt obligations and rank equally with all other unsecured and unsubordinated indebtedness of the Company. The following table details each tranche of outstanding notes issued:

- 15 -

Table of Contents

Notes Issued (In millions)		Maturity Date	Interest Rate	Interest Payment Dates
$	750	March 13, 2015	Fixed 1.000%	March 13 and September 13; commencing on March 13, 2013
	1,000	September 15, 2017	Fixed 1.800%	March 15 and September 15; commencing on March 15, 2013
	1,200	September 15, 2022	Fixed 3.100%	March 15 and September 15; commencing on March 15, 2013
	500	September 15, 2042	Fixed 4.400%	March 15 and September 15; commencing on March 15, 2013
$	3,450

Redemption Option

The Company may redeem the fixed rate notes at its option, at any time in whole, or from time to time in part, at a redemption price equal to the greater of: (1) 100% of the principal amount of the notes being redeemed; and (2) the sum of the present values of the remaining scheduled payments of principal and interest thereon (not including any portion of such payments of interest accrued as of the date of redemption), discounted to the date of redemption on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate (as defined in the applicable series of notes), plus 12 basis points for the notes due 2015, 20 basis points for the notes due 2017, 22 basis points for the notes due 2022 and 25 basis points for the notes due 2042. If a change of control triggering event occurs, the Company will be required, unless it has exercised its right to redeem the notes, to offer to purchase the notes at a purchase price equal to 101% of their principal amount, plus accrued and unpaid interest, if any, on the notes repurchased to the date of repurchase. Total issuance costs relating to the notes, including underwriting discounts and fees, were $26 million. The fair value of the notes as of November 30, 2014, August 31, 2014 and November 30, 2013, was $3.5 billion, $3.4 billion and $3.9 billion, respectively. Fair value for these notes was determined based upon quoted market prices.

$1.0 Billion Note Issuance

On January 13, 2009, the Company issued U.S. denominated notes totaling $1.0 billion bearing an interest rate of 5.250% paid semiannually in arrears on January 15 and July 15 of each year, beginning on July 15, 2009. The notes will mature on January 15, 2019. The Company may redeem the notes, at any time in whole or from time to time in part, at its option at a redemption price equal to the greater of: (1) 100% of the principal amount of the notes to be redeemed; or (2) the sum of the present values of the remaining scheduled payments of principal and interest, discounted to the date of redemption on a semiannual basis at the Treasury Rate (as defined in the applicable series of notes), plus 45 basis points, plus accrued interest on the notes to be redeemed to, but excluding, the date of redemption. If a change of control triggering event occurs, unless the Company has exercised its option to redeem the notes, it will be required to offer to repurchase the notes at a purchase price equal to 101% of the principal amount of the notes plus accrued and unpaid interest to the date of redemption. The notes are unsecured senior debt obligations and rank equally with all other unsecured senior indebtedness of the Company. The notes are not convertible or exchangeable. Total issuance costs relating to this offering were $8 million, which included $7 million in underwriting fees. The fair value of the notes as of November 30, 2014, August 31, 2014 and November 30, 2013 was $1.1 billion, $1.1 billion and $1.1 billion, respectively. Fair value for these notes was determined based upon quoted market prices.

Other Borrowings

The Company periodically borrows under its commercial paper program and intends to borrow under it in future periods. The Company had no activity under its commercial paper program during the first quarter of fiscal 2015.

On November 10, 2014, the Company and WBA entered into a Term Loan Credit Agreement (the Term Loan Agreement) providing the Company or, to the extent the Holdco Reorganization (as defined in the Term Loan Agreement) is consummated on or prior to the Alliance Boots Acquisition Closing Date (as defined in the Term Loan Agreement), WBA (the Company or WBA, as applicable, the Borrower), with the ability to borrow up to £1.45 billion on an unsecured basis to finance a portion of the Alliance Boots second step transaction, repay or refinance certain indebtedness of Walgreens, Alliance Boots GmbH and their respective subsidiaries and to pay related transaction costs. Borrowings under the Term Loan Agreement will bear interest at a fluctuating rate per annum equal to the reserve adjusted Eurocurrency rate plus an applicable margin based on the Borrower’s credit ratings.

- 16 -

Table of Contents

On November 10, 2014, the Company and WBA entered into a five-year unsecured, multicurrency revolving credit agreement (the Revolving Credit Agreement), replacing the prior agreements dated July 20, 2011 and July 23, 2012. The Company will be the initial borrower under the Revolving Credit Agreement. To the extent the Holdco Reorganization (as defined in the Revolving Credit Agreement) is consummated on or prior to the Alliance Boots Acquisition Closing Date (as defined in the Revolving Credit Agreement) (and subject to the satisfaction (or waiver) of certain other conditions set forth therein), WBA will also be a borrower under the Revolving Credit Agreement. The new unsecured revolving credit agreement totals $2.25 billion, of which $375 million will be available for the issuance of letters of credit. The total availability under the facility will increase to $3.0 billion, of which $500 million will be available for the issuance of letters of credit, upon the affirmative vote of the majority of common shares of the Company represented and entitled to vote at the Company’s shareholder meeting to approve the issuance of the necessary shares to complete the second step acquisition of Alliance Boots. The issuance of letters of credit reduces the aggregate amount otherwise available under the revolving credit agreement for the making of revolving loans Borrowings under the Revolving Credit Agreement will bear interest at a fluctuating rate per annum equal to, at the applicable borrower’s option, the alternate base rate or the reserve adjusted Eurocurrency rate, in each case, plus an applicable margin calculated based on the Company’s or, to the extent the Holdco Reorganization is consummated on or prior to the Alliance Boots Acquisition Closing Date, WBA’s credit ratings. The Company’s ability to access these facilities is subject to compliance with the terms and conditions of the credit facilities, including financial covenants. The covenants require the Company to maintain certain financial ratios related to the proportion of consolidated debt to total capitalization and priority debt, along with limitations on the sale of assets and purchases of investments. At November 30, 2014, the Company was in compliance with all such covenants. Total upfront fees related to the term loan and revolving credit agreement were $14 million. The Company pays a facility fee to the financing banks to keep these lines of credit active. At November 30, 2014, there were no letters of credit issued against these credit facilities.

Note 9. Financial Instruments

The Company uses derivative instruments to manage its interest rate ~~exposure~~and foreign currency exposures associated with some of its fixed-rate borrowings. The Company does not use derivative instruments for trading or speculative purposes. All derivative instruments are recognized in the Consolidated Condensed Balance Sheets at fair value. The Company designates interest rate swaps as fair value hedges of fixed-rate borrowings. For derivatives designated as fair value hedges, the change in the fair value of both the derivative instrument and the hedged item are recognized in earnings in the current period. The Company'’s forward starting interest rate swaps entered in fiscal 2014 were used to hedge its anticipated debt ~~issuances~~issuance ~~are~~for debt obtained in November 2014 and were designated as cash flow hedges. Changes in the fair value of cash flow hedges deemed effective are recognized in other comprehensive income. At the inception of a hedge transaction, the Company formally documents the hedge relationship and the risk management objective for undertaking the hedge. In addition, it assesses both at inception of the hedge and on an ongoing basis whether the derivative in the hedging transaction has been highly effective in offsetting changes in fair value of the hedged item and whether the derivative is expected to continue to be highly effective. The impact of any ineffectiveness is recognized currently in earnings.

Counterparties to derivative financial instruments expose the Company to credit-related losses in the event of nonperformance, but the Company regularly monitors the ~~credit~~creditworthiness ~~worthiness~~ of each counterparty.

Fair Value Hedges

~~For~~In ~~derivative~~prior ~~instruments~~fiscal ~~that~~years, ~~are~~the ~~designated~~Company ~~and~~entered ~~qualify~~into asa ~~fair~~series ~~value~~of ~~hedges,~~interest ~~the~~rate ~~gain~~swaps orconverting ~~loss~~$750 million of its 5.250% fixed rate notes to a floating interest rate based on the ~~derivative,~~six-month asLIBOR ~~well~~in asarrears ~~the~~plus ~~offsetting~~a ~~gain~~constant orspread ~~loss~~and an interest rate swap converting $250 million of its 5.250% fixed rate notes to a floating interest rate based on the ~~hedged~~one-month ~~item~~LIBOR in arrears plus a constant spread. All swap termination dates coincide with the notes maturity date, January 15, 2019. The changes in fair value of the notes attributable to the hedged risk, are ~~recognized~~included in ~~interest~~short-term ~~expense~~and long-term debt on the Consolidated Condensed ~~Statements~~Balance ofSheets ~~Earnings~~(see Note 8). For the three months ended November 30, 2014 and 2013, no material gains or losses were recorded from ineffectiveness.

In prior fiscal years, the Company entered into a series of interest rate swaps converting $750 million of its 5.250%% fixed rate notes to a floating interest rate based on the six-month LIBOR in arrears plus a constant spread and an interest rate swap converting $250 million of its 5.250% fixed rate notes to a floating interest rate based on the one-month LIBOR in arrears plus a constant spread. All swap termination dates coincide with the notes maturity date, January 15, 2019. The changes in fair value of the notes attributable to the hedged risk are included in short-term and long-term debt on the Consolidated Condensed Balance Sheets (see Note 8).

Cash Flow Hedges

In ~~the current~~ fiscal ~~year~~2014, the Company entered into a series of forward starting interest rate swap transactions locking in the then current three-month LIBOR interest rate on $~~750~~1.5 ~~million~~billion of anticipated debt issuance, with expected tomaturity ~~mature~~tenures inof ~~2024~~10 and 30 years. The swap transactions ~~are~~were designated as cash flow hedges~~. Changes~~ inwhere the changes in fair value ofwere ~~swaps are~~ recorded in other comprehensive income. Any ineffectiveness iswas recognized in interest expense on the Consolidated Condensed Statements of Earnings. The Company’s cash flow hedges were terminated upon issuance of the hedged debt in November 2014, resulting in $63 million, $39 million net of tax, of loss recorded within other comprehensive income. The loss is amortized through interest expense to the related debt using the effective interest method.

The notional amounts of derivative instruments designated as hedges outstanding as of ~~May~~November 3130, 2014, August 31, ~~2013~~2014 and ~~May~~November 3130, 2013 were as follows (In millions):

May 31, 2014

August 31, 2013

May 31, 2013

November 30, 2014

August 31, 2014

November 30, 2013

Derivatives designated as fair value hedges:

Interest rate swaps

1,000

1,~~800~~000

Derivatives designated as cash flow hedges:

Forward interest rate swaps

~~750~~-

–1,500

–-

At- ~~May 31, 2014, August 31, 2013 and May 31, 2013, the Company had fair value changes in its fair value hedges of $23 million, $3 million and $~~17 million, respectively. Fair value changes in its cash flow hedges reported in other comprehensive income were $13 million, net of tax at May 31, 2014. The fair value and balance sheet presentation of derivative instruments at May 31, 2014, August 31, 2013 and May 31, 2013, were as follows (In millions):-

Location in Consolidated Condensed Balance Sheets		May 31, 2014		August 31, 2013		May 31, 2013
Asset derivatives designated as fair value hedges:
Interest rate swaps	Other current assets	$	-	$	-	$	13
Interest rate swaps	Other non-current assets		26		1		27
Liability derivatives designated as cash flow hedges:
Forward interest rate swaps	Other non-current liabilities		21		-		-

Table of Contents

~~Gains~~The ~~and~~changes ~~losses~~in ~~relating~~fair tovalue ~~the ineffectiveness~~ of the Company's ~~derivative~~debt ~~instruments~~that was swapped from fixed to variable rate and designated as fair value hedges are ~~recorded~~included in ~~interest~~long-term ~~expense~~debt on the Consolidated Condensed ~~Statements~~Balance ofSheets ~~Earnings~~(see Note 8). ~~Gains~~ At ~~related~~November to30, ~~ineffectiveness~~2014, ~~were~~August ~~immaterial~~31, ~~for~~2014 and November 30, 2013, the ~~three~~cumulative ~~and~~fair ~~nine~~value ~~month~~adjustments ~~periods~~resulted ~~ended~~in ~~May~~an 31increase in long-term debt of $22 million, ~~2014~~$12 million and ~~2013~~$21 million, respectively.

The fair value and balance sheet presentation of derivative instruments at November 30, 2014, August 31, 2014 and November 30, 2013, were as follows (in millions):

	Location in Consolidated Condensed Balance Sheets	November 30, 2014			August 31, 2014			November 30, 2013
Asset derivatives designated as fair value hedges:
Interest rate swaps	Other non-current assets		$	26		$	16		$	23
Liability derivatives designated as cash flow hedges:
Forward interest rate swaps	Other non-current liabilities			-			44			-

Warrants

The Company, Alliance Boots and AmerisourceBergen entered into a Framework Agreement dated as of March 18, 2013, pursuant to which (1) Walgreens and Alliance Boots together were granted the right to purchase a minority equity position in AmerisourceBergen, beginning with the right, but not the obligation, to purchase up to 19,859,795 shares of AmerisourceBergen common stock (approximately 7% percent of the then fully diluted equity of AmerisourceBergen, assuming the exercise in full of the warrants described below) in open market transactions; (2) the Company and Alliance Boots were each issued (a) a warrant to purchase up to 11,348,456 shares of AmerisourceBergen common stock at an exercise price of $51.50 per share exercisable during a six-month period beginning in March ~~31,~~ 2016, and (b) a warrant to purchase up to 11,348,456 shares of AmerisourceBergen common stock at an exercise price of $52.50 per share exercisable during a six-month period beginning in March ~~31,~~ 2017. The parties and affiliated entities also entered into certain related agreements governing relations between and among the parties thereto, including the Shareholders Agreement, the Transaction Rights Agreement and the Limited Liability Company Agreement of WAB Holdings LLC, a limited liability company jointly-owned by the Company and Alliance Boots for the purpose of acquiring and holding AmerisourceBergen common stock~~, described in the Company's Current Report on Form 8-K filed on March 20, 2013~~.

~~The~~Foreign ~~Company~~Currency reports its warrants at fair value. See Note 10 for additional fair value measurement disclosures. The fair value and balance sheet presentation of derivative instruments not designated as hedges at May 31, 2014, August 31, 2013 and May 31, 2013, were as follows (In millions):Forwards

Location in Consolidated Condensed Balance Sheets		May 31, 2014		August 31, 2013			May 31, 2013
Asset derivatives not designated as hedges:
Warrants	Other non-current assets	$	463		$	188		$	150

In fiscal 2015, the Company entered into a series of foreign currency forward contracts in anticipation of delivering the required currency needed to execute the second step transaction. At November 30, 2014, the notional amounts on these forwards were approximately £4.0 billion and €600 million. The Company did not elect hedge accounting on these instruments.

The Company reports its warrants and foreign currency forwards at fair value. See Note 10 for additional fair value measurement disclosures. The fair value and balance sheet presentation of derivative instruments not designated as hedges at November 30, 2014, August 31, 2014 and November 30, 2013, were as follows (In millions):

	Location in Consolidated Condensed Balance Sheets	November 30, 2014			August 31, 2014			November 30, 2013
Asset derivatives not designated as hedges:
Warrants	Other non-current assets		$	844		$	553		$	408
Liability derivatives not designated as hedges:
Foreign currency forwards	Other current liabilities			96			-			-

- 18 -

Table of Contents

Note 10. Fair Value Measurements

The Company measures ~~its~~certain assets and liabilities in accordance with ~~Accounting Standards Codification (~~ASC) Topic 820, Fair Value Measurements and Disclosures. ASC Topic 820 defines fair value as the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. In addition, it establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels:

Level 1 -	Quoted prices in active markets that are accessible at the measurement date for identical assets and liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2 -	Observable inputs other than quoted prices in active markets.
Level 3 -	Unobservable inputs for which there is little or no market data available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

Level 1 -

Quoted prices in active markets that are accessible at the measurement date for identical assets and liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

Level 2 -

Observable inputs other than quoted prices in active markets.

Level 3 -

Unobservable inputs for which there is little or no market data available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

Assets and liabilities measured at fair value on a recurring basis were as follows (In millions):

	May 31, 2014			Level 1			Level 2			Level 3
		November 30, 2014			Level 1			Level 2			Level 3
Assets:
Money market funds		$	1,492		$	1,492		$	-		$	-
Money market and commercial paper		$	11,605		$	11,605		$	-		$	-
Interest rate swaps(1)			26			-			26			-
Investment in AmerisourceBergen (2)			~~839~~1,044			~~839~~1,044			-			-
Warrants (3)			~~463~~844			-			~~463~~844			-
Liabilities:
Forward interest rate swaps(4)			21			-			21			-
Foreign currency forwards(4)			96			96			-			-
	August 31, 2013			Level 1			Level 2			Level 3
Assets:
Money market funds		$	1,636		$	1,636		$	-		$	-
Interest rate swaps(1)			1			-			1			-
Investment in AmerisourceBergen (2)			225			225			-			-
Warrants (3)			188			-			188			-
	May 31, 2013			Level 1			Level 2			Level 3
Assets:
Money market funds		$	2,587		$	2,587		$	-		$	-
Interest rate swaps(1)			40			-			40			-
Warrants (3)			150			-			150			-

	August 31, 2014		Level 1		Level 2		Level 3
Assets:
Money market funds	$	1,879	$	1,879	$	-	$	-
Interest rate swaps⁽¹⁾		16		-		16		-
Investment in AmerisourceBergen ⁽²⁾		887		887		-		-
Warrants ⁽³⁾		553		-		553		-
Liabilities:
Forward interest rate swaps⁽⁵⁾		44		-		44		-

	November 30, 2013		Level 1		Level 2		Level 3
Assets:
Money market funds	$	360	$	360	$	-	$	-
Interest rate swaps⁽¹⁾		23		-		23		-
Investment in AmerisourceBergen ⁽²⁾		599		599		-		-
Warrants ⁽³⁾		408		-		408		-

⁽¹⁾	Interest rate swaps are valued using six-month and one-month LIBOR in arrears rates. See Note 9 for additional disclosure regarding financial instruments.

⁽²⁾	The investment in AmerisourceBergen is valued using the closing stock price of AmerisourceBergen as of the balance sheet dates. See Note 6 for additional disclosures on available-for-sale investments.

(3) Warrants were valued using a Monte Carlo simulation. Key assumptions used in the valuation include risk-free interest rates using constant maturity treasury rates; the dividend yield for AmerisourceBergen'’s common stock; AmerisourceBergen'’s common stock price at the valuation date; AmerisourceBergen'’s equity volatility; the number of shares of AmerisourceBergen'’s common stock outstanding; the number of AmerisourceBergen employee stock options and the exercise price; and the details specific to the warrants.

(4) ~~Forward~~Foreign ~~interest~~currency ~~rate~~forwards ~~swaps~~ are valued using ~~three-month~~published ~~LIBOR~~exchange ~~in arrears~~ rates. ~~See~~on ~~Note~~the 9respective ~~for~~balance ~~additional~~sheet ~~disclosure regarding financial instruments~~dates.

~~The~~(5) ~~Company~~Forward ~~reports~~interest ~~its~~rate ~~debt~~swaps ~~instruments~~are ~~under~~valued ~~the~~using ~~guidance~~three-month ofLIBOR ~~ASC~~in ~~Topic~~arrears ~~825,~~rates. ~~Financial~~See ~~Instruments,~~Note ~~which~~9 ~~requires~~for additional disclosure ofregarding ~~the fair value of the Company's debt in the footnotes to the consolidated~~ financial ~~statements~~instruments. ~~See Note 8 for further details.~~

The Company reports its debt instruments under the guidance of ASC Topic 825, Financial Instruments, which requires disclosure of the fair value of the Company’s debt in the footnotes to the consolidated financial statements. The fair value for all notes was determined based upon quoted market prices and therefore categorized as Level 1. See Note 8 for further details.

Note 11. Commitments and Contingencies

The Company is involved in legal proceedings and is subject to investigations, inspections, audits, inquiries and similar actions by governmental authorities, arising in the normal course of the Company'’s business, including the matters described below. ~~Litigation~~ Legal proceedings, in general, and securities and class action litigation, in particular, can be expensive and disruptive. Some of these suits may purport or may be determined to be class actions and/or involve parties seeking large and/or indeterminate amounts, including punitive or exemplary damages, and may remain unresolved for several years. From time to time, the Company is also involved in legal proceedings as a plaintiff involving antitrust, tax, contract, intellectual property and other matters. Gain contingencies, if any, are recognized when they are realized. The results of legal proceedings are often uncertain and difficult to predict, and the costs incurred in litigation can be substantial, regardless of the outcome. The Company believes that its defenses and assertions in pending legal proceedings have merit, and does not believe that any of these pending matters, after consideration of applicable reserves and rights to indemnification, will have a material adverse effect on the Company'’s consolidated financial position. However, substantial unanticipated verdicts, fines and rulings do sometimes occur. As a result, the Company could from time to time incur judgments, enter into settlements or revise its expectations regarding the outcome of certain matters, and such developments could have a material adverse effect on its results of operations in the period in which the amounts are accrued and/or its cash flows in the period in which the amounts are paid.

