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(Mark One)

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.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

The number of shares outstanding of the registrant's Common Stock, $.078125 par value, as of March 31, 2004 was 1,024,569,391.

WALGREEN CO. AND SUBSIDIARIES

CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

The consolidated condensed financial statements included herein have been prepared by the company pursuant to the rules and regulations of the Securities and Exchange Commission. The Consolidated Condensed Balance Sheet as of February 29, 2004, the Consolidated Condensed Statements of Earnings for the three and six months ended February 29, 2004 and February 28, 2003, and the Consolidated Condensed Statements of Cash Flows for the six months ended February 29, 2004 and February 28, 2003, 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. It is suggested that these consolidated condensed financial statements be read in conjunction with the financial statements and the notes thereto included in the company's latest annual report on Form 10-K.

In the opinion of the company the consolidated condensed 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, seasonal 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, nor necessarily indicative of earnings for the full year.

The accompanying Notes to Consolidated Condensed Financial

Statements are an integral part of these Statements.

The accompanying Notes to Consolidated Condensed Financial

Statements are an integral part of these Statements.

The accompanying Notes to Consolidated Condensed Financial

Statements are an integral part of these Statements.

WALGREEN CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(1) Inventories are valued on a lower of last-in, first-out (LIFO) cost or market basis. At February 29, 2004 and August 31, 2003, inventories would have been greater by $772.2 million and $729.7 million 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. Cost of sales is primarily based upon point-of-sale scanning information with an estimate for shrinkage and adjusted based on periodic inventories.

(2) The company capitalized interest expense as part of significant construction projects. The amounts capitalized were $.2 million and $.5 million for the quarter and six-month periods ended February 29, 2004 versus $.4 million and $.8 million a year ago.

(3) The company remains secondarily liable on 51 assigned leases. The maximum potential of undiscounted future payments is $14.1 million as of February 29, 2004. Lease option dates vary with some extending to 2013. Most of the assignments were a result of the sale of the "Wag’s" restaurants in August 1988. The company has recorded liabilities in cases where the assignee has defaulted on its obligations, and such liabilities are not material to the financial statements.

(4) The company applies Accounting Principles Board (APB) Opinion No. 25 and related interpretations in accounting for its stock-based compensation plans. Accordingly, no compensation has been recognized based on the fair value of its grants under these plans. Had compensation costs been determined consistent with the method of Statement of Financial Accounting Standards (SFAS) No. 123 for options granted in fiscal 2004 and 2003, proforma net earnings and net earnings per common share would have been as follows:

(5) On December 8, 2003, the Medicare Prescription Drug Improvement and Modernization Act of 2003 was signed into law. The Act introduces a prescription drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of retirement health care benefit plans. We anticipate that the benefits we pay after 2006 will be lower as a result of the new Medicare provisions; however, the retiree medical obligations and costs reported do not reflect the impact of this legislation. Specific authoritative guidance on the accounting for this Act is pending and that guidance, when issued, may require us to change previously reported information. We have elected to defer recognition of the new Medicare provisions' impact in accordance with Financial Accounting Standards Board Staff Position 106-1.

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

INTRODUCTION

Walgreens is engaged in the retail sale of prescription and nonprescription drugs and carries additional product lines, such as general merchandise, cosmetics, toiletries, household items, food and beverages. Customers can purchase prescriptions at the drugstore counter, as well as through the mail, by telephone, and on the Internet. The total number of drugstores at February 29, 2004 was 4,336 located in 44 states and Puerto Rico, which includes three mail service facilities.

The drugstore industry is highly competitive. In addition to other drugstore chains, independent drugstores, mail order prescription providers and Internet pharmacies, we also compete with various other retailers including grocery, variety, and discount stores.

The long-term outlook for prescription sales is strong due in part to the aging population, as well as the continued development of innovative drugs that improve quality of life and control healthcare costs. Although the effect of the new Medicare prescription drug legislation on retail pharmacy is difficult to ascertain at this time, it is expected to add to prescription sales; however, gross margins on these additional sales could be lower than we currently experience based upon what the government will pay. As an efficient provider, we feel we are positioned well for these industry developments. We continue with expansion into new markets and increased penetration in existing markets. We believe we are well staffed with pharmacists for both current demands and future growth, with only select market needs.

