UNITED STATES DISTRICT COURT EASTERN DISTRICT OF PENNSYLVANIA

IN RE RITE AID CORPORATION : MASTER FILE NO.

SECURITIES LITIGATION : 99-CV-1349 (SD)

______________________________ :

:

This Document Relates to: : CLASS ACTION

Class Action :

______________________________ :

THIRD CONSOLIDATED AMENDED CLASS ACTION COMPLAINT

Plaintiffs, by their attorneys, allege the following based upon knowledge, with respect to their own acts, and upon other facts obtained through an investigation made by and through their attorneys, including a review of the public filings of Rite Aid Corporation ("Rite Aid" or the "Company") with the United States Securities and Exchange Commission ("SEC"), press releases, published reports, news articles, analyst reports, other publications, interviews of non-parties concerning Rite Aid, and consultations with certified public accountants. Plaintiffs believe that further substantial evidentiary support will exist for the allegations after a reasonable opportunity for discovery. Many of the facts supporting the allegations contained herein are known only to defendants and are within their exclusive control.

SUMMARY OF THE COMPLAINT

1. Plaintiffs bring this action as a class action on behalf of themselves and a class (the "Class") consisting of all persons or entities (other than defendants and certain related parties) who purchased or otherwise acquired the securities of Rite Aid during the period from May 2, 1997 through November 10, 1999, inclusive (the "Class Period"). Plaintiffs

complain of a fraudulent and deceptive course of conduct, described in detail beginning at paragraph 44 below, that injured purchasers of Rite Aid securities during the Class Period.

2. Defendant Rite Aid is one of the largest retail drugstore chains in the United States. Although its primary business is the operation of retail drug stores, the Company also engages in pharmacy benefits management ("PBM"), the marketing of prescription plans, and the selling of other managed health care services to employers, health plans and their members, and government-sponsored employee benefit programs.

3. Throughout the Class Period, the Rite Aid defendants portrayed Rite Aid as a company that had "very strong" profitability, and that was "one of the best-positioned, strongest-performing health services companies in the United States." During the Class Period, Rite Aid also represented to the public that it was engaged in a major program to expand and modernize its operations by, inter alia, (a) acquiring other large drugstore chains and a leading PBM provider, PCS Health Systems, Inc. ("PCS"), (b) replacing several of its older, inefficient distribution facilities with larger, more modern and highly automated distribution warehouses, and (c) replacing several hundred of its older pharmacies with new, modern prototype stores.

4. However, as the Company's senior officers and directors knew but did not disclose, Rite Aid's modernization and expansion programs were encountering significant problems. These problems included, inter alia, (a) significant difficulties in integrating its newly acquired drug store chains, which included Thrifty Payless ("Thrifty"), K&B, Incorporated ("K&B"), and Harco, Inc. ("Harco"), (b) significant cost over-runs in connection with its store modernization efforts, and (c) significant problems with the custom-designed software that was to be used in operating its new, supposedly "state-of-the-art" distribution centers.

5. Rather than publicly disclose these material problems, which were eroding the Company's margins and threatening its ability to remain competitive with its more efficient rivals, Rite Aid engaged in a variety of grossly improper earnings-inflating and expense-deflating practices during and immediately prior to the Class Period. Those fraudulent and undisclosed accounting practices enabled the Company, in violation of Generally Accepted Accounting Principles ("GAAP"), to artificially deflate its reported expenses and to artificially inflate its reported revenues, assets, income, earnings, and earnings per share at the end of the Company's quarterly reporting periods, thereby rendering Rite Aid's publicly-filed financial statements and other communications regarding the Company's financial performance complained of herein materially false and misleading.