~~On a quarterly basis, the Company assesses its liabilities and contingencies for outstanding legal proceedings and reserves are established on a case~~-~~by-case~~ ~~basis~~19 for those legal claims for which management concludes that it is probable that a loss will be incurred and that the amount of such loss can be reasonably estimated. Substantially all of these contingencies are subject to significant uncertainties and, therefore, determining the likelihood of a loss and/or the measurement of any loss can be complex. With respect to litigation and other legal proceedings where the Company has determined that a loss is reasonably possible, the Company is unable to estimate the amount or range of reasonably possible loss in excess of amounts reserved due to the inherent difficulty of predicting the outcome of and uncertainties regarding such litigation and legal proceedings. The Company's assessments are based on estimates and assumptions that have been deemed reasonable by management, but that may prove to be incomplete or inaccurate, and unanticipated events and circumstances may occur that might cause the Company to change those estimates and assumptions. Therefore, it is possible that an unfavorable resolution of one or more pending litigation or other contingencies could have a material adverse effect on the Company's consolidated financial statements in a future fiscal period. Management's assessment of current litigation and other legal proceedings, including the corresponding accruals, could change because of the discovery of facts with respect to legal actions or other proceedings pending against the Company which are not presently known. Adverse rulings or determinations by judges, juries, governmental authorities or other parties could also result in changes to management's assessment of current liabilities and contingencies. Accordingly, the ultimate costs of resolving these claims may be substantially higher or lower than the amounts reserved. -

OnTable ~~June 11, 2013, the Company entered into a Settlement and Memorandum~~ of Agreement (the Agreement) with the United States Department of Justice and the United States Drug Enforcement Administration (DEA) that settled and resolved all administrative and civil matters arising out of DEA's previously-disclosed concerns relating to the Company's distribution and dispensing of controlled substances. Under the terms of the Agreement, the Company paid an $80 million settlement amount, surrendered its DEA registrations for six pharmacies in Florida until May 26, 2014, and for its Jupiter, Florida distribution center until Sept. 13, 2014, and agreed to implement certain remedial actions. In addition, the Company dismissed with prejudice its petition with the United States Court of Appeals for the District of Columbia Circuit that challenged certain enforcement authority of the DEA. On July 31, 2013 and August 13, 2013, putative shareholders filed derivative actions in federal court in the Northern District of Illinois against the Walgreens Board of Directors and Walgreen Co. as a nominal defendant (collectively, the defendants), arising out of the Company's June 2013 settlement with the DEA described above. The actions assert claims for breach of fiduciary duty on the grounds that the directors allegedly should have prevented the events that led to the settlement. The plaintiffs filed an amended consolidated complaint on October 4, 2013, pursuant to which they seek damages and other relief on behalf of the Company. The defendants filed their motion to dismiss on December 3, 2013. Subsequent thereto, the plaintiffs filed an opposition brief on February 7, 2014 and the defendants filed their reply brief on March 10, 2014. In June 2014, the parties executed a settlement term sheet reflecting an agreement in principle to settle this matter, subject to, among other things, the execution of final settlement documentation and Board and court approval. Settlement of this matter on the agreed terms would not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows.Contents

On a quarterly basis, the Company assesses its liabilities and contingencies for outstanding legal proceedings and reserves are established on a case-by-case basis for those legal claims for which management concludes that it is probable that a loss will be incurred and that the amount of such loss can be reasonably estimated. Substantially all of these contingencies are subject to significant uncertainties and, therefore, determining the likelihood of a loss and/or the measurement of any loss can be complex. With respect to litigation and other legal proceedings where the Company has determined that a loss is reasonably possible, the Company is unable to estimate the amount or range of reasonably possible loss in excess of amounts reserved due to the inherent difficulty of predicting the outcome of and uncertainties regarding such litigation and legal proceedings. The Company’s assessments are based on estimates and assumptions that have been deemed reasonable by management, but that may prove to be incomplete or inaccurate, and unanticipated events and circumstances may occur that might cause the Company to change those estimates and assumptions. Therefore, it is possible that an unfavorable resolution of one or more pending litigation or other contingencies could have a material adverse effect on the Company’s consolidated financial statements in a future fiscal period. Management's assessment of current litigation and other legal proceedings, including the corresponding accruals, could change because of the discovery of facts with respect to legal actions or other proceedings pending against the Company which are not presently known. Adverse rulings or determinations by judges, juries, governmental authorities or other parties could also result in changes to management’s assessment of current liabilities and contingencies. Accordingly, the ultimate costs of resolving these claims may be substantially higher or lower than the amounts reserved.

On June 11, 2013, the Company entered into a Settlement and Memorandum of Agreement (the Agreement) with the United States Department of Justice and the United States Drug Enforcement Administration (DEA) that settled and resolved all administrative and civil matters arising out of DEA's previously-disclosed concerns relating to the Company's distribution and dispensing of controlled substances. Under the terms of the Agreement, the Company paid an $80 million settlement amount, surrendered its DEA registrations for six pharmacies in Florida until May 26, 2014, and for its Jupiter, Florida distribution center until Sept. 13, 2014, and agreed to implement certain remedial actions. In addition, the Company dismissed with prejudice its petition with the United States Court of Appeals for the District of Columbia Circuit that challenged certain enforcement authority of the DEA. On July 31, 2013 and August 13, 2013, putative shareholders filed derivative actions in federal court in the Northern District of Illinois against the Walgreens Board of Directors and Walgreen Co. as a nominal defendant (collectively, the defendants), arising out of the Company's June 2013 settlement with the DEA described above. The actions assert claims for breach of fiduciary duty on the grounds that the directors allegedly should have prevented the events that led to the settlement. The plaintiffs filed an amended consolidated complaint on October 4, 2013, pursuant to which they seek damages and other relief on behalf of the Company. The defendants filed their motion to dismiss on December 3, 2013. Subsequent thereto, the plaintiffs filed an opposition brief on February 7, 2014 and the defendants filed their reply brief on March 10, 2014. In June 2014, the parties executed a settlement term sheet reflecting an agreement in principle to settle this matter, subject to, among other things, the execution of final settlement documentation and court approval. On September 11, 2014, the defendants, denying all wrongdoing and liability, entered into a Stipulation and Agreement of Settlement whereby the Company agreed to certain corporate governance measures and the payment of up to $3.5 million for plaintiffs' counsel fees and costs in exchange for a complete release of all claims against all defendants. The Court entered a final order approving the Stipulation and Agreement of Settlement on December 16, 2014. The settlement of this matter will not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows.

Note 12. Stock Compensation Plans

The Walgreen Co. Omnibus Incentive Plan (the Omnibus Plan), which became effective in fiscal 2013, provides for incentive compensation to Walgreens non-employee directors, officers and employees, and consolidates into a single plan several previously existing equity compensation plans~~: the Executive Stock Option Plan, the Long-Term Performance Incentive Plan, the Broad Based Employee Stock Option Plan, and the Nonemployee Director Stock Plan (collectively, the Former Plans)~~. As of the effective date of the Omnibus Plan, no further grants may be made under the Former Plans and shares that were previously available for issuance under the Former Plans and not subject to outstanding awards became available for issuance (in addition to newly authorized shares) under the Omnibus Plan. A total of 60.4 million shares became available for delivery under the Omnibus Plan.

The Company granted ~~116~~4,~~478~~102,510 and 6,~~651~~385,~~240~~078 stock options under the Omnibus Plan ~~for~~during the ~~three~~quarters ~~and nine month periods~~ ended ~~May~~November 3130, 2014, ~~respectively. This compares to 367,222~~ and 82013,~~572,886~~ ~~stock options granted in the three and nine month periods ended under the Omnibus and Former Plans last year~~respectively. Stock-based compensation expense, which includes stock option, restricted stock unit, and performance share grants, was $3331 million ~~for the quarter~~ and $8521 million for the ~~nine~~quarters ~~month periods~~ ended ~~May~~November 3130, 2014, ~~compared to $25 million~~ and ~~$70~~2013, ~~million for the same periods last year~~respectively. Compensation expense for any individual quarter may not be representative of compensation expense for the entire fiscal year. Stock options granted in the current fiscal year had a weighted-average grant-date fair value of $1214.8364 using weighted average volatility, dividend yield and expected option life assumptions of 2625.2751%., 21.4879% and 6.8868 years, respectively, using the Black Scholes option pricing model. In accordance with ASC Topic 718 Compensation – Stock Compensation, compensation expense is recognized on a straight-line basis over the employee's vesting period or to the employee's retirement eligible date, if earlier. The recognized retiree eligible expense recorded in the ~~three~~quarters ~~and nine month periods~~ ended ~~May~~November 3130, 2014, ~~was $4 million~~ and ~~$12~~2013 ~~million~~was ~~respectively, compared to~~ $31 million and $63 million, ~~for the same periods in the prior year~~respectively.

The Company granted 17,749 and 658,758 restricted stock units under the Omnibus Plan for the three and nine month periods ended May 31, 2014, compared to 1,611,056 and 2,528,378 restricted stock units granted under the Omnibus Plan and former Walgreen Co. Long-~~Term~~ Performance Incentive Plan in the same periods last year. Restricted stock units granted in the current fiscal year had a weighted average grant date stock price of $60.46. Dividends issued under the program, paid in the form of additional restricted stock units, totaled 17,612 units for the quarter ended and 58,070 for the nine months ended May 31, 2014 versus 13,976 units and 53,441 units in the same periods last year. The Company also granted 2,512 and 705,451 performance shares under the Omnibus Plan for the three and nine month periods ended May 31, 2014 versus 20~~,967~~ and 915,013 shares in the same periods last year. Performance shares granted in the current fiscal year had a grant date stock price of $60.39. In accordance with ASC Topic 718, compensation expense is recognized on a straight line basis based on a three year cliff vesting schedule for restricted stock unit awards and straight line over a three year performance period, based on performance targets, for performance share awards. For the three and nine month periods ended May 31, 2014, the Company recognized $17 million and $43 million, of expense related to these plans, respectively. In the same periods last year, the Company recognized $10 million and $29 million of expense, respectively.-

Table of Contents

The Company granted 904,952 and 610,887 restricted stock units under the Omnibus Plan for the quarters ended November 30, 2014 and 2013, respectively. Restricted stock units granted in the current fiscal year had a weighted average grant date stock price of $63.83. Dividends issued under the program, paid in the form of additional restricted stock units, totaled 20,554 units for the quarter ended November 30, 2014 and 21,298 units for the same period last year. The Company also granted 480,323 and 697,132 performance shares under the Omnibus Plan for the quarters ended November 30, 2014 and 2013, respectively. Performance shares granted in the current fiscal year had a weighted average grant date stock price of $65.31. In accordance with ASC Topic 718, compensation expense is recognized on a straight line basis based on a three year cliff vesting schedule for restricted stock unit awards and straight line over a three year performance period, based on performance targets, for performance share awards. For the quarters ended November 30, 2014 and 2013, respectively, the Company recognized $19 million and $10 million, of expense related to these plans, respectively.

Note 13. Earnings Per Share

The dilutive effect of outstanding stock options on earnings per share is calculated using the treasury stock method. Stock options are anti-dilutive and excluded from the earnings per share calculation if the exercise price exceeds the average market price of the common shares. Outstanding options to purchase common shares that were anti-dilutive and excluded from the ~~third quarter~~ earnings per share calculation totaled 56,~~153~~477,~~210~~264 and 2,~~904~~338,~~835~~689 at ~~May~~November 3130, 2014 and 2013, respectively. ~~Anti-dilutive shares excluded from the year to date earnings per share calculation were 4,613,123 and 15,693,708 in fiscal 2014 and 2013, respectively.~~

Note 14. Retirement Benefits

The principal retirement plan for employees is the Walgreen Profit-Sharing Retirement Trust to which both the Company and participating employees contribute. The Company's contribution, which has historically related to FIFO earnings before interest and taxes (EBIT) and a portion of which is in the form of a guaranteed match, is determined annually at the discretion of the Board of Directors. The profit-sharing provision was $7475 million for the quarter ~~and $239 million for the nine month period of fiscal 2014~~ compared to $8280 million ~~and~~for ~~$253 million in~~ the same ~~periods~~period last year.

The Company provides certain health insurance benefits for retired employees who meet eligibility requirements, including age and years of service. The costs of these benefits are accrued over the service life of the employee. The Company's postretirement health benefit plan is not funded.

Components of net periodic benefit costs (In millions):

	Three Months Ended May 31,						Nine Months Ended May 31,
	Three Months Ended November 30,
	2014			2013			~~2014~~			~~2013~~
Service cost	$	23		$	2		$	6		$	7
Interest cost		4			34			12			10
Amortization of actuarial loss		35			3			9			9
Amortization of prior service cost		(6	)		(5	)		~~(17~~	)		~~(16~~	)
Total postretirement benefit cost	$	36		$	34		$	10		$	10

Note 15. ~~Depreciation~~ Accumulated ~~and~~Other ~~Amortization~~Comprehensive Income (Loss)

The following is a summary of net changes in accumulated other comprehensive income by component and net of tax for the three month periods ended November 30, 2014 and 2013 (In millions):

	Post- retirement Liability			Unrecognized Gains on Available-for- Sale Investments			Unrealized Loss on Cash Flow Hedges			Alliance Boots OCI			Foreign Currency Translation			Total
Balance at August 31, 2014	$	15		$	107		$	(27	)	$	(100	)	$	183		$	178
Other comprehensive income before reclassification adjustments		(2	)		157			(20	)		(16	)		(49	)		70
Amounts reclassified from accumulated OCI		-			-			-			-			-			-
Tax benefit (provision)		1			(58	)		8			6			17			(26	)
Net other comprehensive income (loss)		(1	)		99			(12	)		(10	)		(32	)		44
Balance at November 30, 2014	$	14		$	206		$	(39	)	$	(110	)	$	151		$	222

- 21 -

Table of Contents

	Post- retirement Liability			Unrecognized Gains on Available-for- Sale Investments		Unrealized Loss on Cash Flow Hedges		Alliance Boots OCI			Foreign Currency Translation			Total
Balance at August 31, 2013	$	63		$	1	$	-	$	(59	)	$	(103	)	$	(98)
Other comprehensive income before reclassification adjustments		12			84		-		(52	)		95			139
Amounts reclassified from accumulated OCI		-			-		-		-			-			-
Tax benefit (provision)		(4	)		-		-		18			(33	)		(19	)
Net other comprehensive income (loss)		8			84		-		(34	)		62			120
Balance at November 30, 2013	$	71		$	85	$	-	$	(93	)	$	(41	)	$	22

Note 16. Depreciation and Amortization

The Company has recorded the following depreciation and amortization expense in the Consolidated Condensed Statements of Earnings (In millions):

	Three Months Ended May 31,				Nine Months Ended May 31,
	Three Months Ended November 30,
	2014		2013		~~2014~~		~~2013~~
Depreciation expense	$	~~237~~235	$	~~225~~235	$	~~701~~	$	~~675~~
Intangible asset amortization		71		67		214		216
Amortization expense		63		70
System development costs amortization		3021		2627		86		67
Total depreciation and amortization expense	$	~~338~~319	$	~~318~~332	$	~~1,001~~	$	~~958~~

Amortization expense for the ~~three~~quarter ~~and nine month periods~~ ended ~~May~~November 3130, 2014 of $2122 million, net of tax ($8 million from the step up of certain Alliance Boots assets and $1314 million representing the Company'’s share of amortization within Alliance Boots operations) and $61 million, net of tax ($24 million from the step up of certain Alliance Boots assets and $37 million representing the Company's share of amortization within Alliance Boots operations), respectively is included in equity earnings in Alliance Boots on the Consolidated Condensed Statements of Earnings. This compares to amortization expense of $1621 million, net of tax ($38 million from the step up of certain Alliance Boots assets and $13 million representing the Company'’s share of amortization within Alliance Boots operations) and $65 million, net of tax ($36 million from the step up of certain Alliance Boots assets and $29 million representing the Company's share of amortization within Alliance Boots operations), respectively, for the ~~three~~quarter ~~and nine month periods~~ ended ~~May~~November 3130, 2013.

Note 1617. Supplemental Cash Flow Disclosures

Significant non-cash transactions in the ~~nine~~three month period ended ~~May~~November 3130, 2014, included $~~322~~32 million for additional capital lease obligations. Cash interest paid for the ~~nine~~three month period ended was $~~119~~43 million compared to $9841 million infor the ~~prior~~same ~~year's~~period ~~nine~~last ~~month period~~year. Cash paid for income taxes was $~~971~~18 million and $~~922~~45 million in the ~~nine~~three months ended ~~May~~November 3130, 2014 and 2013, respectively.

Note 1718. Recent Accounting Pronouncements

In ~~May~~November 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-0917, ~~Revenue~~Pushdown ~~from Contracts with Customers, as a new Topic,~~ Accounting ~~Standards Codification (ASC) Topic 606~~. ~~The~~This ~~new~~ASU ~~revenue recognition standard~~ provides acompanies ~~five-step~~with ~~analysis~~the ofoption ~~transactions~~ to ~~determine~~apply ~~when~~pushdown ~~and~~accounting ~~how~~in ~~revenue~~its isseparate ~~recognized. The~~financial ~~core~~statements ~~principle~~upon isoccurrence ~~that~~of aan ~~company~~event ~~should~~in ~~recognize~~which ~~revenue~~an toacquirer ~~depict~~obtains ~~the~~control ~~transfer~~ of ~~promised~~the ~~goods~~acquired orentity. The ~~services~~election to ~~customers~~apply inpushdown anaccounting ~~amount~~can ~~that~~be ~~reflects~~made either in the ~~consideration~~period toin which the ~~entity~~change ~~expects~~of tocontrol beoccurred, ~~entitled~~or in ~~exchange~~a ~~for~~subsequent ~~those goods or services~~period. This ASU is effective ~~for annual periods beginning after December 15, 2016 (fiscal 2018) and shall be applied retrospectively to each period presented or~~ as ~~a cumulative-effect adjustment as~~ of ~~the~~November ~~date~~18, ~~of adoption~~2014. The ~~Company is evaluating the effect of adopting this new accounting guidance but does not expect~~ adoption will not have a material impact on the Company'’s results of operations, cash flows or financial position.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, as a new Topic, Accounting Standards Codification (ASC) Topic 606. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU is effective for annual periods beginning after December 15, 2016 (fiscal 2018) and shall be applied retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company is evaluating the effect of adopting this new accounting guidance but does not expect adoption will have a material impact on the Company’s results of operations, cash flows or financial position.

- 22 -

Table of Contents

In April 2014, the FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This ASU raises the threshold for a disposal to qualify as discontinued operations and requires new disclosures for individually material disposal transactions that do not meet the definition of a discontinued operation. Under the new standard, companies report discontinued operations when they have a disposal that represents a strategic shift that has or will have a major impact on operations or financial results. This update will be applied prospectively and is effective for annual periods, and interim periods within those years, beginning after December 15, 2014 (fiscal 2016). Early adoption is permitted provided the disposal was not previously disclosed. This update will not have a material impact on the Company's reported results of operations and financial position. The impact is non-cash in nature and will not affect the Company's cash position.

InNote ~~May 2013, the FASB reissued an exposure draft on lease accounting that would require entities to recognize assets and liabilities arising from lease contracts on the balance sheet~~19. ~~The~~ Subsequent proposed exposure draft states that lessees and lessors should apply a "right-of-use model" in accounting for all leases. Under the proposed model, lessees would recognize an asset for the right to use the leased asset, and a liability for the obligation to make rental payments over the lease term. When measuring the asset and liability, variable lease payments are excluded, whereas renewal options that provide a significant economic incentive upon renewal would be included. The accounting by a lessor would reflect its retained exposure to the risks or benefits of the underlying leased asset. A lessor would recognize an asset representing its right to receive lease payments based on the expected term of the lease. The lease expense from real estate based leases would continue to be recorded under a straight-line approach, but other leases not related to real estate would be expensed using an effective interest method that would accelerate lease expense. A final standard is currently expected to be issued in 2014 and would be effective no earlier than annual reporting periods beginning on January 1, 2017 (fiscal 2018 for the Company). The proposed standard, as currently drafted, would have a material impact on the Company's financial position and the impact on the Company's reported results of operations is being evaluated. The impact of this exposure draft is non-cash in nature and would not affect the Company's cash position.Events

~~Note~~On 18December 19, 2014, the Company and WBA, entered into a Revolving Credit Agreement (the 364-Day Credit Agreement) with the lenders party thereto and Mizuho Bank, Ltd. ~~Subsequent~~, ~~Events~~as administrative agent. The 364-Day Credit Agreement is a 364-day unsecured, multicurrency revolving facility. The aggregate commitment of all lenders under the 364-Day Credit Agreement will be equal to $750 million. The Company will be the initial borrower under the 364-Day Credit Agreement. To the extent that the Reorg Merger is consummated on or prior to the date of the consummation of the second step transaction (and subject to the satisfaction (or waiver) of certain other conditions set forth therein), WBA will also be a borrower under the 364-Day Credit Agreement. To the extent the Reorg Merger is consummated on or prior to the date of the consummation of the second step transaction, the Company will guarantee the punctual payment when due, whether at stated maturity, by acceleration or otherwise, of all obligations of WBA under the 364-Day Credit Agreement, which guarantee shall remain in full force and effect until certain conditions are met.