RESULTS OF OPERATIONS

Net earnings for the second quarter ended February 29, 2004, were $433.5 million or $.42 per share (diluted). This was a 16.9% increase in net earnings over last year. Net earnings for the six months increased 14.3% to $688.4 million or $.67 per share (diluted). This quarter's results included a $12.7 million pre-tax gain for receipt of our share of prescription drug antitrust litigation settlements. This compares to similar pre-tax settlements of $.3 million recorded in the second quarter last year. The six month periods included $12.7 million (pre-tax) in litigation settlements this year and $17.0 million (pre-tax) last year. Excluding these gains, earnings rose 14.8% to $425.6 million in the second quarter and 15.0% to $680.5 million for the six-month period. The quarterly and six month net earnings increase resulted from improved sales and slightly lower expense ratios, partially offset by a decrease in gross margin ratios.

Net sales increased by 15.8% in the second quarter to $9.8 billion, and rose by 16.1% to $18.5 billion for the first six months. Drugstore sales increases resulted from sales gains in existing stores and added sales from new stores, each of which include an indeterminate amount of market-driven price changes. Comparable drugstore (those open at least one year) sales were up 11.5% and 11.7% for the quarter and first six months. New store openings accounted for a sales increase of 7.1% for the quarter and 7.0% for the first six months. We operated 4,336 drugstores as of February 29, 2004 compared to 3,998 a year earlier.

Prescription sales increased 19.0% for the second quarter and 18.8% for the first six months. Prescriptions accounted for 60.4% of sales in the quarter and 62.1% year-to-date. Prescription sales in comparable drugstores increased 15.5% for the quarter and 15.1% for the six-month period. The effect of generic drugs, which have a lower retail price, replacing brand name drugs reduced prescription sales by 1.4% in the quarter and 1.2% for the six-month period. Third party sales, where reimbursement is received from managed care organizations and government and private insurance, were 91.3% of pharmacy sales compared to 90.5% a year ago.

Non-prescription (front-end) sales increased 11.8% in the second quarter and 12.4% for the first six months. Front-end sales are 39.5% of total sales for the quarter and 37.8% for the six-month period. This compares to 40.9% and 39.0% for the same periods a year ago. Comparable front-end drugstore sales were up 6.2% for the quarter and 6.8% for the first six months. Sales increased in part due to strong cough and cold sales during the periods.

Gross margins were 27.7% of sales in the quarter and 27.1% for the six-month period compared to 27.8% and 27.3% for the comparable periods last year. The quarter and six-month decrease in gross margin was caused by a number of factors. Prescription margins decreased because a greater portion of sales were third party sales, which typically have lower margins than cash prescriptions. These were offset by fewer new generic drug introductions, which have a higher gross margin. As state governments continue their attempts to reduce reimbursement levels, we continue to evaluate the impact of these reimbursement rates on profitability on a case by case basis. Non-pharmacy margins remained relatively stable for both the quarter and the six-month period.

We use the LIFO method of inventory valuation, which can only be determined annually when inflation rates and inventory levels are finalized; therefore, LIFO inventory costs for interim financial statements are estimated. Cost of sales includes a LIFO provision of $22.4 million ($.01 per share) and $42.5 million ($.02 per share) for the quarter and six-month periods ended February 29, 2004 versus $24.9 million ($.01 per share) and $46.7 million ($.03 per share) for the same periods a year ago. This year our estimated annual inflation rate is 1.75%, compared to our estimate of 2.25% at February 28, 2003.

Selling, occupancy and administration expenses decreased to 20.7% from 20.8% of sales in the quarter and to 21.2% from 21.3% of sales for the six months. The decrease in the quarter was principally caused by lower occupancy, offset in part, by higher insurance and store salaries as a percent to sales. In addition, last year's second quarter included $6.9 million of impaired asset costs related to the closing of the Houston, Texas distribution center. Other costs related to the closing were not material. For the six-month period, the decrease was principally caused by lower occupancy and other store expenses partially offset by higher advertising costs.