6. Rite Aid's improper accounting practices (detailed herein at paragraph 46) included, inter alia, the following:

(a) Understating expenses by capitalizing project costs related to store planning, development and construction, rather than deducting them as current operating expenses;

(b) Understating expenses by prematurely taking advertising credits and purchase term discounts against the cost of supplier goods sold to Rite Aid and treating them as accounts receivable;

(c) Understating expenses by using certain accruals taken in prior periods for (i) store closings, (ii) inventory disposal and (iii) acquisitions of certain drugstore chains and PCS to manage earnings by reversing such accruals into income in later periods, or improperly charging current expenses against such accruals;

• Understating expenses by improperly and unilaterally claiming unauthorized deductions from its suppliers' invoices (thereby improperly reducing its reported accounts payable) based on wrongful claims by Rite Aid that it was "entitled" to more favorable terms than those set forth in its suppliers' invoices, or that it was entitled to "adjustments" for "damaged" goods that were in fact not damaged;

• Overstating earnings and understating expenses by improperly carrying uncollectible consumer charge accounts as accounts receivable;

• Inflating the reported value of the Company's assets on its balance sheet by including the value of certain intangible assets (such as goodwill, lease acquisition costs and patient prescription file purchases) which were impaired and were recoverable only in part -- if at all; and

• Inflating assets and earnings by failing to write down obsolete and expired merchandise.

Indeed, as the Company has recently been forced to admit, Rite Aid's accounting improprieties caused Rite Aid's reported pre-tax earnings for fiscal year 1997, 1998 and 1999 (the fiscal years ending March 1, 1997, February 28, 1998 and February 27, 1999) to be inflated by approximately $500 million, and will require each of Rite Aid's previously reported quarterly and annual financial statements covering this three year period to be restated. This $500 million restatement will wipe out approximately 57% of Rite Aid's total reported pre-tax earnings for this three-year period.

7. Moreover, as the Rite Aid defendants also knew but did not disclose, prior to and during the Class Period, the Company further inflated its reported earnings and deflated its reported expenses by engaging in a variety of business and employment practices that were improper and illegal. These improper practices not only distorted the Company's reported financial performance, but also exposed the Company to undisclosed material legal liabilities and threatened to reduce (and did in fact reduce) consumer confidence in Rite Aid's merchandise and business practices. For example, the Company engaged in a scheme to increase its revenues by rigging its cash registers to charge uninsured customers more than insured customers on prescriptions, and also engaged in the illegal practice of selling outdated over-the-counter merchandise (including children's medication, baby formula, pregnancy tests and other pharmaceutical products) that should have been written off. The Company also implemented a scheme to reduce expenses associated with its store modernization program by using store employees -- and in particular store managers and assistant managers -- to perform construction, renovation, and other non-managerial work after regular working hours in violation of state employment laws. Rite Aid also tried to cut expenses -- and cut corners -- by understaffing its stores in violation of state pharmacy board regulations which require a licensed pharmacist to be on duty when a store is open.

8. In addition to failing to disclose this underlying illegal conduct, the defendants also failed to timely disclose that Rite Aid had been served with a subpoena by the Attorney General of the State of Florida in early 1998 which sought production of documents relating to the Company's billing practices (including documents specifically relating to the identity of each overcharged customer, the medication involved, and the amount of each overcharge). Indeed, defendants repeatedly flouted their obligations under GAAP and SEC regulations to disclose this pending government investigation until September 1999 when -- after the Florida Attorney General announced that he was suing Rite Aid for $2 billion in fines and penalties -- the Company issued a press release that informed its stunned investors that the Attorney General's action was "not unexpected."

9. The Rite Aid defendants had strong motivations to conceal the true state of affairs at Rite Aid. First, each of the Individual Defendants had a compelling personal motive to artificially inflate the price of Rite Aid common stock. Most notably, under an extraordinarily lucrative executive compensation plan, the Individual Defendants collectively stood to receive outright grants of Rite Aid common stock and/or cash worth $190 million if the trading price of Rite Aid stock averaged above $49.50 during any 30 day period during fiscal years 1999 to 2001 (i.e., between February 1998 and February 2001). As a result of defendants' fraudulent scheme to artificially inflate the price of Rite Aid stock, in early 1999 Rite Aid's stock reached the $49.50 per share level for the first time, hitting a class period high of $50.94 per share on January 8, 1999.