On ~~June~~December 2529, 2014, the Company’s ~~completed~~shareholders ~~the~~voted ~~sale~~to ofapprove aall ~~majority~~proposals ~~interest~~related ~~in its subsidiary, Take Care Employer Solutions, LLC (Take Care Employer)~~ to ~~Water Street Healthcare Partners (Water Street). At~~ the ~~same~~second ~~time,~~step ~~Water~~transaction ~~Street made an investment in CHS Health Services (CHS), an unrelated entity~~ and ~~merged CHS with Take Care Employer to create a leading worksite health company dedicated to improving~~ the ~~cost~~Reorg ~~and quality of employee health care~~Merger. ~~Water~~The ~~Street~~Company ~~owns~~currently aexpects ~~majority~~to ~~interest~~complete in the ~~new~~second ~~company~~step ~~while~~transaction ~~Walgreens owns a significant minority interest~~ and ~~has representatives on~~ the ~~new~~Reorg ~~company's~~Merger ~~board~~on ofDecember ~~directors. As of May~~ 31, ~~2014,~~subject ~~the Company had classified its assets and liabilities related~~ to the ~~Take~~satisfaction ~~Care Employer business as held for sale and reported them within other assets and liabilities. The net assets~~ of ~~the~~customary ~~business~~closing ~~are approximately $176 million, primarily goodwill and accounts receivable~~conditions. ~~The Company expects an immaterial gain on this transaction.~~

Item 2. Management'’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read together with the financial statements and the related notes included elsewhere herein and our consolidated financial statements, accompanying notes and Management'’s Discussion and Analysis of Financial Condition and Results of Operations contained in our ~~Annual Report on~~ Form 10-K for the year ended August 31, ~~2013~~2014, as amended. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in forward-looking statements. Factors that might cause a difference include, but are not limited to, those discussed under "“Cautionary Note Regarding Forward-Looking Statements"” below and in Item 1A "“Risk Factors"” in our ~~Annual Report on~~ Form 10-K for the year ended August 31, ~~2013 and our Quarterly Report on Form 10-Q for the quarter ended May 31~~2014, ~~2014~~as amended.

INTRODUCTION

Walgreens is principally a retail drugstore chain that sells prescription and non-prescription drugs and general merchandise. General merchandise includes, among other things, ~~household items,~~ convenience and fresh foods, ~~personal~~household ~~care~~items, ~~beauty~~personal care, photofinishing and ~~candy~~beauty care. We offer customers the choice to have prescriptions filled at our retail pharmacies as well as through the mail, telephone or online including through our mobile application. At ~~May~~November 3130, 2014, we operated 8,~~683~~330 locations in 50 states, the District of Columbia, Puerto Rico, ~~Guam,~~ and the U.S. Virgin Islands. Total locations do not include ~~404~~430 Healthcare Clinics ~~that~~and ~~are~~46 ~~operated~~worksite pharmacies, which operate primarily within other Walgreens drugstores. Total locations oralso do not include locations of unconsolidated partially owned entities such as Alliance Boots GmbH (Alliance Boots).

	Number of Locations
Location Type	~~May~~November 3130, 2014		~~May~~November 3130, 2013
Drugstores		8,~~217~~230		8,~~097~~200
Worksite Health and Wellness Centers		~~362~~-		~~369~~372
Infusion and Respiratory Services Facilities		9189		8196
Specialty Pharmacies		119		11
Mail Service Facilities		2		2
Total		8,~~683~~330		8,~~560~~681

The drugstore industry isremains highly competitive where we compete with other drugstore chains, independent drugstores and mail order prescription providers. We also compete with various other retailers including grocery stores, convenience stores, mass merchants, online pharmacies, warehouse clubs and dollar stores.

Our sales, gross profit margin and gross profit dollars are impacted by, among other things, both the percentage of prescriptions that we fill that are generic and the rate at which new generic drugs are introduced to the market. In general, generic versions of drugs generate lower total sales dollars per prescription, but higher gross profit margins and gross profit dollars, as compared with patent-protected brand name drugs. The positive impact on gross profit margins and gross profit dollars typically has been significant in the first several months after a generic version of a drug is first allowed to compete with the branded version, which is generally referred to as a "“generic conversion."” In any given year, the number of major brand name drugs that undergo a conversion from branded to generic status can increase or decrease, which can have a significant impact on our sales, gross profit margins and gross profit dollars. Because any number of factors outside of our control or ability to foresee can affect timing for a generic conversion, we face substantial uncertainty in predicting when such conversions will occur and what effect they will have on particular future periods. In fiscal 2014 and the first quarter of fiscal 2015, we experienced cost increases on a subset of generic drugs that historically experience deflation, some of which were significant. We expect this generic inflation to continue throughout fiscal 2015.

~~The long~~-~~term~~ ~~outlook~~23 for prescription utilization is strong due in part to the aging population, the increasing utilization of generic drugs, the continued development of innovative drugs that improve quality of life and control health care costs, and the expansion of health care insurance coverage under the Patient Protection and Affordable Care Act (the ACA). The ACA seeks to reduce federal spending by altering the Medicaid reimbursement formula (AMP) for multi-source drugs, and when implemented, is expected to reduce Medicaid reimbursements. State Medicaid programs are also expected to continue to seek reductions in reimbursements independent of AMP. We continuously face reimbursement pressure from pharmacy benefit management (PBM) companies, health maintenance organizations, managed care organizations and other commercial third party payers; our agreements with these payers are regularly subject to expiration, termination or renegotiation. In addition, plan changes typically occur in January and in fiscal 2013, the high rate of introduction of new generic drugs moderated the impact of any associated rate adjustments. We experienced lower reimbursements and a significantly lower rate of new generic introductions in the first nine months of fiscal 2014, as compared to the same period last year. We anticipate the effect of new generics to become positive on a year over year basis in the fourth quarter of the current fiscal year.

OnTable July 19, 2012, Walgreens and Express Scripts announced their entry into a new multi-year agreement pursuant to which Walgreens began participating in the broadest Express Scripts retail pharmacy provider network available to Express Scripts clients as of September 15, 2012. From January 1, 2012, until September 14, 2012, however, Express Scripts' network did not include Walgreens pharmacies. The positive impact of this agreement generally has been incremental over time since September 15, 2012.Contents

~~Periodically,~~The welong-term ~~make~~outlook ~~strategic~~for ~~acquisitions~~prescription ~~and~~utilization ~~investments~~is ~~that~~strong ~~fit~~due ~~our~~in ~~long-term~~part ~~growth~~to ~~objectives. Consideration~~the isaging ~~given~~population, tothe ~~retail~~increasing utilization of generic drugs, ~~health~~the ~~and~~continued ~~well-being~~development ~~enterprises~~of innovative drugs that improve quality of life and ~~other~~control ~~potential~~healthcare ~~acquisitions~~costs, and ~~investments~~the ~~that~~expansion ~~provide~~of ~~unique~~healthcare ~~opportunities~~insurance coverage under the Patient Protection and ~~fit~~Affordable ~~our~~Care ~~business~~Act ~~objectives~~(the ACA). InThe ~~the~~ACA ~~first~~seeks ~~quarter~~to ofreduce ~~fiscal~~federal ~~2014,~~spending weby ~~acquired~~altering ~~certain~~the ~~assets~~Medicaid ofreimbursement ~~Kerr~~formula ~~Drug~~(AMP) ~~and~~for ~~its~~multi-source ~~affiliates~~drugs, ~~which~~and ~~include~~when 76implemented, ~~retail~~is ~~drugstore~~expected ~~locations,~~to asreduce ~~well~~Medicaid asreimbursements. State aMedicaid ~~specialty~~programs ~~pharmacy~~are ~~business~~also ~~and~~expected ato ~~distribution~~continue ~~center,~~to ~~all~~seek ~~based~~reductions in ~~North~~reimbursements ~~Carolina~~independent of AMP. InWe ~~fiscal~~continuously ~~2013,~~face wereimbursement ~~acquired~~pressure ~~Stephen~~from L.pharmacy ~~LaFrance~~benefit ~~Holdings~~management (PBM) companies, ~~Inc.~~health ~~(USA~~maintenance ~~Drug)~~organizations, ~~which~~managed ~~included~~care ~~141~~organizations ~~drugstore~~and ~~locations~~other ~~operating~~commercial ~~under~~third ~~the~~party ~~USA~~payers; ~~Drug,~~our ~~Super~~agreements Dwith ~~Drug,~~these ~~May's~~payers ~~Drug,~~are ~~Med-X~~regularly ~~and~~subject ~~Drug~~to ~~Warehouse~~expiration, ~~names~~termination or renegotiation. ~~Additionally~~In addition, weplan ~~acquired~~changes anwith ~~80%~~rate ~~interest~~adjustments inoften ~~Cystic~~occur ~~Fibrosis~~in ~~Foundation~~January ~~Pharmacy~~and ~~LLC. This~~our ~~investment~~reimbursement ~~provides~~arrangements ~~joint~~may ~~ownership~~provide infor arate ~~specialty~~adjustments ~~pharmacy~~at ~~for~~prescribed ~~cystic~~intervals ~~fibrosis~~during ~~patients~~their ~~and~~term. We ~~their~~experienced ~~families~~lower reimbursements in ~~addition~~the tofirst ~~providing~~three ~~new~~months ~~product~~of ~~launch~~fiscal ~~support~~2015, ~~and~~as ~~call~~compared ~~center~~to ~~services~~the ~~for~~same ~~drug~~period ~~manufacturers~~last year.

InWe ~~August~~anticipate ~~2012,~~new wegeneric ~~acquired~~introductions ato ~~45%~~increase ~~equity~~on ~~interest~~a inyear ~~Alliance~~over ~~Boots~~year ~~GmbH~~basis ~~and~~in afiscal ~~call~~2015. The ~~option~~current ~~that~~environment ~~provides~~of ~~Walgreens~~our ~~the~~pharmacy ~~right,~~business ~~but~~also ~~not~~includes ~~the~~ongoing ~~obligation~~generic inflation, toreimbursement ~~purchase~~pressure, ~~the~~and ~~remaining 55% over~~ a ~~six~~shift ~~month~~in ~~period~~pharmacy ~~beginning~~mix ~~February~~toward 2,90-day ~~2015~~at retail. ~~Additional~~Our ~~information~~90-day ~~regarding~~at ~~our~~retail ~~investment~~offering ~~in Alliance Boots~~ is ~~available~~typically inat ~~our~~a ~~Current~~lower ~~Reports~~margin onthan ~~Form~~comparable 830-Kday ~~filed on June 19~~prescriptions, ~~2012~~but ~~and~~provides ~~August~~us ~~6, 2012 (as amended by~~ the ~~Form~~opportunity ~~8-K/A~~to ~~filed~~increase onbusiness ~~September~~with ~~10,~~patients ~~2012). The~~with ~~amendment~~chronic toprescription ~~our~~needs ~~August~~while 6,offering ~~2012~~increased ~~Form 8-K filed on September 10~~convenience, ~~2012,~~helping ~~includes~~facilitate asimproved ~~exhibits~~prescription ~~thereto~~adherence ~~Alliance~~and ~~Boots~~resulting ~~audited~~in ~~consolidated~~a ~~financial~~lower ~~statements~~cost ~~for~~to fill the ~~years~~90-day ~~ended~~prescription. In ~~March 31~~addition, ~~2012,~~because ~~2011~~we ~~and~~decided ~~2010~~to ~~(prepared~~accept inlower ~~accordance~~reimbursement ~~with~~rates ~~International~~in ~~Financial~~order ~~Reporting~~to ~~Standards~~secure ~~(IFRS)~~preferred asrelationships ~~issued~~with byMedicare ~~the~~Part ~~International~~D ~~Accounting~~plans ~~Standards~~serving ~~Board)~~senior ~~and~~patients ~~unaudited~~with ~~pro~~significant ~~forma~~pharmacy ~~consolidated~~needs, ~~financial~~our ~~information~~Medicare ~~related~~Part toD ~~our~~reimbursement ~~45%~~rates ~~investment~~will decrease in ~~Alliance~~calendar ~~Boots~~year 2015. ~~Alliance~~We ~~Boots~~expect ~~audited~~that ~~consolidated~~these ~~financial~~factors ~~statements~~will ~~for~~have ~~the~~an ~~years~~adverse ~~ended~~impact ~~March~~on ~~31,~~gross ~~2014~~profit ~~and~~dollar ~~2013~~growth ~~(prepared~~ in ~~accordance with IFRS as issued by the IASB) are available on~~ our ~~Form~~pharmacy ~~8-K~~business ~~filed~~in onfiscal ~~May 15, 2014~~2015.

WePeriodically, ~~account~~we ~~for~~make ~~our~~strategic ~~45%~~acquisitions ~~investment~~and ~~in Alliance~~investments ~~Boots using~~that ~~the~~fit ~~equity~~our ~~method~~long-term ofgrowth ~~accounting~~objectives. ~~Investments~~Consideration ~~accounted~~is ~~for~~given ~~under~~to ~~the~~retail, ~~equity~~health ~~method~~and ~~are~~well-being ~~recorded~~enterprises ~~initially at cost~~ and ~~subsequently~~other ~~adjusted~~potential ~~for~~acquisitions ~~our~~and ~~share~~investments ofthat ~~the~~provide ~~net~~unique ~~income~~opportunities ~~or loss~~ and ~~cash~~fit ~~contributions~~our ~~and~~business ~~distributions to or from these entities~~objectives. ~~The~~In ~~investment is recorded as equity investment in Alliance Boots in~~ the ~~Consolidated~~first ~~Condensed~~quarter ~~Balance~~of ~~Sheets. Our~~fiscal ~~investment~~2014, inwe ~~Alliance~~acquired ~~Boots~~certain ~~and the related call option were recorded as~~ assets ~~with~~of anKerr ~~$8.0~~Drug ~~billion~~and ~~aggregate~~its ~~value on our May 31~~affiliates, ~~2014 Consolidated Condensed Balance Sheet,~~ which ~~represented~~include ~~31.3%~~76 ofretail ~~our~~drugstore ~~long-lived~~locations, ~~assets~~ as ofwell ~~that~~as ~~date. Because our investment in Alliance Boots is denominated in~~ a ~~foreign~~specialty ~~currency~~pharmacy ~~(British~~business ~~pounds~~and ~~Sterling), translation gains or losses impact the value of the investment. We utilize~~ a ~~three-month~~distribution ~~lag in reporting equity income from our investment in Alliance Boots~~center, ~~reported~~all asbased ~~equity earnings~~ in ~~Alliance~~North ~~Boots on the Consolidated Condensed Statements of Earnings~~Carolina. Net income reported by Alliance Boots is translated from British pounds Sterling at the average rate for the period. See Note 5 to our unaudited Consolidated Condensed Financial Statements for additional information regarding our equity method investments.

~~Fiscal~~In ~~2014~~August ~~combined~~2012, ~~synergies~~we ~~across~~acquired ~~both~~a ~~companies~~45% ~~are~~equity ~~estimated~~interest in Alliance Boots GmbH, which we account for using the equity method of accounting. As part of the initial 45% investment, we also acquired the right, but not the obligation, to beelect ~~between~~to ~~$400~~acquire ~~million~~the remaining 55% interest in Alliance Boots, at any time during the period beginning February 2, 2015 and ~~$450~~ending ~~million~~on August 2, 2015, in exchange for £3.133 ~~The~~billion ~~three-month~~in ~~lag~~cash, ~~impacts~~payable in British Pounds Sterling, and 144,333,468 shares of Walgreens common stock, subject to certain specified potential adjustments (the ~~quarterly~~call option). On August 5, 2014, the Purchase and ~~fiscal~~Option ~~year~~Agreement ~~timing~~was amended to permit the exercise of ~~when~~the ~~Alliance~~call ~~Boots~~option ~~results~~beginning on that date, and ~~synergies~~we, ~~are~~through ~~reflected~~an inindirectly wholly-owned subsidiary to which we previously assigned our rights to the ~~equity~~call ~~earnings~~option, exercised the call option on August 5, 2014. Additional information regarding our investment in Alliance Boots ~~included~~and the pending second step transaction is available in our and Walgreens Boots Alliance's filings with the SEC, including our Form 8-K filed on May 15, 2014 that includes Alliance Boots' audited consolidated financial statements (prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (IFRS) and audited in accordance with U. ~~See~~S. ~~"Cautionary~~GAAS), ~~Note~~comprised ~~Regarding~~of ~~Forward~~the statements of financial position at March 31, 2014 and 2013 of Alliance Boots and its subsidiaries (the Group) and the related Group income statements, Group statements of comprehensive income, Group statements of changes in equity and Group statements of cash flows for each of the years in the three-~~Looking~~year ~~Statements"~~period ended March 31, 2014, and our Form 8-K filed on September 16, 2014 that includes certain unaudited pro forma consolidated financial information related to the pending Transactions (as defined below).

~~The~~In ~~Alliance~~addition, ~~Boots~~we ~~business~~plan isto ~~seasonal~~complete, inimmediately ~~nature~~prior to the completion of the second step transaction, ~~typically~~a ~~generating~~reorganization of Walgreens into a ~~higher~~holding ~~proportion~~company ofstructure ~~revenue~~(the Reorganization, and ~~earnings~~together inwith the ~~winter~~second ~~holiday~~step transaction and ~~cold~~the ~~and~~related ~~flu~~share ~~season.~~issuance, ~~Because~~the weTransactions), ~~utilize~~under which Walgreens would become a ~~three~~wholly-~~month~~owned ~~lag~~subsidiary inof ~~reporting~~a ~~equity~~new ~~income~~Delaware ~~from~~corporation ~~our~~named ~~investment~~"Walgreens inBoots Alliance ~~Boots~~, Inc." (WBA) and Walgreen Co. shareholders immediately prior to the ~~results~~Reorganization ofwould ~~Alliance~~become ~~Boots~~shareholders ~~for~~of ~~December~~WBA, ~~January~~with ~~and~~shares ~~February~~of ~~are~~Walgreen ~~reflected~~Co. incommon ~~the~~stock ~~equity~~being ~~income~~converted ~~included~~automatically ininto ~~our~~shares ~~financial~~of ~~statements~~WBA common stock on a one-for-one basis. The Reorganization is conditioned upon the ~~fiscal~~second ~~quarter~~step ~~ending~~transaction ~~May~~being 31completed immediately following the completion of the Reorganization. ~~See~~The ~~"Cautionary~~second ~~Note~~step ~~Regarding~~transaction ~~Forward-Looking~~is ~~Statements"~~not ~~below~~conditioned on the completion of the Reorganization. Closing of the Transactions is expected to occur on December 31, 2014, subject to customary closing conditions.

The Company continues to evaluate the potential exercise of the option to acquire the 55% equity interest in Alliance Boots it does not currently own, including the potential timing and structure, the combined management team, additional synergy and cost reduction initiatives and potential changes to the Company's capital structure. This evaluation is ongoing and further information in this regard is expected to be announced in the fourth quarter of fiscal 2014. See "Cautionary Note Regarding Forward-~~Looking~~ ~~Statements"~~24 ~~below.~~-

OnTable March 19, 2013, the Company, Alliance Boots GmbH and AmerisourceBergen Corporation (AmerisourceBergen) announced various agreements and arrangements, including a ten-year pharmaceutical distribution agreement between Walgreens and AmerisourceBergen pursuant to which we will source branded and generic pharmaceutical products from AmerisourceBergen; an agreement which provides AmerisourceBergen the ability to access generics and related pharmaceutical products through Walgreens Boots Alliance Development GmbH, a global sourcing joint venture between Walgreens and Alliance Boots; and agreements and arrangements pursuant to which we and Alliance Boots together have the right, but not the obligation, to purchase a minority equity position in AmerisourceBergen and gain associated representation on AmerisourceBergen's board of directors in certain circumstances. AmerisourceBergen began to distribute all branded pharmaceutical products that we historically sourced from distributors and suppliers, effective September 1, 2013. In the second quarter of fiscal year 2014, AmerisourceBergen began distributing generic pharmaceutical products that we previously self-distributed. We expect the levels of generic pharmaceuticals distributed by AmerisourceBergen to continue to increase throughout the fiscal year. In addition to the information in this report, please refer to our Current Report on Form 8-K filed on March 20, 2013, our Quarterly Report on Form 10-Q filed on March 25, 2013 and our Schedule 13D filed on April 15, 2014 for more detailed information regarding these agreements and arrangements. See "Cautionary Note Regarding Forward-Looking Statements" below.Contents

~~STORE~~We ~~CLOSURES~~account for our 45% investment in Alliance Boots using the equity method of accounting. Investments accounted for under the equity method are recorded initially at cost and subsequently adjusted for our share of the net income or loss and cash contributions and distributions to or from these entities. Net income reported by Alliance Boots is translated from British Pounds Sterling at the average rate for the period. The investment is recorded as Equity Investment in Alliance Boots in the Consolidated Condensed Balance Sheets. Our investment in Alliance Boots was recorded with a value of $7.3 billion on our November 30, 2014 Consolidated Condensed Balance Sheet, which represented 29.0% of our long-lived assets as of that date. Because our investment in Alliance Boots is denominated in a foreign currency (British Pounds Sterling), translation gains or losses impact the value of the investment. We utilize a three-month lag in reporting equity income from our investment in Alliance Boots, reported as Equity Earnings in Alliance Boots on the Consolidated Condensed Statements of Earnings. See Note 5 to our unaudited Consolidated Condensed Financial Statements for additional information regarding our equity method investments.

