Retail organic growth continues to be our primary growth vehicle, but we carefully consider unique acquisition opportunities when they are a good fit with the existing store base. In 2007, for example, the company acquired Option Care, Inc., a specialty pharmacy and home infusion services provider.

Prescription sales continue to become a larger portion of the company's business. This year prescriptions accounted for 65.0% of sales compared to 64.3% last year. Third party sales, where reimbursement is received from managed care organizations, government and private insurance, were 94.8% of prescription sales compared to 93.1% a year ago. Overall, Walgreens filled approximately 583 million prescriptions in 2007, an increase of 10% from the previous year.

Walgreens pharmacy sales are expected to continue to grow due, in part, to the aging population, the introduction of lower priced generics and the continued development of innovative drugs that improve quality of life and control healthcare costs. Also, the increase in generic introductions continues to boost the number of prescriptions filled. Although generics reduce sales dollars, they save both patients and payors money and generally offer higher gross profit than brand name drugs.

During fiscal 2007, Walgreens' market share in 59 of the top 60 front-end categories increased, as compared to all food, drug and mass merchandise competitors. Today, 139.1 million people live within two miles of a Walgreens and 5.0 million shoppers walk into a Walgreens store daily.

During fiscal year 2007 the company added $1.8 billion to property and equipment, which included approximately $1.425 billion related to stores, $184.2 million for distribution centers, and $176.5 million related to other corporate items. Capital expenditures for fiscal 2008 are expected to be more than $2.0 billion, excluding acquisitions.

In fiscal 2007, the company opened a distribution center located in Anderson, South Carolina. This is the first of a new-generation of distribution centers, which will increase productivity 20% from the last generation. A second new-generation center in Windsor, Connecticut is planned to open in fiscal 2009.

Walgreens plans to increase business by investing in prime locations, new technology and customer service initiatives in fiscal 2008.

(b) Financial information about industry segments.

The company is principally in the retail drugstore business and its operations are within one reportable segment.

(c) Narrative description of business.

(i) Principal products produced and services rendered.

The drugstores are engaged in the retail sale of prescription and non-prescription drugs and general merchandise. General merchandise includes, among other things, beauty care, personal care, household items, candy, photofinishing, greeting cards, seasonal items and convenience foods. Customers can have prescriptions filled at the drugstore counter, as well as through the mail, by telephone and via the Internet.