10. The Company itself also had a strong motivation to artificially inflate the price of its common stock so that it could finance the $1.5 billion cost of its January 1999 acquisition of PCS with the proceeds of a secondary offering of artificially inflated Rite Aid stock. The acquisition of PCS, one of the country's leading PBM providers, was a key element of Rite Aid's growth strategy that gave Rite Aid access to 54 million prescription plan

members who purchase $10 billion worth of prescription drugs annually. Rite Aid acquired PCS in January 1999 using short-term commercial paper backed by a $1.3 billion short term bank facility expiring October 29, 1999 ("PCS Debt"), but at all material times defendants intended to refinance the PCS Debt as soon as possible through a secondary offering of Rite Aid common stock in 1999 -- a goal that was frustrated when the SEC announced in March 1999 that it was investigating the Company's accounting practices.

11. The market did not begin to learn about the significant problems that Rite Aid was experiencing until March 12, 1999, when the Company announced that its fourth quarter earnings for fiscal year 1999 would be significantly lower than analysts' expectations, largely due to previously undisclosed problems with the Company's store expansion program and the Company's new Perryman distribution center. In response to this negative news, the price of Rite Aid common stock plummeted from $37 per share to $22.56 per share -- a one-day decline of more than 39%, and a decline of approximately 56% from the stock's inflated Class Period high of $50.94.

12. Shortly thereafter, in the wake of the news that the SEC was investigating Rite Aid's accounting practices, Rite Aid announced on June 1, 1999 that it had restated its previously reported financial results for the past three fiscal years, including each of the interim quarters of 1999 for the fiscal year ended February 27, 1999 (the "June 1999 Restatement"). As a result of this Restatement, Rite Aid's reported earnings for fiscal year 1999 were reduced from $158 million to $143.7 million or 54 cents per diluted share -- a reduction of over 9%. However, the full truth remained concealed by defendants, and far worse was yet to come.

13. As a result of defendants' efforts to obscure, deny and conceal the true state of Rite Aid's deteriorating affairs, the extent of Rite Aid's diminishing value was not revealed until, at the earliest, the fall of 1999, when the Company was rocked by a series of disclosures, each more stunning than the last:

• On September 9, 1999, The Wall Street Journal reported that Rite Aid had reimbursed its suppliers for certain large sums that it had previously deducted from their invoices at the end of fiscal year 1999. This revelation was in stark contrast to Rite Aid's prior and repeated assertions that its deductions for "misstated" terms and "damaged" goods were proper, and raised further questions about the Company's accounting practices.

• On September 22, 1999, the Florida Attorney General's office announced that it had filed a $2 billion racketeering lawsuit against Rite Aid accusing it of overcharging 29,000 uninsured customers for prescription drugs. It was later disclosed that Rite Aid had been aware of the Florida investigation for over a year and half. The following day, both Moody's and Standard & Poor's placed Rite Aid on review for a possible downgrade, citing, inter alia, concerns about its ability to refinance its PCS debt. In response to these

disclosures, on September 22 Rite Aid stock fell nearly $3.00 per share, from $16.94 to $14.00, and fell a further $2.00 to $12.00 on September 23 -- representing a two-day decline of nearly 30%, and the lowest price that the Company's stock had traded at in more than three years.

• On October 11, 1999, Rite Aid issued a press release announcing, in conjunction with its disclosure of a loss of approximately $67.9 million for its second fiscal quarter ended August 28, 1999, that the Company -- for the second time in less than six months -- was planning to restate its financial statements for prior years and interim periods. (The Company announced soon after that this second restatement was so large that it would result in a $500 million reduction in Rite Aid's previously reported pre-tax earnings for the period covering fiscal years 1997, 1998 and 1999.) In response to this extraordinary announcement, on October 11, 1999 Rite Aid stock fell another $2.50, from $12.50 to $10.00 per share -- reflecting a further one day decline of over 20%, and a total decline of over 80% from the stock's inflated class period high.