OnUpon ~~March~~closing ~~24, 2014, our Board~~ of ~~Directors~~the ~~approved~~second astep ~~plan~~transaction, toAlliance ~~close~~Boots ~~underperforming stores in efforts to optimize and focus resources in a manner intended to increase shareholder value. We estimate that total pre-tax charges associated with the plan~~ will be ~~between~~included ~~$240~~in ~~million~~our ~~and~~consolidated ~~$280~~financial ~~million, largely attributable to lease termination costs~~statements. ~~This~~ Subject ~~store optimization plan is expected~~ to ~~result~~the inclosing ~~an annual operating income benefit~~ of ~~$40~~the ~~million~~second tostep ~~$50~~transaction, ~~million~~we ~~beginning~~expect ~~in fiscal 2015. The amounts and timing of all estimates are subject~~ to ~~change. The~~eliminate ~~actual amounts and timing may vary materially based on various factors, including~~ the ~~timing~~reporting ~~and~~lag ~~number~~beginning ofwith ~~store closings;~~ the ~~timing~~second ~~and~~quarter ~~amount~~ of ~~sublease~~fiscal income and other lease expense; factors relating to real estate including sale proceeds; asset write-downs and other factors affecting inventory value; changes in management's assumptions; and other factors2015. ~~See "Cautionary Note Regarding Forward-Looking Statements" below.~~

WeFiscal ~~closed~~2015 25combined ~~stores~~synergies ~~and~~across ~~incurred~~both ~~pre-tax~~companies ~~charges~~are ofestimated ~~$95~~to ~~million~~be (approximately $47650 million. ~~related~~The tothree-month ~~lease~~lag ~~termination~~impacts ~~costs~~the quarterly and ~~$48~~fiscal ~~million~~year intiming ~~asset~~of ~~impairments)~~when ~~during~~Alliance ~~the~~Boots ~~quarter~~results ~~ended~~and ~~May~~synergies are ~~31,~~reflected ~~2014. We~~in ~~expect~~the ~~that~~equity ~~substantially~~earnings ~~all~~in ofAlliance ~~the~~Boots ~~remaining~~included ~~charges~~in ~~will~~our befinancial ~~recognized~~statements. See ~~during~~"Cautionary ~~the~~Note ~~fourth~~Regarding ~~quarter~~Forward-Looking ofStatements" ~~fiscal 2014~~below.

The Alliance Boots business is seasonal in nature, typically generating a higher proportion of revenue and earnings in the winter holiday and cold and flu season. Because we have utilized a three-month lag in reporting equity income from our investment in Alliance Boots, the results of Alliance Boots for June, July and August are reflected in the equity income included in our financial statements for the fiscal quarter ending November 30. See “Cautionary Note Regarding Forward-Looking Statements” below.

On March 19, 2013, we, in conjunction with Alliance Boots and AmerisourceBergen Corporation (AmerisourceBergen) announced various agreements and arrangements, including a ten-year pharmaceutical distribution agreement between ourselves and AmerisourceBergen pursuant to which we will source branded and generic pharmaceutical products from AmerisourceBergen; an agreement which provides AmerisourceBergen the ability to access generics and related pharmaceutical products through Walgreens Boots Alliance Development GmbH, a global sourcing joint venture between ourselves and Alliance Boots; and agreements and arrangements pursuant to which we and Alliance Boots together have the right, but not the obligation, to purchase a minority equity position in AmerisourceBergen and gain associated representation on AmerisourceBergen's board of directors in certain circumstances. In fiscal 2014, AmerisourceBergen began distributing all branded and generic pharmaceutical products that we historically sourced from distributors, suppliers or were self-distributed; the distribution transition was substantially complete at August 31, 2014. In addition to the information in this report, please refer to our Current Report on Form 8-K filed on March 20, 2013, for more detailed information regarding these agreements and arrangements.

STORE CLOSURES AND COST REDUCTION INITIATIVES

On March 24, 2014, our Board of Directors approved a plan to close underperforming stores in efforts to optimize and focus resources in a manner intended to increase shareholder value. As of November 30, 2014, we have closed 68 locations, one of which was closed in the first three months of fiscal 2015. Pre-tax charges recognized in fiscal 2015 were $17 million primarily from lease termination costs. This store optimization plan is expected to result in an annual operating income benefit of $40 million to $50 million beginning in fiscal 2015. The amounts and timing of all estimates are subject to change. The actual amounts and timing may vary materially based on various factors, including the timing and number of store closings; the timing and amount of sublease income and other lease expense; factors relating to real estate including sale proceeds; asset write-downs and other factors affecting inventory value; changes in management’s assumptions; and other factors. See “Cautionary Note Regarding Forward-Looking Statements” below.

In addition, as part of our goal to establish an efficient global platform, we are pursuing a multi-faceted cost-reduction initiative across the enterprise with the goal of realizing $1 billion in cost savings by the end of fiscal 2017. This effort is focused on several areas including corporate costs, distribution costs, field costs and store costs. The Company anticipates that aspects of this multi-faceted plan will result in restructuring and other special charges as it is implemented over the next three fiscal years. See "Cautionary Note Regarding Forward-Looking Statements" below.

- 25 -

Table of Contents

OPERATING STATISTICS

	Percentage Increases/(Decreases)
	Three Months Ended					Nine Months Ended
	Three Months Ended November 30,
	May 31, 2014		May 31, 2013			May 31, 2014		May 31, 2013
	2014		2013
Net Sales		56.97		35.29			~~5.6~~		~~(0.5~~	)
Net Earnings Attributable to Walgreen Co.		1516.74		1668.23			~~21.1~~		~~1.1~~
Comparable Drugstore Sales		45.87		15.4			~~4.8~~		~~(3.1~~	)
Prescription Sales		89.40		37.43			~~7.6~~		~~(1.4~~	)
Comparable Drugstore Prescription Sales		68.31		27.02			~~6.4~~		~~(4.2~~	)
Front-End Sales		2.3		23.73			~~2.5~~		~~0.9~~
Comparable Drugstore Front-End Sales		21.25		02.4			~~2.2~~		~~(1.5~~	)
Gross Profit		4.2.8		4.1.0			~~2.0~~		~~2.7~~
Selling, General and Administrative Expenses		41.38		5(0.34	)		~~1.8~~		~~5.0~~
	Percent to Net Sales
	Three Months Ended					Nine Months Ended
	May 31, 2014		May 31, 2013			May 31, 2014		May 31, 2013
Gross Margin		28.1		28.5			28.3		29.4
Selling, General and Administrative Expenses		23.5		23.8			23.5		24.3

	Other Statistics
	Percent to Net Sales
	Three Months Ended				Nine Months Ended
	Three Months Ended November 30,
	May 31, 2014		May 31, 2013		May 31, 2014		May 31, 2013
	2014		2013
Prescription Sales as a % of Net Sales		64.4		63.1		63.7		62.6
Gross Margin		27.1		28.1
Third Party Sales as a % of Total Prescription Sales		96.6		96.1		96.3		95.7
Selling, General and Administrative Expenses		22.8		23.9
Number of Prescriptions (in millions)		178		173		528		516
Comparable Prescription % Increase/(Decrease)		2.1		5.2		1.6		(0.1	)
30 Day Equivalent Prescriptions (in millions) *		218		209		645		618
Comparable 30 Day Equivalent Prescription % Increase *		4.1		7.1		3.9		2.0
Total Number of Locations						8,683		8,560

	Other Statistics
	Three Months Ended November 30,
	2014		2013
Prescription Sales as a % of Net Sales		66.8		64.7
Third Party Sales as a % of Total Prescription Sales		96.6		95.8
Number of Prescriptions (in millions)		181		175
Comparable Prescription % Increase		2.9		3.3
30 Day Equivalent Prescriptions (in millions) *		222		213
Comparable 30 Day Equivalent Prescription % Increase *		4.1		5.5
Total Number of Locations		8,330		8,681

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

RESULTS OF OPERATIONS

Net earnings attributable to Walgreen Co. for the ~~third~~first quarter ended ~~May~~November 3130, 2014, were $~~722~~809 million, or $0.7585 per diluted share. This was a 1516.74% increase in net earnings over the same quarter last year. The net earnings increase in the quarter was primarily attributable to ~~higher net sales, a~~ lower ~~effective income tax rate, lower~~ selling, general and administrative expenses as a percentage of sales, ~~and~~a lower effective income tax rate, gains on fair market value adjustments related to the AmerisourceBergen warrants and an increase in net sales partially offset by lower gross margins, losses on unhedged forward currency contracts and a higher interest expense. Included in the ~~third~~ quarter net earnings and net earnings per diluted share, respectively, was income of $68222 million, or $0.0723 per diluted share, ofrelated ~~store~~to ~~closure~~combined fair value adjustments and ~~other~~amortization ~~optimization~~related ~~costs;~~to ~~income~~both ofour and Alliance Boots warrants to purchase AmerisourceBergen common stock; $6786 million of income, or $0.0709 per diluted share, ~~related~~from tothe ~~combined~~partial ~~fair~~release ~~value~~of ~~adjustments~~a ~~and~~capital ~~amortization~~loss ~~related~~valuation toallowance; ~~both~~expense ~~our~~of ~~and~~$96 ~~Alliance~~million, ~~Boots~~or ~~warrants~~$0.10 toper ~~purchase~~diluted ~~AmerisourceBergen~~share, ~~common~~from ~~stock~~fair market value adjustments on foreign currency forward contracts; $6358 million, or $0.06 per diluted share, in acquisition-related amortization; $5541 million, or $0.0604 per diluted share, in Alliance Boots related tax; $2834 million, or $0.03 per diluted share, from the quarter'’s LIFO provision; $18 million, or $0.02 per diluted share, of store closure and other optimization costs; $1416 million, or $0.0102 per diluted share, of other acquisition-related costs; and $9 million, or $0.01 per diluted share, of incremental interest expense on Walgreens Boots Alliance, Inc. notes. Included in the ~~third~~first quarter ended ~~May~~November 3130, 2013 net earnings and net earnings per diluted share, respectively, ~~were~~was ~~the~~income ~~negative impacts~~ of $76161 million, or $0.0817 per diluted share, ~~from~~related ~~the~~to ~~quarter's~~fair ~~LIFO~~value ~~provision~~adjustments and amortization related to both our and Alliance Boots warrants to purchase AmerisourceBergen common stock; $5258 million, or $0.0506 per diluted share, in acquisition-related amortization; $4737 million, or $0.0504 per diluted share, ~~related~~from ~~to a legal settlement with~~ the ~~Drug~~quarter's ~~Enforcement~~LIFO ~~Administration (DEA)~~provision; $4428 million, or $0.0503 per diluted share, in Alliance Boots related tax; ~~and~~ $1716 million, or $0.02 per diluted share, of other acquisition-related costs~~. Net~~ ~~earnings~~and ~~in the quarter ended May 31, 2013 were positively impacted by~~ $4815 million, or $0.0502 per diluted share, ~~from~~of ~~combined~~store ~~fair~~closure ~~value adjustments~~ and ~~amortization~~other ~~related~~optimization ~~to both our and Alliance Boots warrants to purchase AmerisourceBergen common stock~~costs.

~~For~~- the nine month period ended May 31, 2014, net earnings increased 21.1% to $2,171 million or $2.25 per diluted share. The net earnings increase for the nine month period was primarily attributable to higher net sales, lower selling, general and administrative expenses as a percentage of sales, higher equity earnings in Alliance Boots, fair market value gains related to the AmerisourceBergen warrants and a lower effective tax rate partially offset by lower gross margins. Included in the nine month period net earnings and net earnings per diluted share, respectively, was $254 million of income, or $0.26 per diluted share, related to combined fair value adjustments and amortization related to both our and Alliance Boots warrants to purchase AmerisourceBergen common stock; $181 million, or $0.19 per diluted share, in acquisition-related amortization; $130 million, or $0.13 per diluted share, in Alliance Boots related tax; $98 million, or $0.10 per diluted share, from the nine months' LIFO provision; $84 million, or $0.09 per diluted share, of store closure and other optimization costs; and $41 million, or $0.04 per diluted share, of acquisition-related costs. Included in the nine month period ending May 31, 2013, net earnings and net earnings per diluted share, respectively, were the negative impacts of $182 million, or $0.19 per diluted share, in acquisition-related amortization; $156 million, or $0.16 per diluted share, from the LIFO provision; $86 million, or $0.09 per diluted share, in Alliance Boots related tax; $53 million, or $0.05 per diluted share, of acquisition related costs; $47 million, or $0.06 per diluted share, relating to certain litigation matters including the DEA settlement; and $24 million, or $0.03 per diluted share, in costs related to Hurricane Sandy. Net earnings in the nine month period were positively impacted by $48 million, or $0.05 per diluted share, from combined fair value adjustments and amortization related to both our and Alliance Boots warrants to purchase AmerisourceBergen common stock and $13 million, or $0.01 per diluted share, from an additional gain on the 2011 sale of the Walgreens Health Initiatives, Inc. business relating to a client retention escrow.

~~Net~~Table ~~sales for the quarter ended May 31, 2014, increased by 5.9% to $19.4 billion. Sales increased from higher comparable store sales and new stores, each~~ of which includes an indeterminate amount of market-driven price changes. Sales in comparable drugstores were up 4.8% in the quarter ended May 31, 2014. Comparable drugstores are defined as those that have been open for at least twelve consecutive months without closure for seven or more consecutive days and without a major remodel or a natural disaster in the past twelve months. Relocated and acquired stores are not included as comparable stores for the first twelve months after the relocation or acquisition. We operated 8,683 locations (8,217 drugstores) as of May 31, 2014, compared to 8,560 locations (8,097 drugstores) a year earlier.Contents

~~Prescription~~Net sales ~~increased~~for ~~by 8.4% in~~ the ~~current~~ quarter ~~and~~ended ~~7.6%~~November ~~for the first nine months~~30, ~~representing~~2014 ~~64.4%~~increased ~~and~~by 636.7% ofto ~~total~~$19.6 ~~net sales, respectively~~billion. InSales ~~the prior year, prescription sales~~ increased ~~3.4%~~from inhigher ~~the~~comparable ~~quarter~~store sales and ~~decreased~~new ~~1.4%~~stores, ~~year~~each toof ~~date,~~which ~~representing~~includes ~~63.1%~~an ~~and~~indeterminate ~~62.6%~~amount of ~~total~~market-driven ~~net~~price ~~sales, respectively~~changes. Sales ~~Comparable~~in ~~drugstore~~comparable ~~prescription~~drugstores ~~sales~~ were up 65.37% in the ~~current~~ quarter ~~and~~ended ~~6.4%~~November ~~for~~30, ~~the nine month period~~2014. ~~The~~Comparable ~~effect~~drugstores ofare ~~generic~~defined ~~drugs,~~as ~~which~~those that have abeen ~~lower~~open ~~retail~~for ~~price,~~at ~~replacing~~least ~~brand~~twelve ~~name~~consecutive ~~drugs~~months ~~reduced~~without ~~prescription~~closure ~~sales~~for byseven ~~1.4%~~or inmore ~~the~~consecutive ~~current~~days ~~quarter~~ and ~~1.2%~~without ~~for~~a ~~the~~major ~~first~~remodel ~~nine~~or ~~months~~a ~~versus~~natural ~~reductions~~disaster ~~of 4.2% and 6.3%~~ in the ~~same~~past ~~periods~~twelve ~~last year~~months. ~~The~~Relocated ~~effect of generics on total net sales was a reduction of 0.8% in the current quarter~~ and ~~0.7%~~acquired ~~year~~stores toare ~~date~~not ~~compared~~included toas ~~reductions~~comparable ofstores ~~2.4%~~ for the ~~quarter~~first ~~and~~twelve ~~3.5%~~months ~~for~~after the ~~first~~relocation ~~nine~~or ~~months last year~~acquisition. ~~Third~~We ~~party~~operated ~~sales~~8,330 ~~where~~locations ~~reimbursement is received from managed care organizations~~(8,230 ~~the~~drugstores) ~~government,~~as ~~employers or private insurers, were 96.6%~~ of ~~prescription~~November ~~sales for the quarter and 96.3% for the nine month periods ended May 31~~30, 2014, compared to ~~96.1% for the quarter and 95.7% for the nine month period last year. We receive market driven reimbursements from third party payers based on negotiated and contracted reimbursement rates~~8,681 alocations ~~number of which typically reset in January. The total number of prescriptions filled for the current quarter~~ (~~including~~8,200 ~~immunizations~~drugstores) ~~was~~a ~~approximately 178 million compared to 173 million for the same period last~~ year~~. Prescriptions~~ ~~adjusted to 30 day equivalents were 218 million in the current quarter versus 209 million in last year's quarter~~earlier.

~~Front-end~~Prescription sales increased 2by 9.30% ~~for~~in the current quarter and ~~were~~represented 3566.68% of total net sales. ~~For~~In the ~~nine~~prior ~~months ended May 31~~year, ~~2014,~~prescription ~~front-end~~ sales increased 27.53% and ~~comprised~~represented 3664.37% of total net sales. In ~~comparison,~~Comparable ~~prior~~drugstore ~~year~~prescription ~~front end~~ sales ~~increased~~were 2up 8.71% ~~for~~in the quarter ~~and~~ended ~~increased~~November 030, 2014.9% The ~~for~~effect ~~the~~of ~~nine~~generic ~~month~~drugs, ~~period~~which have a lower retail price, ~~and~~replacing ~~comprised~~brand 36name drugs reduced prescription sales by 1.9% ~~and~~in 37the current quarter versus 0.49% in the same period last year. The effect of generics on total net sales~~. Comparable~~ ~~drugstore~~was ~~front-end~~a ~~sales~~reduction ~~increased~~of 21.21% ~~for~~in the current quarter ~~and~~compared 2to 0.25% in the prior year’s toquarter. Third ~~date~~party ~~compared~~sales, towhere reimbursement is received from managed care organizations, the ~~prior~~government, ~~year~~employers ~~which~~or ~~increased~~private 0insurers, were 96.46% inof prescription sales for the quarter ~~and~~ended ~~decreased~~November 130, 2014 compared to 95.58% in the prior year. We toreceive ~~date~~market driven reimbursements from third party payers based on negotiated and contracted reimbursement rates, a number of which typically reset in January. The ~~increase~~total innumber ~~comparable~~of ~~front-end~~prescriptions ~~sales~~filled infor the current quarter (including immunizations) was ~~primarily~~approximately ~~attributed~~181 million compared to an175 ~~increase~~million for the same period last year. Prescriptions adjusted to 30 day equivalents were 222 million in ~~basket~~the ~~size~~current ~~partially~~quarter ~~offset~~versus by213 ~~lower~~million ~~customer~~in ~~traffic.~~last year’s quarter

~~Gross~~Front-end ~~margin as a percent of~~ sales ~~was~~increased 282.13% infor the current quarter and 28were 33.32% ~~for~~of ~~the~~total ~~first~~net ~~nine months compared to 28~~sales.5% In ~~and~~comparison, ~~29.4%~~prior ~~last~~ year~~. Retail~~ ~~pharmacy~~front ~~margins~~end ~~were~~sales ~~negatively~~increased ~~impacted~~3.3% infor the quarter and ~~year~~comprised to35.3% ~~date~~of ~~periods~~total bynet ~~lower~~sales. ~~third-party~~Comparable ~~reimbursement;~~drugstore ~~the~~front-end ~~increase~~sales inincreased ~~Medicare~~1.5% ~~Part~~for ~~D mix including~~ the ~~strategy~~current toquarter ~~continue~~compared ~~driving 90-day prescriptions at retail; fewer brand-~~to~~-generic~~ ~~drug conversions compared with~~ the prior year ~~period; generic drug price inflation on a subset of generic drugs; and a mix of specialty drugs,~~ which ~~carry~~increased ~~a lower margin percentage~~2. ~~Front-end~~4% ~~margins were positively impacted~~ in the ~~current~~ quarter ~~primarily from the personal care, household items and convenience and fresh foods categories partially offset by the candy, non-prescription drug and beauty categories~~. ~~Year~~The toincrease ~~date front-end margins were negatively impacted~~ in ~~the~~comparable ~~convenience and fresh foods, non-prescription drug, photofinishing and candy categories. Retail pharmacy and~~ front-end ~~margins~~sales ~~were positively impacted~~ in the current quarter ~~and~~was ~~year~~primarily attributed to ~~date~~an ~~periods~~increase byin ~~purchasing~~basket ~~synergies~~size ~~realized~~partially ~~from~~offset ~~the joint venture formed~~ by ~~Walgreens~~lower ~~and~~customer ~~Alliance Boots~~traffic. ~~We expect the negative factors impacting pharmacy margin will more than offset the anticipated generic introduction in the fourth quarter on a year over year basis.~~

Gross ~~profit~~margin ~~dollars~~as ~~for~~a percent of sales was 27.1% in the current quarter ~~and~~compared ~~nine~~to ~~month~~28.1% ~~periods~~last ~~ended~~year. Retail ~~May~~pharmacy ~~31,~~margins ~~2014~~were ~~increased~~negatively ~~$218~~impacted ~~million,~~in orthe ~~4.2%,~~quarter by lower third-party reimbursements; generic drug price inflation; an increase in Medicare Part D mix including the strategy to continue driving 90-day prescriptions at retail; and ~~$314~~the ~~million~~mix of specialty drugs, orwhich 2carry a lower margin percentage.~~0%,~~ The ~~respectively,~~decrease ~~compared~~in retail pharmacy margins were partially offset by additional brand-to-generic ~~the~~drug ~~same~~conversions ~~periods~~compared ~~last~~with the prior year period. ~~The~~Front-end ~~increase~~margins iswere ~~attributed~~positively toimpacted ~~higher~~in ~~sales~~the ~~volumes~~current quarter primarily from the convenience and fresh foods, household items and non-prescription drug categories partially offset by ~~lower~~the ~~retail~~photofinishing ~~pharmacy~~and ~~margins~~seasonal categories.