The effective tax rate was 37.5% for the quarter and six-month period this fiscal year compared to 37.75% for the same periods last fiscal year.

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. Some of the more significant estimates include liability for closed locations, liability for insurance claims, vendor allowances, allowance for doubtful accounts, and cost of sales. We use the following techniques to determine estimates:

FINANCIAL CONDITION

Cash and cash equivalents were $1,107.2 million at February 29, 2004, compared to $683.2 million at February 28, 2003. 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 top-tier money market funds, tax exempt bonds and commercial paper.

Net cash provided by operating activities for the first half of fiscal 2004 was $637.4 million compared to $653.9 million a year ago, due primarily to higher third party receivables and a reduction in accrued expenses, offset in part by tighter control over inventory levels. Our profitability is the principal source for providing funds for expansion and remodeling programs, dividends to shareholders and funding for various technological improvements.

Net cash used for investing activities was $405.7 million versus $294.3 million last year. Additions to property and equipment were $411.5 million compared to $335.6 million last year. There were 146 new or relocated drugstores, including three home medical centers and three home infusion centers opened during the first six months of this year. This compares to 160 in the same period last year which included six home medical centers and one specialty pharmacy. New stores are owned or leased. There were 15 owned locations opened during the first six months of this year and 59 under construction at February 29, 2004 versus 19 owned and 48 under construction for the same period last year.

Capital expenditures for fiscal 2004 are expected to exceed $1 billion. We expect to open approximately 425 new stores in fiscal 2004. with a net increase of approximately 350 stores, and have a total of 7,000 drugstores by the year 2010. Major areas for store expansion in fiscal 2004 include California, the Carolinas, Florida, Texas and the state of Washington. We are continuing to relocate stores to more convenient and profitable freestanding locations. In addition to new stores, a significant portion of the expenditures will be made for technology and distribution centers. A new distribution center in Southern California is currently receiving merchandise and will begin shipping to stores in May. Another is planned for South Carolina with an anticipated opening date in 2007.

Net cash used for financing activities was $141.6 million compared to $126.3 million last year. During the six months of this fiscal year, we purchased $113.4 million of our company shares to support the long-term needs of the employee stock plans, compared to purchases of $102.5 million last year. This year we have proceeds related to employee stock plans of $69.4 million versus $55.7 million last year. There were no new borrowings or outstanding borrowings during either period. At February 29, 2004, we had a syndicated bank line of credit facility of $200 million to support our short-term commercial paper program.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

The following table lists our contractual obligations and commitments as of February 29, 2004:

* Not on balance sheet.

OFF-BALANCE SHEET ARRANGEMENTS

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

We have no other off-balance sheet arrangements other than those disclosed on the above Contractual Obligations and Commitments table.

Both on and off balance sheet financing are considered when targeting debt to equity ratios to balance the interest of equity and debt investors. This balance allows us to lower our cost of capital while maintaining a prudent level of financial risk.

RECENT ACCOUNTING PRONOUNCEMENTS

In November 2003, the EITF reached a consensus on Issue No. 03-10, "Application of EITF Issue No. 02-16, ‘Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor,’ by Resellers to Sales Incentives Offered to Consumers by Manufacturers" which will be effective in fiscal year 2005. We are already in conformity with this new pronouncement; therefore, the implementation will not impact the financial statements.

In December 2003, FASB Statement 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits-an Amendment of FASB Statements No. 87, 88, and 106" was revised to include additional disclosures. The interim disclosure requirements will be reflected in our fiscal year third quarter statements and the annual disclosure requirements will be reflected in our fiscal 2004 year-end financial statements.

In January 2004, FSP FAS 106-1, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvements and Modernization Act of 2003" was issued. Required disclosures are presented in Notes to Consolidated Condensed Financial Statements, paragraph (5).