14. In the aftermath of the foregoing negative disclosures regarding the Company's actual financial performance and its improper accounting and business practices, on October 19, 1999 Rite Aid announced that defendant Martin Grass had "resigned" as Rite Aid's chairman and CEO. Grass's departure, however, was not the end of the story.

15. On November 10, 1999 (the last day of the Class Period), Rite Aid gave financial markets a final jolt by issuing a press release which warned investors that the Company's previously issued profit and cash flow forecasts -- which defendant Grass had announced only a month earlier during an October 11 conference call -- should not be relied upon. The November 10 press release also confirmed that the Company had been "contacted" by the enforcement arm of the SEC. In response to these disclosures, on November 10, 1999 Rite Aid stock fell a further $2.56, from $7.94 to $5.38 per share -- representing an additional one day decline of over 32%, a total decline of over 89% from the stock's inflated Class Period high, and the stock's lowest price in nearly 14 years.

16. Approximately one week later, on November 19, 1999, the Company filed an 8-K with the SEC that contained several additional disclosures regarding the nature of the Company's fraudulent conduct -- and of its auditor's, defendant KPMG LLP ("KPMG"), culpable participation therein. For example, the November 19 Form 8-K disclosed that KPMG had identified numerous material weaknesses in the Company's financial controls by no later than the conclusion of its field work relating to its audit of Rite Aid's fiscal year 1999 financial statements, and that KPMG had informed Rite Aid in a letter dated June 24, 1999 that it had concluded that the Company's internal controls were "insufficient" to allow Company management "to accumulate and reconcile information

necessary to properly record and analyze transactions on a timely basis." In addition, the 8-K revealed that, according to KPMG, the auditors also informed Rite Aid's management and audit committee no later than June of 1999 that it "was no longer willing to rely on representations made by the then serving Chief Financial Officer [defendant Frank Bergonzi]." However, KPMG did not disclose these profoundly serious accounting concerns to the market at the time of its audit. To the contrary, even in the face of blatantly false affirmative representations in the Company's class period 10-K's and audited annual financial statements that the Company "maintain[ed] an effective internal control structure," KPMG, acting with deliberate or at least reckless disregard for the truth, issued "clean" audit opinions on those financial statements.

17. As of March 2000, Rite Aid's stock continues to languish in a trading range well below ten dollars per share. Although Rite Aid management has confirmed as recently as January 2000 that it expects the upcoming "Second Restatement" to reduce its previously reported pre-tax earnings by approximately $500 million, the Company has warned investors that it will likely take the Company's new auditors (Deloitte & Touche) until at least July of 2000 to sort out the defendants' accounting misconduct and to issue the actual details of the Restatement. By this Complaint, plaintiffs now seek recovery for themselves and all other class members to compensate for the severe and substantial losses and damages they have suffered as a result of defendants' fraudulent scheme and their repeated violations of the federal securities laws and their disclosure obligations thereunder.

JURISDICTION AND VENUE

18. This Court has jurisdiction over the subject matter of this action pursuant to Section 27 of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78aa and 28 U.S.C. § 1331. The claims asserted herein arise under Sections 10(b) and 20(a) of the Exchange Act, as amended, 15 U.S.C. § 78j(b) and § 78t(a), and Rule 10b-5, 17 C.F.R. § 240.10b-5 promulgated thereunder by the SEC.

19. Venue is proper in this District pursuant to Section 27 of the Exchange Act and 28 U.S.C. Section 1391(b). Many of the acts and transactions giving rise to the violations of law complained of herein, including the preparation and dissemination to the investing public of materially false and misleading information, occurred in this District. In addition, Rite Aid maintains its principal executive offices within this District.