WeGross ~~use~~profit ~~the~~dollars ~~LIFO method of inventory valuation, which can only be determined annually when inflation rates and inventory levels are finalized; therefore, LIFO inventory costs~~ for the ~~interim financial statements are estimated. Cost of sales included a LIFO provision of $41 million and $150 million for the~~ quarter ~~and nine month periods~~ ended ~~May~~November 3130, 2014, ~~respectively,~~increased ~~versus~~ $~~120~~144 million ~~and $247 million in the same periods a year ago. In the current quarter~~, ~~our~~or ~~estimated annual inflation rate decreased from~~ 2.508% ~~to 2.25%~~, ~~primarily~~compared ~~due~~ to ~~lower~~the ~~forecasted~~same ~~prescription~~period ~~drug~~last ~~inventory levels~~year. The Inincrease ~~the~~is ~~prior~~attributed ~~year's quarter, the estimated annual inflation rate increased from 2.75%~~ to ~~3.50%~~higher ~~primarily~~sales ~~due~~volumes topartially ~~higher~~offset ~~than~~by ~~anticipated~~lower ~~prescription~~retail ~~drug~~pharmacy ~~inflation~~margins.

~~Selling,~~We ~~general~~use ~~and~~the ~~administrative~~LIFO ~~expenses~~method asof ainventory ~~percentage~~valuation, ofwhich ~~sales~~can ~~were~~only ~~23.5%~~be ~~for~~determined ~~the~~annually ~~current~~when ~~year's~~inflation ~~third~~rates ~~quarter~~ and ~~first~~inventory ~~nine~~levels ~~months~~are ~~compared~~finalized; totherefore, ~~23.8%~~LIFO ~~and~~inventory ~~24.3%~~costs infor the ~~same~~interim ~~periods~~financial astatements ~~year~~are ~~ago~~estimated. As Cost ~~a percentage~~ of sales, ~~expenses~~included ina ~~the~~LIFO ~~current~~provision ~~quarter~~of ~~were~~$52 ~~lower~~million ~~primarily~~for ~~due~~the toquarter ~~lower~~ended ~~store~~November ~~compensation costs~~30, ~~store occupancy costs~~2014, ~~acquisition~~versus ~~related~~$58 ~~costs~~million ~~and~~in ~~legal expenses, partially offset by store closure costs related to our store optimization plan and higher weather-related costs. Expenses for~~ the ~~nine~~same ~~month~~ period as a ~~percentage~~year ~~of sales were lower primarily due to lower store compensation costs, legal expenses and store occupancy costs, partially offset by higher store closure costs through our store optimization plan~~ago. ~~Included~~In in the ~~prior~~current ~~year's nine month period were expenses related to Hurricane Sandy~~quarter, ~~the~~our ~~DEA~~estimated ~~settlement,~~annual ~~and~~inflation ~~higher~~rate ~~investments~~was in2.50% ~~strategic~~compared ~~initiatives~~to ~~and~~2.75% ~~capabilities~~last year.

Selling, general and administrative ~~expense~~expenses ~~dollars~~as ~~increased~~a ~~$189~~percentage ~~million~~of orsales 4were 22.38% ~~over~~for the ~~prior~~first ~~year's~~ quarter ~~and~~compared ~~$242~~to ~~million or 1~~23.89% ~~over~~in the ~~prior~~same ~~year's~~period ~~nine~~a ~~month~~year ~~period~~ago. ~~The~~As ~~current~~a ~~quarter's~~percentage ~~growth includes 2.3%~~ of ~~store closure and other optimization costs~~sales, ~~1.8% of headquarters~~ expenses, ~~1.4%~~in ofthe ~~new~~current ~~store~~quarter ~~expenses and 0.1% of acquisition related amortization which~~ were ~~partially offset by~~ lower ~~legal~~primarily ~~costs~~due ~~incurred as compared~~ to ~~last year related to the DEA settlement of 0.7%,~~ lower ~~comparable~~ store ~~expenses~~compensation ~~of 0.3% and acquisition related~~ costs ~~of 0.3%. Growth for the nine month period ended May 31~~, ~~2014 included 1.3% of new~~ store ~~expenses,~~occupancy ~~0.9% of store closure and other optimization~~ costs, and ~~0.3%~~advertising ofexpenses, ~~comparable store growth. These were~~ partially offset by ~~lower~~increased ~~legal costs related to the DEA settlement last year of 0.2% and lower~~ acquisition related ~~costs of 0~~expenses.~~2%. In addition, Hurricane Sandy costs in the prior year were 0.3%.~~

~~Equity~~Selling, ~~earnings~~general inand ~~the~~administrative ~~45%~~expense ~~Alliance~~dollars ~~Boots~~increased ~~equity~~$77 ~~method~~million ~~investment~~or ~~for~~1.8% over the ~~three~~first ~~month~~quarter ~~period~~of ~~ended~~the ~~May~~prior ~~31, 2014 were $137 million compared to $131 million last~~ year. The current quarter’s ~~included~~growth ~~$27~~rate includes ~~million~~1.1% of ~~expense~~new instore ~~fair~~expenses, ~~value~~0.6% ~~adjustments~~of ~~and~~comparable ~~amortization~~store ~~related~~and toheadquarters ~~Alliance~~expenses ~~Boots~~and ~~warrants to purchase AmerisourceBergen common stock~~0. ~~Earnings~~2% ~~also reflect $11 million ($8 million net~~ of ~~tax)~~store ofclosure ~~incremental~~and ~~acquisition-related~~other ~~amortization~~optimization incosts ~~the~~which ~~current~~were ~~quarter~~partially ~~compared~~offset toby ~~amortization~~0.1% of $7lower ~~million~~acquisition ~~($3~~related ~~million net of tax) in the prior year's quarter~~amortization.

Equity earnings in the 45% Alliance Boots equity method investment for the nine month period ended May 31, 2014 were $482 million as compared to $220 million last year. Alliance Boots earnings are reported on a three-~~month~~ ~~lag. As~~27 a result, the nine month period ended May 31, 2013 only included seven months of August through February's results of operations of Alliance Boots reflected in the equity earnings in Alliance Boots due to the timing of this investment. Earnings in the first nine months of the current year included $91 million in fair value adjustments and amortization related to Alliance Boots warrants to purchase AmerisourceBergen common stock and $71 million from remeasuring deferred tax balances related to UK tax law changes enacted in July 2013. Earnings also reflect $31 million ($24 million net of tax) of incremental acquisition-related amortization in the current nine month period compared to amortization of $47 million ($36 million net of tax) in the prior year period, $23 million ($18 million net of tax) of which was related to inventory.

~~Other~~Table ~~income for the three and nine month periods ended May 31, 2014 was $124 million and $290 million, respectively. The change in fair value~~ of our AmerisourceBergen warrants resulted in recording other income of $119 million and $275 million for the three and nine month periods, respectively, primarily attributable to the change in the price of AmerisourceBergen's common stock. In addition, we recorded $5 million and $15 million in the quarter and nine month periods, respectively, of other income relating to the amortization of the deferred credit associated with the initial value of the warrants.Contents

~~Interest~~Equity ~~was~~earnings ain ~~net~~the ~~expense~~45% ofAlliance ~~$35~~Boots ~~million~~equity inmethod investment for both of the ~~quarter~~three ~~and~~month ~~$113~~periods ~~million~~ended ~~year~~November to30, ~~date~~2014 ~~compared~~and to2013 were $50151 million. The ~~and~~current quarter included $~~110~~42 million ~~for~~of ~~the~~income ~~prior~~in ~~quarter~~fair value adjustments and ~~year~~amortization related to ~~date,~~Alliance ~~respectively.~~Boots ~~The~~warrants ~~current~~to ~~and~~purchase ~~prior~~AmerisourceBergen ~~year's~~common ~~interest~~stock. The ~~expense~~current isquarter ~~net~~also included a gain of $123 million inrelated to previously held equity interest from the ~~quarter~~Alliance ~~and~~Boots acquisition of the remaining 50% of UniDrug Distribution Group. Earnings also reflect $410 million ~~year~~($8 tomillion ~~date,~~net ~~which~~of ~~was~~tax) ~~capitalized~~of toincremental ~~construction~~acquisition-related ~~projects. Interest~~amortization ~~expense~~ in the current and prior year'’s ~~nine~~quarter. The ~~month~~prior ~~period~~year’s ~~was~~equity ~~reduced~~earnings byincluded aan income tax benefit of $1971 million ~~receipt~~from ofremeasuring ~~interest~~deferred ~~income~~tax balances related to ~~late~~UK ~~payments~~tax oflaw ~~state~~changes ~~Medicaid~~enacted ~~receivables~~in July 2013, which reduced the future income tax rate for UK entities.

~~The~~Other ~~effective~~income ~~tax rate~~ for the ~~quarter~~three month period ended November 30, 2014 was ~~31.5%~~$199 million compared to ~~38.7%~~$225 million in the prior year. The ~~decrease~~change in ~~the~~fair ~~current~~value ~~quarter's~~of ~~tax~~our ~~rate~~AmerisourceBergen aswarrants, ~~compared~~primarily attributable to the ~~same~~change ~~quarter~~in of the ~~prior~~price ~~year~~of isAmerisourceBergen's ~~primarily~~common ~~attributable~~stock, toresulted ~~additional~~in ~~foreign~~recording ~~source~~other income ~~taxed~~of at$290 ~~lower~~million ~~rates,~~and a$220 ~~net~~million ~~benefit~~ for ~~changes~~the inthree ~~uncertain~~month ~~tax~~periods ~~positions,~~ended ~~higher~~November ~~non-deductible~~30, ~~expenses~~2014 ~~that~~and ~~occurred~~2013, inrespectively. We ~~the~~recorded ~~prior~~other ~~year~~income ~~and~~relating ~~other~~to ~~discrete~~the ~~items. For~~amortization of the ~~fourth~~deferred ~~quarter,~~credit weassociated ~~estimate~~with ~~our~~the ~~effective~~initial ~~tax~~value ~~rate~~of tothe bewarrants ~~approximately~~of ~~36%. The~~$5 ~~effective~~million ~~tax~~in ~~rate~~both ~~for~~ the ~~nine~~current ~~month~~quarter ~~period~~and ~~decreased~~the ~~from~~prior ~~37.7% last~~ year’s tocomparable 34quarter.3% Other income in the current year ~~primarily~~also ~~attributable~~included toan ~~additional~~expense ~~foreign~~of ~~source~~$96 ~~income~~million ~~taxed~~related atto ~~lower~~our ~~rates,~~foreign ~~higher~~currency ~~non-deductible~~forward ~~expenses~~contracts ~~incurred~~for inwhich ~~the~~we ~~prior~~have ~~year~~elected ~~and~~not ~~other~~to ~~discrete~~apply ~~items.~~hedge accounting treatment

Interest was a net expense of $55 million in the quarter compared to $41 million for the prior quarter. Interest expense is net of capitalized construction projects which was immaterial in the current year compared to $2 million in the prior year. The increase in interest expense in the current quarter is primarily due to the notes issued by Walgreens Boots Alliance, Inc., which were issued to fund a portion of the cash consideration payable in connection with second step transaction and to refinance substantially all of existing Alliance Boots borrowings.

The effective tax rate was 26.4% compared to 36.8% in the prior year's quarter. The decrease in the current year's effective tax rate, as compared to last year's rate is primarily attributed to the Company recognizing a discrete tax benefit of $86 million of previously unrecognized capital loss deferred tax assets due to the Company generating capital gain income from sale-leaseback transactions in the current period and its expectations of generating additional capital gain income in the second quarter of the current year. Excluding the benefit of this discrete item, the Company’s effective tax rate for the current quarter was 33.9%. Additional factors contributing to the current year’s reduced tax rate include incremental foreign source earnings taxed at lower tax rates, partly offset by increased expenses for which no tax benefit will be realized. If future transactions occur which generate sufficient capital gain income, the Company may recognize additional discrete tax benefits for previously unrecognized capital loss deferred tax assets in future periods.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents were $212.19 billion at ~~May~~November 3130, 2014, compared to $31.0 billion at ~~May~~November 3130, 2013. Short-term investment objectives are to minimize risk, maintain liquidity and maximize after-tax yields. To attain these objectives, investment limits are placed on the amount, type and issuer of securities. Investments are principally in U.S. Treasury market funds.

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

~~The~~Net ~~Company~~cash ~~continues~~provided toby ~~evaluate~~operating activities for the ~~potential~~three ~~exercise~~months ofended ~~the~~November ~~option~~30, 2014, was $1.0 billion compared to ~~acquire~~$133 million a year ago. When compared to the ~~55%~~prior ~~equity~~year, ~~interest~~cash infrom ~~Alliance~~operating ~~Boots~~activities itincreased ~~does~~primarily ~~not~~as ~~currently~~a ~~own,~~result ~~including~~of ~~the~~changes ~~potential~~in ~~timing~~working ~~and~~capital ~~structure,~~balances. For the ~~combined~~three ~~management~~months ~~team~~ended November 30, ~~additional~~2014, ~~synergy~~working ~~and~~capital ~~cost~~provided ~~reduction~~$189 ~~initiatives~~million ~~and~~of ~~potential~~cash ~~changes~~as compared to the ~~Company's~~prior year, where working capital ~~structure.~~was ~~This~~a ~~evaluation~~cash isoutflow ~~ongoing~~of ~~and~~$846 ~~further~~million. Prior ~~information~~year’s inworking ~~this~~capital ~~regard~~outflow isreflected ~~expected~~the toimpact beof ~~announced~~the AmerisourceBergen distribution transition. inCash provided by operations is the ~~fourth~~principal ~~quarter~~source of ~~fiscal~~funds ~~2014. See~~for ~~"Cautionary~~expansion, ~~Note~~acquisitions, ~~Regarding~~store ~~Forward-Looking~~remodeling ~~Statements"~~programs, ~~below~~dividends to shareholders and stock repurchases.

Net cash ~~provided~~used byfor ~~operating~~investing activities was $55 million for the ~~nine~~three months ended ~~May~~November 3130, 2014, ~~was~~compared to $~~2.5~~925 ~~billion~~million ~~compared~~in tothe ~~$3.2~~first ~~billion~~quarter alast year ~~ago~~. The ~~When~~Company ~~compared~~had tobusiness and intangible asset acquisitions in the ~~prior~~current year, ~~cash~~totaling ~~from~~$13 ~~operating~~million ~~activities~~compared ~~decreased~~to ~~primarily~~$243 asmillion ain ~~result~~the ofprior ~~changes~~period, inprimarily ~~working~~from ~~capital~~the ~~balances~~acquisition of Kerr Drug. ~~For~~Proceeds from the ~~nine~~sale ~~months~~of ~~ended~~assets, ~~May~~primarily ~~31,~~from ~~2014,~~our ~~working~~sale-leaseback ~~capital~~activity, ~~used~~provided $~~480~~294 million ofduring ~~cash~~the ascurrent year compared towith $14 million in the prior year,. In ~~where~~the ~~working~~prior ~~capital~~year, ~~was~~the aCompany ~~cash~~purchased ~~inflow~~$290 million of ~~$491~~AmerisourceBergen ~~million~~common stock. ~~The~~Additions ~~decrease~~to inproperty ~~cash~~and ~~used~~equipment ~~for~~were ~~working~~$335 ~~capital~~million ~~was~~compared ~~primarily~~to ~~attributable~~$364 tomillion ~~timing~~last ofyear. During ~~payments~~the ~~related~~first tothree ~~the~~months, ~~AmerisourceBergen~~we ~~distribution~~added ~~transition~~a ~~and~~total ~~increased~~of ~~receivables,~~49 ~~partially~~locations ~~offset~~(21 bynet) ~~lower~~compared ~~inventory~~to ~~levels~~132 last year (99 net). ~~Cash~~There ~~provided~~were by2 ~~operations~~owned islocations added during the ~~principal~~first ~~source~~three ofmonths ~~funds~~and ~~for~~16 ~~expansion,~~under ~~acquisitions,~~construction ~~remodeling~~at ~~programs~~November 30, ~~dividends~~2014 toversus ~~shareholders~~14 owned locations added and ~~stock~~55 ~~repurchases~~under construction last year.

~~Net~~- ~~cash~~28 used for investing activities was $1.5 billion for the nine months ended May 31, 2014 and 2013. Additions to property and equipment were $821 million compared to $874 million last year. During the first nine months, we added a total of 216 locations (101 net) compared to 312 last year (175 net). There were 23 owned locations added during the first nine months and 17 under construction at May 31, 2014 versus 32 owned locations added and 40 under construction last year.-

	Drugstores			Worksites			Infusion and Respiratory Services			Specialty Pharmacies			Mail Service		Total
August 31, 2013		8,116			371			82			11			2		8,582
New/Relocated		107			23			1			1			-		132
Acquired		70			-			14			-			-		84
Closed/Replaced		(76	)		(32	)		(6	)		(1	)		-		(115	)
May 31, 2014		8,217			362			91			11			2		8,683

Table of Contents

Business acquisitions this year were $323 million versus $588 million in the prior year. Business acquisitions in the current year include the purchase of certain assets of regional drugstore chain Kerr Drug and its affiliates for $173 million, subject to adjustment in certain circumstances. Business acquisitions in the comparable prior year period included the purchase of the regional drugstore chain USA Drug from Stephen L. LaFrance Holdings, Inc. and members of the LaFrance family for $429 million net of assumed cash, an 80% interest in Cystic Fibrosis Foundation Pharmacy, LLC for $29 million net of assumed cash, and selected other assets (primarily prescription files). Last year we received client retention proceeds of $20 million related to the sale of Walgreens Health Initiatives, Inc in fiscal 2011. In connection with our strategic relationship with AmerisourceBergen, we purchased AmerisourceBergen common stock in open market transactions totaling $493 million during the nine month period ended May 31, 2014.

	Drugstores			Infusion and Respiratory Services			Specialty Pharmacies		Mail Service		Total
August 31, 2014		8,207			91			9		2		8,309
New/Relocated		49			-			-		-		49
Acquired		-			-			-		-		-
Closed/Replaced		(26	)		(2	)		-		-		(28	)
November 30, 2014		8,230			89			9		2		8,330

Capital expenditures for fiscal ~~2014~~2015 are expected to be approximately $1.37 billion, excluding business acquisitions, joint ventures and prescription file purchases, although the actual amount may vary depending upon a variety of factors, including, among other things, the timing of implementation of certain capital projects. InWe addition, we continue to optimize and focus our resources in a manner to increase shareholder value. As of May 31, 2014, we have closed 25 of the 76 retail locations previously announced to be closed. In the fourth quarter of fiscal 2014, we expect to ~~incur~~add charges between $145 million and $185 million in costs related to the closure of the remaining 51 retail store locations, most of which relates to lease termination charges. Including these store closures, we expect our net drugstore locations to increase by approximately 5560 to 75120 ~~locations~~new indrugstores is fiscal ~~2014~~2015.