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain information in this Form 10-Q, as well as in other public filings, the company website, press releases and oral statements made by our representatives, is forward-looking information based on current expectations and plans that involve risks and uncertainties. Forward-looking information includes statements concerning pharmacy sales trends, prescription margins, number and location of new store openings, the level of capital expenditures, demographic trends; as well as those that include or are preceded by the words "expects,""estimates,""believes," "plans," "anticipates" or similar language. For such statements, we claim the protection of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

The following factors, in addition to those discussed elsewhere in this Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended August 31, 2003, could cause results to differ materially from management expectations as projected in such forward-looking statements: the impact of events related to any terrorist actions; changes in economic conditions generally or in the markets served by the company; consumer preferences and spending patterns; competition from other drugstore chains, supermarkets, on-line retailers, other retailers and mail order companies; the introduction of new brand and generic prescription drugs; changes in state or federal legislation or regulations; the efforts of third party payers to reduce pharmacy reimbursement rates; the success of planned advertising and merchandising strategies; the availability and cost of real estate and construction; changes in accounting policies and practices; the company's ability to hire and retain pharmacists and other store and management personnel; the company's relationships with its suppliers; the company's ability to successfully implement new computer systems and technology; and adverse determinations with respect to litigation or other claims. Unless otherwise required by applicable securities laws, the company assumes no obligation to update its forward-looking statements to reflect subsequent events or circumstances.

Item 3. Qualitative and Quantitative Disclosure about Market Risk

Management does not believe that there is any material market risk exposure with respect to derivative or other financial instruments that would require disclosure under this item.

Item 4. Controls and Procedures

Based on their evaluation as of February 29, 2004 pursuant to Exchange Act Rule 13a-15(b), the company's management, including its Chief Executive Officer and Chief Financial Officer believe the company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)) are effective.

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 Chief Executive Officer and Chief Financial Officer, no changes during the quarter ended February 29, 2004 were identified that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting.

  Item 4. Submission of Matters to a Vote of Security Holders
a. The company held its Annual Meeting of Shareholders on January 14, 2004.
b. The shareholders voted for election of the following directors to serve until the next annual meeting or until their successors are elected and qualified:

c. The proposal to approve the Walgreen Co. Nonemployee Director Stock Plan, as amended and restated, was approved by a vote of 474,331,153 for, 220,199,581 against and 11,291,313 abstentions. There were 180,631,479 broker non-votes.

Item 6. Exhibits and Reports on Form 8-K

a. Exhibits

3. (a) Articles of Incorporation of the company, as amended, filed with the Securities and Exchange Commission as Exhibit 3(a) to the company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1999, and incorporated by reference herein.

(b) By-Laws of the company, as amended and restated effective as of July 9, 2003, filed with the Securities and Exchange Commission as Exhibit 3(b) to the company's quarterly report on Form 10-Q for the quarter ended November 30, 2003, and incorporated by reference herein.

4. (a) Rights Agreement dated as of July 10, 1996, between the company and Harris Trust and Savings Bank, filed with the Securities and Exchange Commission as Exhibit 1 to Registration Statement on Form 8-A on July 11, 1996 (File No. 1-604), and incorporated by reference herein.

10.(a) Walgreen Co. Nonemployee Director Stock Plan (effective January 14, 2004), as amended and restated, filed as Exhibit 10(a) to the company’s Quarterly Report on Form 10-Q for the quarter ended February 29, 2004.

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

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

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

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

(b) Reports on Form 8-K

Form 8-K, furnished January 6, 2004, to provide information under Items 12 and 7 regarding the company's results of operations for its quarter ended November 30, 2003.

Form 8-K, filed January 12, 2004, to provide information under Items 5 and 7 regarding the company's one-year agreement with NASDAQ to dual list its stock on the NASDAQ and the New York Stock Exchange.

 

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: April 9, 2004	/s/ W.M. Rudolphsen
	W.M. Rudolphsen
	Senior Vice President
	(Chief Financial Officer)
Dated: April 9, 2004	/s/ M.M. Scholz
	M.M. Scholz
	Controller
	(Chief Accounting Officer)