20. In connection with the acts, conduct, and other wrongs alleged in this Complaint, the defendants, directly and indirectly, used the means and instrumentalities of interstate commerce including the mail, the internet, telephone communications, and the facilities of national securities exchanges.

THE PARTIESPlaintiffs

21. Lead Plaintiffs. Lead plaintiffs Dr. John Tang, Joan Vorpahl, and Haim Aybar purchased the securities of Rite Aid at artificially inflated prices during the Class Period, as set forth in their previously filed certifications in connection with their motions for appointment as lead plaintiffs, and were damaged thereby. The Court has previously designated these individuals to serve as lead plaintiffs pursuant to an Order dated June 2, 1999.

22. Plaintiffs Ronald Tunney and Steve Couture purchased Rite Aid securities during the Class Period and after the March 12, 1999 announcement (which ended the original Class Period). These plaintiffs intend to seek to be certified as class representatives and their certifications will be filed with the Court.

23. Additional Plaintiffs. Numerous additional plaintiffs herein purchased Rite Aid securities in the open market during the Class Period and were damaged thereby. These plaintiffs have signed appropriate certifications under the PSLRA, and, if needed, are willing and able to serve as Class representatives. The certifications of these plaintiffs have previously been filed of record with the Court.

Defendants

A. Defendant Rite Aid

24. Defendant Rite Aid is a corporation duly organized and existing under the laws of the State of Delaware with its principal executive offices located at 30 Hunter Lane, Camp Hill, Pennsylvania 17011. Rite Aid is one of the largest retail drug store chains in the United States, and as of August 28, 1999, it operated 3,849 drugstores across the country. Although the Company's primary business is the operation of retail drug stores, the Company also engages in pharmacy benefits management ("PBM"), marketing prescription plans and selling other health care services to employers, health maintenance organizations, and government-sponsored employee benefit programs.

B. Individual Defendants

25. Defendant Martin L. Grass ("Grass") served as Rite Aid's Chairman of the Board of Directors, Chief Executive Officer and Director at all relevant times during the Class Period. Grass signed Rite Aid's Form 10-Ks for the 1997, 1998 and 1999 fiscal years. On October 18, 1999, simultaneously with the announcement of the Second Restatement eradicating $500 million in pre-tax earnings over a three year period, the Company announced that Grass had resigned as Chairman of the Board and Chief Executive Officer.

26. Defendant Timothy J. Noonan ("Noonan") served as Rite Aid's President, Chief Operating Officer and Director at all relevant times during the Class Period. Noonan signed Rite Aid's Form 10-Ks for the 1997, 1998 and 1999 fiscal years. On October 18,

1999, simultaneously with the resignation of defendant Grass, Noonan was appointed interim Chief Executive Officer. Noonan resigned his positions as an officer and director of Rite Aid on March 1, 2000.

27. Defendant Frank M. Bergonzi ("Bergonzi") served as Rite Aid's Executive Vice President and Chief Financial Officer at all relevant times during the Class Period. On June 14, 1999, two weeks after the June 1999 Restatement, Rite Aid announced that Bergonzi intended to retire from Rite Aid during the fall of 1999. Bergonzi signed Rite Aid's Form 10-Qs and Form 10-Ks during the 1997, 1998 and 1999 fiscal years.

28. Defendants Grass, Noonan and Bergonzi (collectively, the "Individual Defendants") were at all relevant times during the Class Period controlling persons of Rite Aid within the meaning of Section 20(a) of the Exchange Act. Because of the Individual Defendants' positions with the Company, they had access to undisclosed adverse information about its business, operations, real estate and construction programs, balance sheet, accounting and reserve policies, accounts receivable, inventories, operational trends, financial condition, and present and future business prospects through access to internal corporate documents (including the Company's operating plans, budgets, forecasts, and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management meetings and meetings of the board and committees thereof, and through reports and other information provided to them in connection therewith.