Net cash ~~used~~provided by financing activities was $~~944~~9.2 ~~million~~billion compared to a net use of $345 million in the prior year. In ~~net~~the ~~cash~~current ~~provided~~year, byWBA ~~financing~~received ~~activities~~proceeds from public offerings of $248.0 ~~million~~billion of U.S. dollar denominated debt and approximately $2.0 billion of Euro and Pound Sterling denominated debt. InThe proceeds from these offerings will be used to fund a portion of the ~~current~~cash ~~fiscal~~consideration ~~year~~payable in connection with second step transaction, werefinance ~~paid~~substantially inall ~~full~~of ~~our~~existing ~~$550~~Alliance ~~million~~Boots ~~unsecured~~borrowings and pay related fees and expenses. Following the completion of the second step transaction, a portion of the net proceeds from the issuance of the notes ~~that~~may ~~matured~~also inbe ~~March~~used ~~2014~~for general corporate purposes, including the repayment and/or refinancing of existing WBA or Walgreen Co. obligations. We repurchased shares to support the needs of the employee stock plans totaling $~~205~~500 million this year compared to $~~567~~205 million last year. Proceeds related to employee stock plans were $~~518~~112 million during the first ~~nine~~three months of fiscal 2015 versus $~~391~~173 million for the same period last year. Cash dividends paid were $~~898~~322 million during the first ~~nine~~three months of fiscal ~~2014,~~2015 versus $~~780~~298 million for the same period a year ago. Last year we received proceeds from a public offering of $4.0 billion of notes with varying interest rates (see Note 8). The notes were used, in part, to repay the $3.0 billion 364-day bridge term loaned obtained in connection with the investment in Alliance Boots.

In connection with our capital policy, our Board of Directors has authorized share repurchase programs and set a long-term dividend payout ratio target between 30 and 35 percent of net earnings attributable to Walgreen Co. ~~Our~~ In August 2014, our Board of Directors authorized the ~~2012~~2014 stock repurchase program, which allows for the repurchase of up to $23.0 billion of the Company'’s common stock prior to its expiration on ~~December~~August 31, ~~2015~~2016. We did not purchase any shares under the program in the first ~~nine~~three months of fiscal ~~2014 or 2013~~2015.

We determine the timing and amount of repurchases based on our assessment of various factors including prevailing market conditions, alternate uses of capital, liquidity, the economic environment and other factors. The timing and amount of these purchases may change at any time and from time to time. The Company has repurchased and may from time to time in the future repurchase shares on the open market through Rule 10b5-1 plans, which enable a company to repurchase shares at times when it otherwise might be precluded from doing so under insider trading laws.

We ~~have~~ periodically ~~borrowed~~borrow under our commercial paper program ~~during the first nine months of the current fiscal year,~~ and ~~may~~intend ~~continue~~ to borrow under it in future periods. We had ~~average daily short-term borrowings of $5 million of commercial paper outstanding at a weighted average interest rate of 0.23% for the nine months ended May 31, 2014. There were~~ no ~~borrowings~~activity ~~outstanding~~ under ~~the program at May 31, 2014. In connection with~~ our commercial paper program, weduring ~~maintain~~the ~~two unsecured backup syndicated lines of credit that total $1.35 billion. The~~ first ~~$500~~quarter ~~million facility expires on July 20, 2015, and allows for the issuance~~ of upfiscal ~~to $250 million in letters of credit~~2015. The second $850 million facility expires on July 23, 2017, and allows for the issuance of up to $200 million in letters of credit. The issuance of letters of credit under either of these facilities reduces available borrowings. Our ability to access these facilities is subject to our compliance with the terms and conditions of the credit facility, including financial covenants. The covenants require us to maintain certain financial ratios related to the proportion of consolidated debt to total capitalization and priority debt, along with limitations on the sale of assets and purchases of investments. At May 31, 2014, we were in compliance with all such covenants. The Company pays a facility fee to the financing banks to keep these lines of credit active. At May 31, 2014, there were no letters of credit issued against these facilities.

AsOn ofNovember ~~July~~10, 2014, we entered into a term loan agreement which provides the ability to borrow up to £1.45 billion to finance a portion of the Alliance Boots second step transaction, ~~2014~~repay or refinance certain indebtedness of Walgreens, ~~our~~Alliance Boots GmbH and their respective subsidiaries and to pay related transaction costs. Borrowings under the term loan agreement will bear interest at a fluctuating rate per annum equal to the reserve adjusted Eurocurrency rate plus an applicable margin based on the Company’s credit ratings ~~were:~~.

Rating Agency	Long-Term Debt Rating	Commercial Paper Rating		Outlook
Moody's	Baa1		P-2	Stable
Standard & Poor's	BBB		A-2	Stable

On November 10, 2014, we entered into a five-year unsecured, multicurrency revolving credit agreement, replacing the prior agreements dated July 20, 2011 and July 23, 2012. The new unsecured revolving credit agreement totals $2.25 billion, of which $375 million will be available for the issuance of letters of credit. The total availability under the facility will increase to $3.0 billion, of which $500 million will be available for the issuance of letters of credit, upon the affirmative vote of the majority of common shares of Walgreens represented and entitled to vote at a Walgreens shareholder meeting to approve the issuance of the necessary shares to complete the second step acquisition of Alliance Boots. The issuance of letters of credit reduces the aggregate amount otherwise available under the revolving credit agreement for the making of revolving loans. Our ability to access these facilities is subject to compliance with the terms and conditions of the credit facilities, including financial covenants. The covenants require us to maintain certain financial ratios related to the proportion of consolidated debt to total capitalization and priority debt, along with limitations on the sale of assets and purchases of investments. At November 30, 2014, we were in compliance with all such covenants. The Company pays a facility fee to the financing banks to keep these lines of credit active. At November 30, 2014, there were no letters of credit issued against these credit facilities.

On December 19, 2014, the Company and WBA, entered into a Revolving Credit Agreement (the 364-Day Credit Agreement) with the lenders party thereto and Mizuho Bank, Ltd., as administrative agent. The 364-Day Credit Agreement is a 364-day unsecured, multicurrency revolving facility. The aggregate commitment of all lenders under the 364-Day Credit Agreement will be equal to $750 million. The Company will be the initial borrower under the 364-Day Credit Agreement. To the extent that the Reorg Merger is consummated on or prior to the date of the consummation of the second step transaction (and subject to the satisfaction (or waiver) of certain other conditions set forth therein), WBA will also be a borrower under the 364-Day Credit Agreement. To the extent the Reorg Merger is consummated on or prior to the date of the consummation of the second step transaction, the Company will guarantee the punctual payment when due, whether at stated maturity, by acceleration or otherwise, of all obligations of WBA under the 364-Day Credit Agreement, which guarantee shall remain in full force and effect until certain conditions are met. See the Current Report on Form 8-K filed by the Company on December 24, 2014 for further details.

- 29 -

Table of Contents

As of December 29, 2014, the credit ratings of Walgreen Co. and Walgreens Boots Alliance, Inc. were:

Rating Agency	Long-Term Debt Rating	Commercial Paper Rating	Outlook
Moody's	Baa2	P-2	Stable
Standard & Poor's	BBB	A-2	Stable

In assessing our credit strength, both Moody's and Standard & Poor's consider our business model, capital structure, financial policies and financial performance as well as the financial performance and level of outstanding debt of Alliance Boots. Our credit ratings impact our borrowing costs, access to capital markets and operating lease costs. The rating agency ratings are not recommendations to buy, sell or hold our debt securities or commercial paper. Each rating may be subject to revision or withdrawal at any time by the assigning rating organization and should be evaluated independently of any other rating.

~~Pursuant~~On toAugust ~~our~~5, ~~Purchase~~2014, ~~and~~we ~~Option~~entered ~~Agreement~~into ~~with~~an ~~Alliance~~amendment ~~Boots,~~to wethe ~~have~~Purchase ~~the~~and ~~right~~Option Agreement, ~~but~~which ~~not~~among ~~the~~other ~~obligation~~things, toaccelerated ~~purchase~~ the ~~remaining~~option ~~55%~~period ~~interest~~to ~~in Alliance Boots during~~ the period beginning ~~February~~August 25, ~~2015~~2014 and ending ~~August~~February 25, 2015. IfPursuant weto ~~exercise~~the ~~this call option~~amendment, we ~~would,~~exercised ~~subject to~~ the ~~terms~~call ~~and~~option ~~conditions~~on ofAugust ~~such agreement~~5, be2014 and are obligated to make a cash payment of £3.133 billion (equivalent to approximately $54.29 billion based on exchange rates as of ~~May~~November 3130, 2014) and issue approximately 144.3 million shares of ~~our~~ common stock, with the amount and form of such consideration being subject to adjustment in certain circumstances. We ~~including~~(or WBA, if the ~~volume~~Reorganization ~~weighted~~is ~~average~~completed) ~~price~~also would assume the then-outstanding debt of ~~our~~Alliance ~~common~~Boots ~~stock~~upon isthe ~~below~~closing ~~$31~~of the second step transaction.18 As ~~per~~of ~~share~~its ~~during~~March a31, ~~period~~2014 ~~shortly~~fiscal ~~before~~year ~~the~~end, ~~closing~~Alliance Boots had total borrowings of ~~the~~approximately ~~second~~£5.7 ~~step~~billion ~~transaction~~(equivalent to approximately $9. 4 billion based on exchange rates as of March 31, 2014). We also ~~would~~expect ~~assume~~to ~~the~~incur ~~then-outstanding~~other ~~debt~~fees ofand ~~Alliance~~expenses ~~Boots~~associated ~~upon~~with the closing of the ~~second step~~ transaction.

Pursuant to our arrangements with AmerisourceBergen and Alliance Boots, we and Alliance Boots have the right, but not the obligation, to purchase a minority equity position in AmerisourceBergen over time pursuant to open market purchases and warrants to acquire AmerisourceBergen common stock. WAB Holdings, LLC, aan ~~newly-formed~~ entity jointly owned by Walgreens and Alliance Boots, which is consolidated by Walgreens, can acquire up to 19,859,795 shares which represents approximately 7% of the outstanding AmerisourceBergen common stock on a fully-diluted basis, assuming exercise in full of the warrants. The amount of permitted open market purchases is subject to increase in certain circumstances. We have purchased a total of approximately 11.5 million AmerisourceBergen shares in the open market~~, including 7~~.5 We ~~million~~have ~~shares~~funded ~~with~~and aplan ~~cost~~to ~~basis~~continue ofto ~~$493~~fund ~~million in the nine month period ended May 31, 2014. We have funded~~ these purchases over time through cash contributions to WAB Holdings. Share purchases may be made from time to time in open market transactions or pursuant to instruments and plans complying with Rule 10b5-1.

If we elect to exercise the two warrants issued by AmerisourceBergen in full, Walgreens would, subject to the terms and conditions of such warrants, be required to make a cash payment of approximately $584.4 million in connection with the exercise of the first warrant during a six-month period beginning in March 2016 and $595.8 million in connection with the exercise of the second warrant during a six-month period beginning in March 2017. Similarly, if Alliance Boots elects to exercise the two warrants issued by AmerisourceBergen in full, Alliance Boots would, subject to the terms and conditions of such warrants, be required to pay AmerisourceBergen similar amounts upon the exercise of their warrants in 2016 and 2017. If Walgreens elects to exercise its option to purchase the remaining 55% interest in Alliance Boots, Walgreens would acquire the warrants held by Alliance Boots and be required to make cash payments of approximately $1.2 billion in order to exercise each tranche of warrants. Our and Alliance Boots ability to invest in equity in AmerisourceBergen above certain thresholds is subject to the receipt of regulatory approvals.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any unconsolidated special purpose entities and, except as described herein, we do not have significant exposure to any off – -balance sheet arrangements. The term "“off – -balance sheet arrangement"” generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have: (i) any obligation arising under a guarantee contract, derivative instrument or variable interest; or (ii) a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.

- 30 -

Table of Contents

Letters of credit are issued to support purchase obligations and commitments (as reflected on the Contractual Obligations and Commitments table) as follows (in millions):

	May 31, 2014
	November 30, 2014
Inventory purchase commitments	$	2999
Insurance		~~259~~289
Real estate development		45
Total	$	~~292~~393

We have no off – -balance sheet arrangements other than those disclosed on the Contractual Obligations and Commitments table. Both on – -balance sheet and off – -balance sheet financing alternatives are considered when pursuing our capital structure and capital allocation objectives.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

The following table lists our contractual obligations and commitments as of ~~May~~November 3130, 2014:

	Payments Due by Period (In millions)
	Total		Less than 1 Year		1-3 Years		3-5 Years		Over 5 Years
Operating leases (1)	$	3433,~~589~~561	$	2,~~500~~508	$	4,~~943~~969	$	4,~~635~~622	$	2221,~~511~~462
Purchase obligations (2)
Purchase obligations(2):
Open inventory purchase orders		1,~~694~~216		1,~~694~~216		-		-		-
Real estate development		~~200~~177		~~133~~135		6038		74		-
Other corporate obligations		~~670~~820		~~225~~332		~~283~~303		~~145~~168		17
Long-term debt*		4,505		758		7		2,022		1,718
Alliance Boots purchase option exercise(3)		4,900		4,900		-		-		-
Interest payment on long-term debt		1,282		138		259		235		650
Long-term debt*		14,535		774		2,507		2,253		9,001
Insurance*		627		182		202		92		151
Interest payment on long-term debt		5,630		468		890		798		3,474
Retiree health*		348		11		28		34		275
Insurance*		607		167		233		121		86
Closed location obligations*		171		38		46		27		60
Retiree health*		430		12		28		34		356
Capital lease obligations *(1)		499		15		30		28		426
Closed location obligations*		265		49		58		39		119
Other long-term liabilities reflected on the balance sheet*(3)		1,198		107		244		170		677
Capital lease obligations*(1)		519		15		31		30		443
Total	$	45,783	$	5,801	$	6,102	$	7,395	$	26,485
Finance lease obligations*(1)		268		-		1		1		266
Other long-term liabilities reflected on the balance sheet*(4)		1,340		106		235		181		818
Total	$	64,268	$	10,682	$	9,293	$	8,251	$	36,042

* Recorded on balance sheet.

(1)	Amounts for operating leases and capital leases do not include certain operating expenses under these leases such as common area maintenance, insurance and real estate taxes. These expenses for the Company's most recent fiscal year were $435 million.
(2)	Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including open purchase orders.
(3)	Includes $127 million ($74 million in 1-3 years, $45 million in 3-5 years and $8 million over 5 years) of unrecognized tax benefits recorded under Accounting Standards Codification Topic 740, Income Taxes.

⁽¹⁾

Amounts for operating leases, capital leases and finance leases do not include certain operating expenses under these leases such as common area maintenance, insurance and real estate taxes. These expenses for the Company's most recent fiscal year were $429 million.

~~The~~(2) Purchase obligations ~~and commitments included in the table above do not~~ include ~~unconsolidated~~agreements ~~partially~~to ~~owned~~purchase ~~entities,~~goods ~~such~~or asservices ~~Alliance~~that ~~Boots~~are ~~GmbH,~~enforceable ofand ~~which~~legally webinding ~~own 45% of the outstanding share capital. The expected timing of payments of the obligations above is estimated based on current information. Timing of payments~~ and ~~actual~~that ~~amounts~~specify ~~paid~~all ~~may~~significant ~~be different~~terms, ~~depending~~including onopen ~~the~~purchase ~~time of receipt of goods or services, or changes to agreed-upon amounts for some obligations~~orders.

In(3) ~~connection~~Pursuant ~~with~~to the Alliance Boots Purchase and Option Agreement ~~dated June 18~~, ~~2012,~~as ~~we have the right~~amended, ~~but not~~ the ~~obligation,~~Company tois ~~purchase~~required ~~the remaining 55% interest in Alliance Boots GmbH at any time during the period beginning February 2, 2015, and ending August 2, 2015. If we exercise this call option, we would, subject~~ to ~~the terms and conditions of such agreement, be obligated to~~ make a cash payment of £3.133 billion (~~equivalent to~~ approximately $54.29 billion ~~based~~at onNovember ~~exchange rates as of May 31~~30, 2014) ~~and issue approximately 144.3 million shares of our common stock, with the amount and form of such consideration being subject to adjustment in certain circumstances including~~ if the ~~volume~~second ~~weighted~~step ~~average~~transaction ~~price~~is ofcompleted. ~~our~~The ~~common~~Company ~~stock~~ is ~~below~~also ~~$31.18~~required ~~per~~to ~~share~~issue ~~during~~approximately a144.3 ~~period~~million ~~shortly~~common ~~before~~shares ~~the~~if ~~closing of~~ the second step transaction~~. We~~ ~~also~~is completed and would assume the then-outstanding debt of Alliance Boots ~~GmbH~~ upon ~~the~~ closing of the ~~second step~~ transaction~~. In the event that we do not exercise the option~~, orneither ~~we exercise the call option but the second step transaction does not close, under certain circumstances, our ownership~~ of ~~Alliance~~which ~~Boots~~is ~~GmbH~~reflected ~~will reduce from 45% to 42%~~ in ~~exchange~~the ~~for~~above ~~nominal consideration to Walgreens~~table.

In(4) ~~addition,~~Includes ~~pursuant~~$141 tomillion ~~our~~($80 ~~arrangements~~million ~~with AmerisourceBergen and Alliance Boots, we and Alliance Boots have the right, but not the obligation, to purchase a minority equity position~~ in ~~AmerisourceBergen~~1-3 ~~over time~~years, including pursuant to open market purchases and warrants to acquire AmerisourceBergen common stock. If we elect to exercise the two warrants issued by AmerisourceBergen in full, Walgreens would, subject to the terms and conditions of such warrants, be required to make a cash payment of approximately $~~584.4~~51 million in ~~connection with the exercise of the first warrant during a six~~3-~~month~~5 ~~period~~years ~~beginning in March 2016~~ and $~~595.8~~10 million inover ~~connection~~5 ~~with~~years) ~~the exercise~~ of ~~the~~unrecognized ~~second~~tax ~~warrant~~benefits ~~during~~recorded aunder ~~six-month~~Accounting ~~period~~Standards ~~beginning~~Codification inTopic ~~March 2017. Similarly~~740, ifIncome Alliance Boots elects to exercise the two warrants issued by AmerisourceBergen in full, Alliance Boots would, subject to the terms and conditions of such warrants, be required to pay AmerisourceBergen similar amounts upon the exercise of their warrants in 2016 and 2017Taxes. If Walgreens elects to exercise its option to purchase the remaining 55% interest in Alliance Boots, Walgreens would acquire the warrants held by Alliance Boots and be required to make cash payments of approximately $1.2 billion in order to exercise each tranche of warrants. Our and Alliance Boots ability to invest in equity in AmerisourceBergen above certain thresholds is subject to the receipt of regulatory approvals. See "Liquidity and Capital Resources" above.

The obligations and commitments included in the table above do not include the obligations and commitments of unconsolidated partially owned entities, such as Alliance Boots, of which we own 45% of the outstanding share capital as of the date of this report. The expected timing of payments of the obligations above is estimated based on current information. Timing of payments and actual amounts paid may be different, depending on the time of receipt of goods or services, or changes to agreed-upon amounts for some obligations.

On August 5, 2014, we entered into an amendment to the Purchase and Option Agreement, which among other things, accelerated the option period to the period beginning August 5, 2014 and ending February 5, 2015. Pursuant to the amendment, we exercised the call option on August 5, 2014 and are obligated to make a cash payment of £3.133 billion (equivalent to approximately $4.9 billion based on exchange rates as of November 30, 2014) and issue approximately 144.3 million shares of our common stock, with the amount and form of such consideration being subject to adjustment in certain circumstances. We also would assume the then-outstanding debt of Alliance Boots upon the closing of the second step transaction.

- 31 -

Table of Contents

In addition, pursuant to our arrangements with AmerisourceBergen and Alliance Boots, we and Alliance Boots have the right, but not the obligation, to purchase a minority equity position in AmerisourceBergen over time, including open market purchases and warrants to acquire AmerisourceBergen common stock. If we elect to exercise the two warrants issued by AmerisourceBergen in full, Walgreens would, subject to the terms and conditions of such warrants, be required to make a cash payment of approximately $584.4 million in connection with the exercise of the first warrant during a six-month period beginning in March 2016 and $595.8 million in connection with the exercise of the second warrant during a six-month period beginning in March 2017. Similarly, if Alliance Boots elects to exercise the two warrants issued by AmerisourceBergen in full, Alliance Boots would, subject to the terms and conditions of such warrants, be required to pay AmerisourceBergen similar amounts upon the exercise of their warrants in 2016 and 2017. If the second step transaction is completed, Walgreens would acquire the warrants held by Alliance Boots and be required to make cash payments of approximately $1.2 billion in order to exercise each tranche of warrants. Our and Alliance Boots ability to invest in equity in AmerisourceBergen above certain thresholds is subject to the receipt of regulatory approvals. See “Liquidity and Capital Resources” above.