29. It is appropriate to treat the Individual Defendants as a group for pleading purposes and to presume that the false, misleading and incomplete information conveyed in the Company's public filings, press releases and other publications as alleged herein are the collective actions of the narrowly defined group of defendants identified above. Each of the Individual Defendants, by virtue of his high-level position with the Company, directly participated in the management of the Company, was directly involved in the day-to-day operations of the Company at the highest level and was privy to confidential proprietary information concerning the Company and its business, operations, prospects, growth, finances, and financial condition as alleged herein. Said defendants were involved in drafting, producing, reviewing, approving and/or disseminating the materially false and misleading statements and information alleged herein, including SEC filings, press releases, and other publications, were aware of or recklessly disregarded that materially false or misleading statements were being issued regarding the Company, and approved or ratified these statements in violation of the federal securities laws.

30. As officers, directors, and controlling persons of a publicly held company whose common stock was, and is, registered with the SEC, traded on the New York Stock Exchange ("NYSE"), and governed by the provisions of the federal securities laws, the Individual Defendants each had a duty to disseminate accurate and truthful information promptly with respect to the Company's financial condition and performance, growth, operations, financial statements, business, earnings, management, and present and future business prospects, and to correct any previously-issued statements that had become materially misleading or untrue, so that the market price of the Company's publicly-

traded securities would be based upon truthful and accurate information. The Individual Defendants' misrepresentations and omissions during the Class Period violated these specific requirements and obligations.

31. The Individual Defendants participated in the drafting, preparation, and/or approval of the various public and shareholder and investor reports and other communications complained of herein and were aware of, or recklessly disregarded, the misstatements contained therein and the omissions therefrom, and were aware of their materially false and misleading nature. Because of their positions with Rite Aid, each of the Individual Defendants had access to adverse undisclosed information about Rite Aid's business prospects and financial condition and performance as particularized herein and knew (or recklessly disregarded) that these adverse facts rendered the positive representations made by or about Rite Aid and its business issued or adopted by the Company materially false and misleading.

32. The Individual Defendants, because of their positions of control and authority as officers and controlling persons of the Company, were able to and did control the content of the various SEC filings, press releases and other public statements pertaining to the Company during the Class Period. Each of the Individual Defendants was provided with copies of the documents alleged herein to be misleading prior to or shortly after their issuance and/or had the ability and/or opportunity to prevent their issuance or cause them to be corrected. Accordingly, each of the Individual Defendants is responsible for the accuracy of the public reports, releases, and statements detailed herein and is therefore primarily liable for the representations contained therein.

C. Defendant KPMG LLP

33. Defendant KPMG is a worldwide firm of certified public accountants, auditors and consultants that provides a variety of accounting, auditing and consulting services. KPMG, through its Harrisburg, Pennsylvania office, served as Rite Aid's auditor and principal accounting firm commencing prior to the Class Period herein and continuing at all relevant times. KPMG acted in these capacities pursuant to the terms of contracts it had with Rite Aid that required, inter alia, KPMG to audit Rite Aid's financial statements in accordance with Generally Accepted Auditing Standards ("GAAS"), to report the results of those audits and quarterly reviews to Rite Aid, its board of directors and the members of the investing public, including plaintiffs and the members of the Class. With knowledge of Rite Aid's true financial condition, as alleged below, or in reckless disregard thereof, KPMG certified the false and misleading financial statements of Rite Aid described below and provided unqualified Independent Auditors' Reports, dated April 24, 1997, April 14, 1998, and May 28, 1999, which were included in various of the Company's SEC filings and public disseminations. These unqualified audit opinions and reports greatly enhanced and facilitated the fraud alleged below and violated GAAS and GAAP, which KPMG was obliged to observe.

34. In return for providing these various auditing and accounting services, despite KPMG's persistent violations of its contractual and other legal obligations to Rite Aid and

Rite Aid's investors, KPMG received substantial compensation from Rite Aid, the exact amount of which is unknown at this time. Rite Aid was among the largest and most lucrative engagements in KPMG's Harrisburg office, and KPMG benefitted substantially from KPMG's ongoing relationship with Rite Aid.

35. Defendant KPMG, by virtue of its position as independent accountant and auditor of Rite Aid, had access to the files and key employees of the Company at all relevant times. As a result of the auditing and other services it provided to Rite Aid, KPMG personnel were frequently present at Rite Aid's corporate headquarters throughout each year, and had continual access to and knowledge of Rite Aid's confidential internal corporate, financial, operating and business information, and had the opportunity to observe and review the Company's business and accounting practices, and to test the Company's internal and publicly reported financial statements as well as the Company's internal controls and structures. KPMG knew or recklessly disregarded Rite Aid's true financial and operating situation, and intentionally or recklessly failed to take steps which, as Rite Aid's auditor, KPMG could and should have taken to fully and fairly disclose that situation to the investing public. KPMG falsely represented that its audits of Rite Aid's 1997, 1998 and 1999 financial statements had been conducted in accordance with GAAS, and wrongfully issued "clean" or unqualified opinions or certifications that those financial statements fairly presented Rite Aid's financial condition and results of operations in conformity with GAAP.

36. KPMG knowingly participated in and/or acquiesced in the presentation by its audit client of false and misleading financial information to the investing public which materially misstated, among other things, the Company's reported net income. As a result of KPMG's knowing misconduct and participation in Rite Aid's fraudulent scheme, KPMG is jointly and severally liable to plaintiffs and the other members of the Class.

* * *

37. Rite Aid, KPMG, and the Individual Defendants are sometimes collectively referred to herein as the "Defendants." Rite Aid and the Individual Defendants are sometimes collectively referred to herein as the "Rite Aid Defendants."

38. Each of the Defendants is liable as a participant in a fraudulent scheme and course of conduct that operated as a fraud or deceit upon purchasers of Rite Aid securities, by disseminating materially false and misleading statements and/or concealing material adverse facts. The scheme (i) deceived the investing public regarding Rite Aid's business, financial condition, present and future prospects, growth, operations, assets, and the intrinsic value of Rite Aid's securities, and (ii) caused plaintiffs and other members of the Class to purchase Rite Aid securities at artificially inflated prices.

CLASS ACTION ALLEGATIONS

39. Plaintiffs bring this action as a class action pursuant to Rule 23 of the Federal Rules of Civil Procedure, on behalf of themselves and a class (the "Class") consisting of all

persons who purchased Rite Aid securities on the open market during the Class Period and who suffered damages thereby. Excluded from the Class are Defendants, the officers and directors of the Company at all relevant times, members of their immediate families, any entity in which any defendant has a controlling interest, and the legal affiliates, representatives, heirs, controlling persons, successors, and predecessors in interest or assigns of any such excluded person or entity.

40. This action is properly maintainable as a class action because:

(a) During the Class Period, more than 200 million shares of Rite Aid common stock were outstanding. Rite Aid is actively traded on the New York Stock Exchange. The members of the Class are dispersed throughout the United States and are so numerous that joinder of all Class members is impracticable. Millions of shares of Rite Aid common stock and Rite Aid securities were publicly traded during the Class Period and, based upon Rite Aid's SEC filings and other public disclosures, plaintiffs believe that there are thousands of members of the Class;

(b) Plaintiffs' claims are typical of the claims of the other members of the Class. Plaintiffs and all members of the Class purchased and/or acquired their Rite Aid securities in reliance upon defendants' statements to the public and/or the integrity of the open market and sustained damages as a result of Defendants' wrongful conduct complained of herein;

(c) Plaintiffs are representative parties who will fairly and adequately protect the interests of the other members of the Class and have retained counsel competent and experienced in class action securities litigation;

(d) A class action is superior to other available methods for the fair and efficient adjudication of the claims asserted herein, because joinder of all members is impracticable. Furthermore, because the damages suffered by the individual Class members may be relatively small, the expense and burden of individual litigation make it virtually impossible for the Class members to individually redress the wrongs done to them. The likelihood of individual Class members prosecuting separate claims is remote;

(e) Plaintiffs anticipate no unusual difficulties in the management of this action as a class action; and

(f) The common questions of law and fact predominate over any questions effecting any individual members of the Class.