CRITICAL ACCOUNTING POLICIES

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and include amounts based on management'’s prudent judgments and estimates. Actual results may differ from these estimates. Management believes that any reasonable deviation from those judgments and estimates would not have a material impact on our consolidated financial position or results of operations. To the extent that the estimates used differ from actual results, however, adjustments to the statement of earnings and corresponding balance sheet accounts would be necessary. These adjustments would be made in future statements. For a discussion of the Company'’s significant accounting policies, please see our Annual Report on Form 10-K for the fiscal year ended August 31, ~~2013~~2014, as amended. Some of the more significant estimates include goodwill and other intangible asset impairment, allowance for doubtful accounts, vendor allowances, asset impairments, liability for closed locations, liability for insurance claims, cost of sales and income taxes. We use the following methods to determine our estimates:

Goodwill and other intangible asset impairment -
	Goodwill and other indefinite-lived intangible assets are not amortized, but are evaluated for impairment annually during the fourth quarter, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. As part of our impairment analysis for each reporting unit, we engage a third party appraisal firm to assist in the determination of estimated fair value for each unit. This determination includes estimating the fair value using both the income and market approaches. The income approach requires management to estimate a number of factors for each reporting unit, including projected future operating results, economic projections, anticipated future cash flows and discount rates. The market approach estimates fair value using comparable marketplace fair value data from within a comparable industry grouping. The determination of the fair value of the reporting units and the allocation of that value to individual assets and liabilities within those reporting units requires us to make significant estimates and assumptions. These estimates and assumptions primarily include, but are not limited to: the selection of appropriate peer group companies; control premiums appropriate for acquisitions in the industries in which we compete; the discount rate; terminal growth rates; and forecasts of revenue, operating income, depreciation and amortization and capital expenditures. The allocation requires several analyses to determine fair value of assets and liabilities including, among other things, purchased prescription files, customer relationships and trade names. Although we believe our estimates of fair value are reasonable, actual financial results could differ from those estimates due to the inherent uncertainty involved in making such estimates. Changes in assumptions concerning future financial results or other underlying assumptions could have a significant impact on either the fair value of the reporting units, the amount of the goodwill impairment charge, or both. We also compared the sum of the estimated fair values of the reporting units to the Company's total value as implied by the market value of the Company's equity and debt securities. This comparison indicated that, in total, our assumptions and estimates were reasonable. However, future declines in the overall market value of the Company's equity and debt securities may indicate that the fair value of one or more reporting units has declined below its carrying value. One measure of the sensitivity of the amount of goodwill impairment charges to key assumptions is the amount by which each reporting unit "passed" (fair value exceeds the carrying amount) or "failed" (the carrying amount exceeds fair value) the first step of the goodwill impairment test. Preliminary goodwill impairment testing at one of the Company's reporting units indicated that its fair value was within 10% of carrying value. Goodwill allocated to this reporting unit was $690 million at May 31, 2014. We have not made any material changes to the method of evaluating goodwill and intangible asset impairments during the last three years. Based on current knowledge, we do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to determine impairment.
Allowance for doubtful accounts -
	The provision for bad debt is based on both specific receivables and historic write-off percentages. We have not made any material changes to the method of estimating our allowance for doubtful accounts during the last three years. Based on current knowledge, we do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to determine the allowance.
Vendor allowances -
	Vendor allowances are principally received as a result of purchases, sales or promotion of vendors' products. Allowances are generally recorded as a reduction of inventory and are recognized as a reduction of cost of sales when the related merchandise is sold. Those allowances received for promoting vendors' products are offset against advertising expense and result in a reduction of selling, general and administrative expenses to the extent of advertising incurred, with the excess treated as a reduction of inventory costs. We have not made any material changes to the method of estimating our vendor allowances during the last three years. Based on current knowledge, we do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to determine vendor allowances.
Asset impairments -
	The impairment of long-lived assets is assessed based upon both qualitative and quantitative factors, including years of operation and expected future cash flows, and tested for impairment annually or whenever events or circumstances indicate that a certain asset may be impaired. If the future cash flows reveal that the carrying value of the asset group may not be recoverable, an impairment charge is immediately recorded. We have not made any material changes to the method of estimating our asset impairments during the last three years. Based on current knowledge, we do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to determine asset impairments.
Liability for closed locations -
	The liability is based on the present value of future rent obligations and other related costs (net of estimated sublease rent) to the first lease option date. We have not made any material changes to the method of estimating our liability for closed locations during the last three years. Based on current knowledge, we do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to determine the liability.
Liability for insurance claims -
	The liability for insurance claims is recorded based on estimates for claims incurred and is not discounted. The provisions are estimated in part by considering historical claims experience, demographic factors and other actuarial assumptions. We have not made any material changes to the method of estimating our liability for insurance claims during the last three years. Based on current knowledge, we do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to determine the liability.
Cost of sales -
	Drugstore cost of sales is derived based on point-of-sale scanning information with an estimate for shrinkage and adjusted based on periodic inventory counts. Inventories are valued at the lower of cost or market determined by the last-in, first-out (LIFO) method. We have not made any material changes to the method of estimating cost of sales during the last three years. Based on current knowledge, we do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to determine cost of sales.
Equity method investments -
	We use the equity method to account for investments in companies if the investment provides the ability to exercise significant influence, but not control, over operating and financial policies of the investee. Our proportionate share of the net income or loss of these companies is included in consolidated net income. Judgment regarding the level of influence over each equity method investment includes considering key factors such as our ownership interest, representation on the board of directors, participation in policy-making decisions and material intercompany transactions. The underlying net assets of the Company's equity method investment in Alliance Boots include goodwill and indefinite-lived intangible assets. These assets are evaluated for impairment annually or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. Based on testing performed during fiscal 2014, the fair value of each Alliance Boots reporting unit exceeded its carrying value. For certain reporting units, relatively modest changes in key assumptions may have resulted in the recognition of a goodwill impairment charge. As of May 31, 2014, the Company continues to evaluate whether the fair value of one of the Alliance Boots wholesale reporting units is below its carrying value based on the Company's updated projections for that reporting unit. The Company utilizes a three-month lag in reporting its share of equity income in Alliance Boots, including for this reporting unit. Goodwill allocated to this reporting unit by Alliance Boots as of February 28, 2014 was £257 million, £116 million based on the Company's 45% ownership percentage (approximately $195 million using February 28, 2014 exchange rates). The Company will continue to monitor this reporting unit in accordance with Accounting Standards Codification 350, Intangibles - Goodwill and Other.
Income taxes -
	We are subject to routine income tax audits that occur periodically in the normal course of business. U.S. federal, state, local and foreign tax authorities raise questions regarding our tax filing positions, including the timing and amount of deductions and the allocation of income among various tax jurisdictions. In evaluating the tax benefits associated with our various tax filing positions, we record a tax benefit for uncertain tax positions using the highest cumulative tax benefit that is more likely than not to be realized. Adjustments are made to our liability for unrecognized tax benefits in the period in which we determine the issue is effectively settled with the tax authorities, the statute of limitations expires for the return containing the tax position or when more information becomes available. In determining our provision for income taxes, we use an annual effective income tax rate based on full-year income, permanent differences between book and tax income, the relative proportion of foreign and domestic income, projections of income subject to Subpart F rules and statutory income tax rates. The effective income tax rate also reflects our assessment of the ultimate outcome of tax audits. Discrete events such as audit settlements or changes in tax laws are recognized in the period in which they occur.

Goodwill and other intangible asset impairment –

Goodwill and other indefinite-lived intangible assets are not amortized, but are evaluated for impairment annually during the fourth quarter, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. As part of our impairment analysis for each reporting unit, we engage a third party appraisal firm to assist in the determination of estimated fair value for each unit. This determination includes estimating the fair value using both the income and market approaches. The income approach requires management to estimate a number of factors for each reporting unit, including projected future operating results, economic projections, anticipated future cash flows and discount rates. The market approach estimates fair value using comparable marketplace fair value data from within a comparable industry grouping.

The determination of the fair value of the reporting units and the allocation of that value to individual assets and liabilities within those reporting units requires us to make significant estimates and assumptions. These estimates and assumptions primarily include, but are not limited to: the selection of appropriate peer group companies; control premiums appropriate for acquisitions in the industries in which we compete; the discount rate; terminal growth rates; and forecasts of revenue, operating income, depreciation and amortization and capital expenditures. The allocation requires several analyses to determine fair value of assets and liabilities including, among other things, purchased prescription files, customer relationships and trade names. Although we believe our estimates of fair value are reasonable, actual financial results could differ from those estimates due to the inherent uncertainty involved in making such estimates. Changes in assumptions concerning future financial results or other underlying assumptions could have a significant impact on either the fair value of the reporting units, the amount of the goodwill impairment charge, or both.

We also compared the sum of the estimated fair values of the reporting units to the Company’s total value as implied by the market value of the Company’s equity and debt securities. This comparison indicated that, in total, our assumptions and estimates were reasonable. However, future declines in the overall market value of the Company’s equity and debt securities may indicate that the fair value of one or more reporting units has declined below its carrying value.

We have not made any material changes to the method of evaluating goodwill and intangible asset impairments during the last three years. Based on current knowledge, we do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to determine impairment.

- 32 -

Table of Contents

Allowance for doubtful accounts –

The provision for bad debt is based on both specific receivables and historic write-off percentages. We have not made any material changes to the method of estimating our allowance for doubtful accounts during the last three years. Based on current knowledge, we do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to determine the allowance.

Vendor allowances -

Vendor allowances are principally received as a result of purchases, sales or promotion of vendors' products. Allowances are generally recorded as a reduction of inventory and are recognized as a reduction of cost of sales when the related merchandise is sold. Those allowances received for promoting vendors' products are offset against advertising expense and result in a reduction of selling, general and administrative expenses to the extent of advertising incurred, with the excess treated as a reduction of inventory costs. We have not made any material changes to the method of estimating our vendor allowances during the last three years. Based on current knowledge, we do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to determine vendor allowances.

Asset impairments -

The impairment of long-lived assets is assessed based upon both qualitative and quantitative factors, including years of operation and expected future cash flows, and tested for impairment annually or whenever events or circumstances indicate that a certain asset may be impaired. If the future cash flows reveal that the carrying value of the asset group may not be recoverable, an impairment charge is immediately recorded. We have not made any material changes to the method of estimating our asset impairments during the last three years. Based on current knowledge, we do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to determine asset impairments.

Liability for closed locations -

The liability is based on the present value of future rent obligations and other related costs (net of estimated sublease rent) to the first lease option date. We have not made any material changes to the method of estimating our liability for closed locations during the last three years. Based on current knowledge, we do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to determine the liability.

Liability for insurance claims -

The liability for insurance claims is recorded based on estimates for claims incurred and is not discounted. The provisions are estimated in part by considering historical claims experience, demographic factors and other actuarial assumptions. We have not made any material changes to the method of estimating our liability for insurance claims during the last three years. Based on current knowledge, we do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to determine the liability.

Cost of sales -

Drugstore cost of sales is derived based on point-of-sale scanning information with an estimate for shrinkage and adjusted based on periodic inventory counts. Inventories are valued at the lower of cost or market determined by the last-in, first-out (LIFO) method. We have not made any material changes to the method of estimating cost of sales during the last three years. Based on current knowledge, we do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to determine cost of sales.

Equity method investments -

We use the equity method to account for investments in companies if the investment provides the ability to exercise significant influence, but not control, over operating and financial policies of the investee. Our proportionate share of the net income or loss of these companies is included in consolidated net income. Judgment regarding the level of influence over each equity method investment includes considering key factors such as our ownership interest, representation on the board of directors, participation in policy-making decisions and material intercompany transactions.

The underlying net assets of the Company’s equity method investment in Alliance Boots include goodwill and indefinite-lived intangible assets. These assets are evaluated for impairment annually or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. Based on the Company’s evaluation as of August 31, 2014, the fair value of one of the Alliance Boots pharmaceutical wholesale reporting units did not exceed its carrying value by a significant amount. The Company utilizes a three-month lag in reporting its share of equity income in Alliance Boots, including for this reporting unit. Goodwill allocated to this reporting unit by Alliance Boots as of August 31, 2014 was £248 million, £112 million based on the Company’s 45% ownership percentage (approximately $185 million using August 31, 2014 exchange rates). The Company will continue to monitor this reporting unit in accordance with Accounting Standards Codification 350, Intangibles – Goodwill and Other.

- 33 -

Table of Contents

Income taxes -

In determining our provision for income taxes, we use an annual effective income tax rate based on full-year income, permanent differences between book and tax income, the relative proportion of foreign and domestic income, statutory income tax rates, projections of income subject to Subpart F rules and unrecognized tax benefits related to current year results. Discrete events such as our assessment of the ultimate outcome of tax audits, audit settlements, recognizing previously unrecognized tax benefits due to lapsing of the applicable statute of limitations, recognizing or de-recognizing benefits of deferred tax assets due to future year financial statement results and changes in tax laws are recognized in the period in which they occur.

We are subject to routine income tax audits that occur periodically in the normal course of business. U.S. federal, state, local and foreign tax authorities raise questions regarding our tax filing positions, including the timing and amount of deductions and the allocation of income among various tax jurisdictions. In evaluating the tax benefits associated with our various tax filing positions, we record a tax benefit for uncertain tax positions using the highest cumulative tax benefit that is more likely than not to be realized. Adjustments are made to our liability for unrecognized tax benefits in the period in which we determine the issue is effectively settled with the tax authorities, the statute of limitations expires for the return containing the tax position or when more information becomes available. As of November 30, 2014, all of the Company’s unrecognized tax benefits were reported as non-current tax liabilities. Based on current knowledge, the Company does not expect significant changes to its existing unrecognized tax benefits during the next 12 months.

RECENT ACCOUNTING PRONOUNCEMENTS

In ~~May~~November 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-0917, ~~Revenue~~Pushdown ~~from Contracts with Customers, as a new Topic,~~ Accounting ~~Standards Codification (ASC) Topic 606~~. ~~The~~This ~~new~~ASU ~~revenue recognition standard~~ provides acompanies ~~five-step~~with ~~analysis~~the ofoption ~~transactions~~ to ~~determine~~apply ~~when~~pushdown ~~and~~accounting ~~how~~in ~~revenue~~its isseparate ~~recognized. The~~financial ~~core~~statements ~~principle~~upon isoccurrence ~~that~~of aan ~~Company~~event ~~should~~in ~~recognize~~which ~~revenue~~an toacquirer ~~depict~~obtains ~~the~~control ~~transfer~~ of ~~promised~~the ~~goods~~acquired orentity. The ~~services~~election to ~~customers~~apply inpushdown anaccounting ~~amount~~can ~~that~~be ~~reflects~~made either in the ~~consideration~~period toin which the ~~entity~~change ~~expects~~of tocontrol beoccurred, ~~entitled~~or in ~~exchange~~a ~~for~~subsequent ~~those goods or services~~period. If ~~This~~the ~~ASU~~election is ~~effective~~made ~~for~~in ~~annual~~a ~~periods~~subsequent ~~beginning after December 15~~period, ~~2016~~it ~~(fiscal~~would ~~2018) and shall~~ be ~~applied~~considered ~~retrospectively~~a tochange ~~each~~in ~~period~~accounting ~~presented~~principle orand astreated ain ~~cumulative-effect~~accordance ~~adjustment~~with asTopic of250, ~~the~~Accounting ~~date~~Changes ofand ~~adoption~~Error Corrections. ~~The~~This ~~Company~~ASU is ~~evaluating~~effective ~~the~~as ~~effect~~ of ~~adopting~~November ~~this~~18, ~~new~~2014. The ~~accounting guidance but does not expect~~ adoption will not have a material impact on the Company'’s results of operations, cash flows or financial position.

In May 2013, the Financial Accounting Standards Board (FASB) reissued an exposure draft on lease accounting that would require entities to recognize assets and liabilities arising from lease contracts on the balance sheet. The proposed exposure draft states that lessees and lessors should apply a "right-of-use model" in accounting for all leases. Under the proposed model, lessees would recognize an asset for the right to use the leased asset, and a liability for the obligation to make rental payments over the lease term. When measuring the asset and liability, variable lease payments are excluded whereas renewal options that provide a significant economic incentive upon renewal would be included. The accounting by a lessor would reflect its retained exposure to the risks or benefits of the underlying leased asset. A lessor would recognize an asset representing its right to receive lease payments based on the expected term of the lease. The lease expense from real estate based leases would continue to be recorded under a straight line approach, but other leases not related to real estate would be expensed using an effective interest method that would accelerate lease expense. A final standard is currently expected to be issued in 2014 and would be effective no earlier than annual reporting periods beginning on January 1, 2017 (fiscal 2018 for the Company). The proposed standard, as currently drafted, would have a material impact on the Company's financial position and the impact on the Company's reported results of operations is being evaluated. The impact of this exposure draft is non-cash in nature and would not affect the Company's cash position.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report and other documents that we file or furnish with the Securities and Exchange Commission contain forward-looking statements that are based on current expectations, estimates, forecasts and projections about our future performance, our business, our beliefs and our management's assumptions. In addition, we, or others on our behalf, may make forward-looking statements in press releases or written statements, on the Company's website or in our communications and discussions with investors and analysts in the normal course of business through meetings, webcasts, phone calls, conference calls and other communications. Some of such forward-looking statements may be based on certain data and forecasts relating to our business and industry that we have obtained from internal surveys, market research, publicly available information and industry publications. Industry publications, surveys and market research generally state that the information they provide has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed. Statements that are not historical facts are forward-looking statements, including, without limitation, statements regarding our future financial and operating performance, as well as forward-looking statements concerning planned store closings in connection with our store optimization plan and the effects thereof, our investment in Alliance Boots GmbH and the other arrangements and transactions contemplated by the Purchase and Option Agreement and other agreements relating to our strategic partnership with Alliance Boots and their possible effects, our commercial agreement with AmerisourceBergen, the arrangements and transactions contemplated by our framework agreement with AmerisourceBergen and Alliance Boots and their possible effects, estimates of the impact of developments on our earnings, earnings per share and other financial and operating metrics, cough/cold and flu season, prescription volume, pharmacy sales trends, prescription margins, generic prescription drug inflation, number and location of new store openings, network participation, vendor, payer and customer relationships and terms, possible new contracts or contract extensions, competition, economic and business conditions, outcomes of litigation and regulatory matters, the level of capital expenditures, industry trends, demographic trends, growth strategies, financial results, cost reduction initiatives, impairment or other charges, acquisition and joint venture synergies, competitive strengths and changes in legislation or regulations. Words such as "“expect,"” "“likely,"” "“outlook,"” "“forecast,"” "“would,"” "“could,"” "“should,"” "“can,"” "“will,"” "“project,"” "“intend,"” "“plan,"” "“goal,"” "“target,"” "“continue,"” "“sustain,"” "“synergy,"” "“on track,"” "“believe,"” "“seek,"” "“estimate,"” "“anticipate,"” "“may,"” "“possible,"” "“assume,"” variations of such words and similar expressions are intended to identify such forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

~~These forward~~-~~looking~~ ~~statements~~34 are not guarantees of future performance and are subject to risks, uncertainties and assumptions that could cause actual results to vary materially from those indicated, including, but not limited to, those relating to whether the costs associated with our store optimization plan will exceed current forecasts, our ability to realize expected savings and benefits in the amounts and at the times anticipated, the impact of private and public third-party payers efforts to reduce prescription drug reimbursements, the impact of generic prescription drug inflation, the timing and magnitude of the impact of branded to generic drug conversions, the Purchase and Option Agreement and other agreements relating to our strategic partnership with Alliance Boots, the arrangements and transactions contemplated thereby and their possible effects, our commercial agreement with AmerisourceBergen, the arrangements and transactions contemplated by our framework agreement with AmerisourceBergen and Alliance Boots and their possible effects, the occurrence of any event, change or other circumstance that could give rise to the termination, cross-termination or modification of any of the transaction documents, the parties' ability to realize anticipated synergies and achieve anticipated financial, tax and operating results, the amount of costs, fees, expenses and charges incurred in connection with strategic transactions, the risks associated with transitions in supply arrangements, the risks associated with international business operations, the risks associated with governance and control matters in minority investments, whether the option to acquire the remainder of the Alliance Boots equity interest will be exercised and the financial, tax, operational and other ramifications thereof, the timing of decisions regarding such second step transaction and related decisions regarding the potential combined company, the risks associated with equity investments in AmerisourceBergen including whether the warrants to invest in AmerisourceBergen will be exercised and the ramifications thereof, changes in vendor, payer and customer relationships and terms, changes in network participation and reimbursement and other terms, the operation and growth of our customer loyalty program, changes in economic and business conditions generally or in the markets in which we or Alliance Boots participate, competition, risks associated with new business areas and activities, risks associated with acquisitions, joint ventures, strategic investments and divestitures, including those associated with cross-border transactions and the integration of large, complex businesses, the ability to realize anticipated results from capital expenditures and cost reduction initiatives, the timing and amount of any impairment or other charges, outcomes of legal and regulatory matters, and changes in legislation, regulations or interpretations thereof. These and other risks, assumptions and uncertainties are described in Item 1A (Risk Factors) of our most recent Annual Report on Form 10-K, and in other reports that we file or furnish with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those indicated or anticipated by such forward-looking statements. Accordingly, you are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they are made. Except to the extent required by law, we do not undertake, and expressly disclaim, any duty or obligation to update publicly any forward-looking statement after the initial publication of such statement, whether as a result of new information, future events, changes in assumptions or otherwise.

Table of Contents

These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that could cause actual results to vary materially from those indicated, including, but not limited to, those relating to whether the costs associated with our store optimization plan will exceed current forecasts, our ability to realize expected savings and benefits in the amounts and at the times anticipated, the impact of private and public third-party payers efforts to reduce prescription drug reimbursements, the impact of generic prescription drug inflation, the timing and magnitude of the impact of branded to generic drug conversions, the Purchase and Option Agreement and other agreements relating to our strategic partnership with Alliance Boots, the arrangements and transactions contemplated thereby and their possible effects, our commercial agreement with AmerisourceBergen, the arrangements and transactions contemplated by our framework agreement with AmerisourceBergen and Alliance Boots and their possible effects, the occurrence of any event, change or other circumstance that could give rise to the termination, cross-termination or modification of any of the transaction documents, the parties' ability to realize anticipated synergies and achieve anticipated financial, tax and operating results, the amount of costs, fees, expenses and charges incurred in connection with strategic transactions, the risks associated with transitions in supply arrangements, the risks associated with international business operations, the risks associated with governance and control matters in minority investments, the risks associated with equity investments in AmerisourceBergen including whether the warrants to invest in AmerisourceBergen will be exercised and the ramifications thereof, changes in vendor, payer and customer relationships and terms, changes in network participation and reimbursement and other terms, the operation and growth of our customer loyalty program, changes in economic and business conditions generally or in the markets in which we or Alliance Boots participate, competition, risks associated with new business areas and activities, risks associated with acquisitions, joint ventures, strategic investments and divestitures, including those associated with cross-border transactions and the integration of large, complex businesses, the ability to realize anticipated results from capital expenditures and cost reduction initiatives, the timing and amount of any impairment or other charges, outcomes of legal and regulatory matters, and changes in legislation, regulations or interpretations thereof. These and other risks, assumptions and uncertainties are described in Item 1A (Risk Factors) of our most recent Annual Report on Form 10-K, and in other reports that we file or furnish with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those indicated or anticipated by such forward-looking statements. Accordingly, you are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they are made. Except to the extent required by law, we do not undertake, and expressly disclaim, any duty or obligation to update publicly any forward-looking statement after the initial publication of such statement, whether as a result of new information, future events, changes in assumptions or otherwise.

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

We are exposed to interest rate volatility with regard to future issuances of fixed-rate debt, and existing and future issuances of floating-rate debt. Primary exposures include U.S. Treasury rates, LIBOR and commercial paper rates. From time to time, we use interest rate swaps and forward-starting interest rate swaps to hedge our exposure to interest rate changes, to reduce the volatility of our financing costs and, based on current and toprojected market conditions, achieve a desired proportion of fixed versus floating-rate debt~~, based on current and projected market conditions~~. Generally under these swaps, we agree with a counterparty to exchange the difference between fixed-rate and floating-rate interest ~~rate~~ amounts based on an agreed upon notional principal amount. To manage our exposure to interest rate fluctuations between now and the date of an anticipated debt issuance, as of May 31, 2014 we entered into several forward-starting interest rate swaps for a $750 million notional amount. On June 13, 2014, we entered into an additional forward-starting interest rate swap for a $250 million notional amount.

Information regarding our interest rate swap transactions is set forth in Note 10 to the Consolidated Financial Statements. These financial instruments are sensitive to changes in interest rates. On May 31, 2014, we had $1.0 billion in long-~~term~~ ~~debt~~35 obligations that had floating interest rates, all of which relates to fixed rate debt swapped to variable rate. A one percentage point increase or decrease in interest rates would increase or decrease the annual interest expense we recognize and the cash we pay for interest expense by approximately $10 million.-

InTable connection with our Purchase and Option Agreement with Alliance Boots and the transactions contemplated thereby, our exposure to foreign currency risks, primarily with respect to the British pound Sterling, and to a lesser extent the Euro and certain other foreign currencies, is expected to increase. We are exposed to the translation of foreign currency earnings to the U.S. dollar as a result of our 45% interest in Alliance Boots GmbH, which we account for using the equity method of accounting on a three month lag. Foreign currency forward contracts and other derivative instruments may be used from time to time in some instances to hedge in full or in part certain risks relating to foreign currency denominated assets and liabilities, intercompany transactions, and in connection with acquisitions, joint ventures or investments outside the United States. As of May 31, 2014 and May 31, 2013, we did not have any outstanding foreign exchange derivative instruments.Contents

~~Changes~~Information inregarding ~~the~~our ~~AmerisourceBergen~~interest ~~common~~rate ~~stock~~swap ~~price~~transactions ~~and~~is ~~equity~~set ~~volatility~~forth ~~may have a significant impact on the value of the warrants to acquire AmerisourceBergen common stock described~~ in Note 910 to our ~~unaudited~~ Consolidated ~~Condensed~~ Financial Statements. AsThese ~~of May~~financial ~~31,~~instruments ~~2014,~~are asensitive ~~one~~to ~~dollar~~changes ~~change~~ in ~~AmerisourceBergen's~~interest ~~common~~rates. On ~~stock~~November ~~would~~30, ~~holding~~2014, ~~other~~we ~~factors~~had ~~constant,~~$1.8 ~~increase~~billion orin ~~decrease~~long-term ~~the~~debt ~~fair~~obligations ~~value~~that ofhad ~~the~~floating ~~Company's~~interest ~~warrants~~rates. byA ~~$21~~one ~~million~~percentage ~~and~~point aincrease ~~one~~or ~~percent~~decrease ~~change~~ in ~~AmerisourceBergen's~~interest ~~equity~~rates ~~volatility~~ would, ~~holding other factors constant,~~ increase or decrease the ~~fair~~annual ~~value~~interest ofexpense ~~the~~we ~~Company's~~recognize ~~warrants~~and ~~by $3 million. Additionally,~~ the ~~Company~~cash ~~holds~~we anpay ~~investment~~for ininterest ~~AmerisourceBergen~~expense ~~common stock. As of May 31, 2014, a one dollar change in AmerisourceBergen common stock would increase or decrease the fair value of the Company's investment~~ by approximately $1118 million.

In connection with the Purchase and Option Agreement with Alliance Boots and the transactions contemplated thereby, our exposure to foreign currency risks, primarily with respect to the British Pound Sterling, and to a lesser extent the Euro and certain other foreign currencies, is expected to increase. We are exposed to the translation of foreign currency earnings to the U.S. dollar as a result of our 45% interest in Alliance Boots, which we account for using the equity method of accounting on a three-month lag. This exposure will further increase if the second step transaction is completed. Foreign currency forward contracts and other derivative instruments may be used from time to time in some instances to hedge in full or in part certain risks relating to foreign currency denominated assets and liabilities, intercompany transactions, and in connection with acquisitions, joint ventures or investments outside the United States. As of November 30, 2014, we had foreign currency forwards of £4.0 billion (approximately $6.2 billion using November 30, 2014 exchange rates) and €600 million (approximately $747 million using November 30, 2014 exchange rates). The Company entered an additional foreign currency forward on December 1, 2014 of €350 million (approximately $436 million using November 30, 2014 exchange rates). These financial instruments are sensitive to changes in exchange rates. A change in the exchange rates of one U.S. cent per Pound Sterling would increase or decrease other income by approximately $40 million and a change of one U.S. cent per Euro would increase or decrease other income by approximately $10 million.

Changes in AmerisourceBergen common stock price and equity volatility may have a significant impact on the value of the warrants to acquire AmerisourceBergen common stock described in Note 9 to our unaudited Consolidated Financial Statements. As of November 30, 2014, a one dollar change in AmerisourceBergen’s common stock would, holding other factors constant, increase or decrease the fair value of the Company’s warrants by $23 million. A one percent change in AmerisourceBergen’s equity volatility would, holding other factors constant, increase or decrease the fair value of the Company’s warrants by an immaterial amount. Additionally, the Company holds an investment in AmerisourceBergen common stock. As of November 30, 2014, a one dollar change in AmerisourceBergen common stock would increase or decrease the fair value of the Company’s investment by $11 million.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Management conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Form 10-Q. The controls evaluation was conducted under the supervision and with the participation of the Company'’s management, including its Chief Executive Officer (CEO) and Chief Financial Officer (CFO). Based upon the controls evaluation, our CEO and CFO have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the SEC, and that such information is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

In connection with the evaluation pursuant to Exchange Act Rule 13a-15(d) of the Company's internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) by the Company's management, including its CEO and CFO, no changes during the quarter ended ~~May~~November 3130, 2014 were identified that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

The Company transitioned to a new general ledger system in the fiscal quarter ending November 30, 2014. This is part of an ongoing initiative to enhance the overall design and operating effectiveness of the Company's financial reporting controls and is not in response to an identified internal control deficiency. Management believes that controls over project development and implementation are adequate to assure there will be no material effect, or a reasonable likelihood of a material effect, on our internal control over financial reporting.

The Company expects to complete its acquisition of the remaining share capital of Alliance Boots on December 31, 2014, subject to customary closing conditions. The Company has begun the process of evaluating Alliance Boots internal controls. As permitted by related SEC staff interpretative guidance for newly acquired businesses, the Company expects to exclude Alliance Boots from management's assessment of the effectiveness of the Company's internal control over financial reporting for the allotted one year period post acquisition.

- 36 -

Table of Contents

Inherent Limitations on Effectiveness of Controls

Our management, including the CEO and CFO, do not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system'’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

The information in response to this item is incorporated herein by reference to Note 11 of the Consolidated Condensed Financial Statements of this Quarterly Report.

Item 1A.

Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A "“Risk Factors"” in our ~~Annual Report on~~ Form 10-K for the year ended August 31, ~~2013~~2014, as amended ~~and supplemented by the risk factor described below~~, which could materially affect our business, financial condition or future results.

Changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters could significantly affect our financial condition and results of operations.

Generally accepted accounting principles and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of matters that are relevant to our business, including, but not limited to, revenue recognition, asset impairment, impairment of goodwill and other intangible assets, inventories, vendor rebates and other vendor consideration, lease obligations, self-insurance liabilities, tax matters, unclaimed property laws and litigation and other contingent liabilities are highly complex and involve many subjective assumptions, estimates and judgments. Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judgments could significantly change our reported or expected financial performance or financial condition.

For example, changes in accounting standards and the application of existing accounting standards particularly related to the measurement of fair value as compared to carrying value for the Company's reporting units, including goodwill, intangible assets and investments in equity interests, including investments held by our equity method investees, may have an adverse effect on the Company's financial condition and results of operations. Factors that could lead to impairment of goodwill and intangible assets include significant adverse changes in the business climate and declines in the financial condition of a reporting unit. Factors that could lead to impairment of investments in equity interests of the companies in which we invested or the investments held by those companies include a prolonged period of decline in their operating performance or adverse changes in the economic, regulatory and legal environments of the countries they operate in. As of May 31, 2014, the Company continues to evaluate whether the fair value of one of the Alliance Boots wholesale reporting units is below its carrying value based on the Company's updated projections for that reporting unit. The Company utilizes a three-month lag in reporting its share of equity income in Alliance Boots, including for this reporting unit. Goodwill allocated to this reporting unit by Alliance Boots as of February 28, 2014 was £257 million, £116 million based on the Company's 45% ownership percentage (approximately $195 million using February 28, 2014 exchange rates). The Company will continue to monitor this reporting unit in accordance with Accounting Standards Codification 350, Intangibles - Goodwill and Other. In addition, we are closely monitoring the operating results related to one of our reporting units with allocated goodwill of $690 million at May 31, 2014. This reporting unit has experienced challenging economic and operating pressures, and if these pressures were to continue for a sustained period of time, this would increase the risk associated with its goodwill balance.

New accounting guidance also may require systems and other changes that could increase our operating costs and/or change our financial statements. For example, implementing future accounting guidance related to leases, contingencies and other areas impacted by the current convergence project between the Financial Accounting Standards Board ("FASB") and the International Accounting Standards Board ("IASB") could require us to make significant changes to our lease management system or other accounting systems, and could result in changes to our financial statements.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

(c) The following table provides information about purchases by the Company during the quarter ended ~~May~~November 3130, 2014 of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act. Subject to applicable law, share purchases may be made in open market transactions, privately negotiated transactions, or pursuant to instruments and plans complying with Rule 10b5-1.

	Issuer Purchases of Equity Securities
Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Repurchase Programs (1)		Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Program (1)
3/1/2014 - 3/31/2014		-		-		-		425,062,173
9/1/2014 - 9/30/2014		8,022,588	$	62.31		-		3,000,000,000
4/1/2014 - 4/30/2014		-		-		-		425,062,173
10/1/2014 - 10/31/2014		-		-		-		3,000,000,000
5/1/2014 -5/31/2014		-		-		-		425,062,173
11/1/2014 -11/30/2014		-		-		-		3,000,000,000
Total		-8,022,588	$	62.31		-

(1) OnIn ~~July~~August 132014, ~~2011,~~ the Board of Directors approved athe 2014 share repurchase program ~~(2012~~which ~~repurchase program) that~~ allows for the ~~repurchase~~purchase of up to $23.0 billion of the Company'’s common stock prior to its expiration on ~~December~~August 31, ~~2015~~2016.

- 37 -

Table of Contents

Item 6.

Exhibits

The agreements included as exhibits to this report are included to provide information regarding their terms and not intended to provide any other factual or disclosure information about the Company or the other parties to the agreements. The agreements may contain representations and warranties by each of the parties to the applicable agreement that were made solely for the benefit of the other parties to the applicable agreement, and:

• should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;

• may have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;

• may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and

• were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.

Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time.

Exhibit No.	~~Exhibit No.~~Description	~~Description~~	SEC Document Reference	~~SEC Document Reference~~
	3.1	Amended and Restated Articles of Incorporation of Walgreen Co.		Incorporated by reference to Exhibit 3.1 to Walgreen Co.'s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on January 19, 2011.
2.1	Reorganization Agreement and Plan of Merger, dated October 17, 2014, by and among Walgreen Co., Walgreens Boots Alliance, Inc. and Ontario Merger Sub, Inc.		Incorporated by reference to Exhibit 2.3 to Walgreen Co.’s Annual Report on Form 10-K for the fiscal year ended August 31, 2014 (File No. 1-00604) filed with the SEC on October 20, 2014.
	3.2	Amended and Restated By-Laws of Walgreen Co., as amended effective as of August 2, 2012		Incorporated by reference to Exhibit 3.1 to Walgreen Co.'s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on August 6, 2012.
2.2	Amendment No. 1, dated December 23, 2014, to the Reorganization Agreement and Plan of Merger, dated October 17, 2014, by and among Walgreen Co., Walgreens Boots Alliance, Inc. and Ontario Merger Sub, Inc.		Incorporated by reference to Exhibit 2.1 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on December 24, 2014.
	10.1	First Amendment to the Walgreen Co. 2013 Omnibus Incentive Plan		Filed herewith.
2.3	Amendment No. 2, dated December 29, 2014, to the Reorganization Agreement and Plan of Merger, dated October 17, 2014, as amended December 23, 2014, by and among Walgreen Co., Walgreens Boots Alliance, Inc. and Ontario Merger Sub, Inc.		Filed herewith.
	10.2	Retirement Agreement and Release between Walgreen Co. and Robert Zimmerman		Filed herewith.
3.1	Amended and Restated Articles of Incorporation of Walgreen Co.		Incorporated by reference to Exhibit 3.1 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on January 19, 2011.
	10.3	Consulting Services Agreement between Walgreen Co. and Robert Zimmerman		Filed herewith.
3.2	Amended and Restated By-Laws of Walgreen Co., as amended effective as of August 2, 2012		Incorporated by reference to Exhibit 3.1 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on August 6, 2012.
	10.4	Limited Liability Company Agreement of WAB Holdings LLC, dated as of March 18, 2013, by and between Walgreens Pharmacy Strategies, LLC and Alliance Boots Luxembourg S.à r.l.		Incorporated by reference to Exhibit 99.9 to the Schedule 13D (File No. 005-77989) filed with the SEC by Walgreen Co., et. al., with respect to AmerisourceBergen Corporation common stock on April 15, 2014.
4.9	Indenture dated November 18, 2014 among Walgreens Boots Alliance, Inc. and Wells Fargo Bank, National Association, as trustee.		Incorporated by reference to Exhibit 4.1 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on November 18, 2014.
	12	Computation of Ratio of Earnings to Fixed Charges.		Filed herewith.
4.10	Form of Floating Rate Notes due 2016.		Incorporated by reference to Exhibit 4.2 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on November 18, 2014.
	31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.		Filed herewith.
4.11	Form of 1.750% Notes due 2017.		Incorporated by reference to Exhibit 4.3 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on November 18, 2014.
	31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.		Filed herewith.
4.12	Form of 2.700% Notes due 2019.		Incorporated by reference to Exhibit 4.4 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on November 18, 2014.
	32.1	Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.		Furnished herewith.
4.13	Form of 3.300% Notes due 2021.		Incorporated by reference to Exhibit 4.5 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on November 18, 2014.
	32.2	Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.		Furnished herewith.
	101.INS	XBRL Instance Document		Filed herewith
	101.SCH	XBRL Taxonomy Extension Schema Document		Filed herewith
	101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document		Filed herewith
	101.DEF	XBRL Taxonomy Extension Definition Linkbase Document		Filed herewith
	101.LAB	XBRL Taxonomy Extension Label Linkbase Document		Filed herewith
	101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document		Filed herewith

- 38 -

Table of Contents

4.14	Form of 3.800% Notes due 2024.	Incorporated by reference to Exhibit 4.6 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on November 18, 2014.

4.15	Form of 4.500% Notes due 2034.	Incorporated by reference to Exhibit 4.7 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on November 18, 2014.

4.16	Form of 4.800% Notes due 2044.	Incorporated by reference to Exhibit 4.8 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on November 18, 2014.

4.17	Form of Guarantee of Walgreen Co.	Incorporated by reference to Exhibit 4.9 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on November 18, 2014.

4.18	Form of 2.875% Notes due 2020 (£).	Incorporated by reference to Exhibit 4.2 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on November 20, 2014.

4.19	Form of 3.600% Notes due 2025 (£).	Incorporated by reference to Exhibit 4.3 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on November 20, 2014.

4.20	Form of 2.125% Notes due 2026 (€).	Incorporated by reference to Exhibit 4.4 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on November 20, 2014.

4.21	Form of Guarantee of Walgreen Co.	Incorporated by reference to Exhibit 4.5 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on November 20, 2014.

10.1	Form of Restricted Stock Unit Award agreement (effective July 2014).	Incorporated by reference to Exhibit 10.3 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on August 8, 2014.

10.2	Form of Restricted Stock Unit Agreement, as amended (Special Transition Awards)	Incorporated by reference to Exhibit 10.2 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on December 24, 2014.

10.3	Form of Performance Share Award agreement (effective July 2014).	Incorporated by reference to Exhibit 10.4 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on August 8, 2014.

10.4	Form of Stock Option Award agreement (effective July 2014).	Incorporated by reference to Exhibit 10.5 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on August 8, 2014.

10.74	Nomination and Support Agreement, dated as of September 5, 2014, between JANA Partners LLC and Walgreen Co.	Incorporated by reference to Exhibit 99.1 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on September 8, 2014.

10.75	Term Loan Credit Agreement, dated as of November 10, 2014, among Walgreen Co., Walgreens Boots Alliance, Inc., the lenders from time to time party thereto, and Bank of America, N.A., as administrative agent.	Incorporated by reference to Exhibit 10.1 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on November 12, 2014.

10.76	Revolving Credit Agreement, dated as of November 10, 2014, among Walgreen Co., Walgreens Boots Alliance, Inc., the lenders from time to time party thereto and Bank of America, N.A., as administrative agent.	Incorporated by reference to Exhibit 10.2 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on November 12, 2014.

10.77	Revolving Credit Agreement, dated as of December 19, 2014, among Walgreen Co., Walgreens Boots Alliance, Inc., the lenders from time to time party thereto and Mizuho Bank, LTD., as administrative agent.	Incorporated by reference to Exhibit 10.1 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on December 24, 2014.

12	Computation of Ratio of Earnings to Fixed Charges.	Filed herewith.

31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	Filed herewith.

- 39 -

Table of Contents

31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	Filed herewith.

32.1	Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.	Furnished herewith.

32.2	Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.	Furnished herewith.

101.INS	XBRL Instance Document	Filed herewith

101.SCH	XBRL Taxonomy Extension Schema Document	Filed herewith

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document	Filed herewith

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document	Filed herewith

101.LAB	XBRL Taxonomy Extension Label Linkbase Document	Filed herewith

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document	Filed herewith

- 40 -

Table of Contents

SIGNATURES

Pursuant to the requirements 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.

	WALGREEN CO.
	(Registrant)
Dated: 7/1/14	/s/ W.D. Miquelon
Dated: 12/29/14	/s/ Timothy R. McLevish
	W.D. Miquelon
	Timothy R. McLevish
	Executive Vice President, Chief Financial Officer and President, International
	Executive Vice President and Chief Financial Officer
	(Chief Financial Officer)
Dated: 12/29/14	/s/ T.J. Heidloff
Dated: 7/1/14	/s/ T.J. Heidloff
	Theodore J. Heidloff
	Divisional Vice President – Accounting and Controller
	(Principal Accounting Officer)

- 41 -

Filing Compare · WALGREEN CO