41. The questions of law and fact which are common to plaintiffs and the Class include, among others:

(a) Whether the federal securities laws were violated by Defendants' acts and omissions as alleged herein;

(b) Whether the documents, press releases, reports, and/or statements disseminated to the investing public and to Rite Aid shareholders during the Class Period omitted or misrepresented material facts about the financial condition, business, and income of Rite Aid;

(c) Whether KPMG's audit and review reports, as presented in documents disseminating Rite Aid's financial statements, were materially false and misleading as alleged herein;

(d) Whether Defendants have acted with knowledge or with reckless disregard

for the truth in omitting to state and/or misrepresenting material facts;

(e) Whether, during the Class Period, the market price of Rite Aid's securities was artificially inflated due to the omissions and/or material misrepresentations complained of herein;

(f) Whether Defendants participated in and pursued the common course of conduct complained of herein;

(g) Whether the Individual Defendants were "control persons" within the meaning of Section 20(a) of the Exchange Act;

(h) Whether Defendants acted wilfully and recklessly in making the material misstatements and omissions described herein; and

(i) Whether the members of the Class have sustained damages and, if so, what is the extent of such damages.

FRAUD-ON-THE-MARKET DOCTRINE

42. Plaintiffs rely, in part, on the presumption of reliance established by the fraud-on-the-market doctrine. The market for Rite Aid securities was at all times an efficient market for the following reasons, among others:

(a) Rite Aid met the requirements for listing, and is listed on the New York Stock Exchange, a highly efficient market that quickly reflects all publicly available information concerning a listed company;

(b) As a regulated issuer, Rite Aid filed periodic public reports with the SEC that contained material misrepresentations and/or omitted material facts during the Class Period, as alleged herein, causing the price of Rite Aid stock to trade at artificially inflated prices;

(c) The trading volume of Rite Aid's common stock was substantial during the Class Period, indicating that there was a liquid market for Rite Aid stock during the Class Period;

(d) Rite Aid was followed by various analysts employed by major brokerage firms, including, among others, Merrill Lynch Capital Markets ("Merrill Lynch"), Salomon Smith Barney, Raymond James & Associates, Inc. ("Raymond James"), Morgan Stanley Dean Witter ("Morgan Stanley"), Credit Suisse First Boston Corporation ("CSFB"), Bear, Stearns & Co. Inc. ("Bear Stearns"), Donaldson Lufkin & Jenrette ("DLJ") and Brown Brothers Harriman & Co. ("Brown Bros."), who issued reports which were distributed to their sales force and certain customers of their respective brokerage firms and which were available to the investing public on various automated data retrieval services. In writing their reports, analysts reflected information provided by defendants;

(e) The market price of Rite Aid securities reacted efficiently to new information entering the market; and

(f) Plaintiffs and other members of the Class acquired Rite Aid securities after the time that defendants made the misrepresentations or omissions and before the time that the truth was revealed, without knowledge of the falsity of the misrepresentations.

43. The foregoing facts clearly indicate the existence of an efficient market for the trading of Rite Aid securities and, consequently, the applicability of the fraud-on-the-market presumption of reliance. Accordingly, plaintiffs and the other members of the Class are entitled to a presumption of reliance with respect to the misstatements and omissions alleged in this Complaint.

DEFENDANTS' WRONGFUL COURSE OF CONDUCT

Undisclosed Adverse Factors Impacting Rite

Aid's Business During The Class Period

44. Throughout the Class Period, Rite Aid and the Individual Defendants portrayed Rite Aid as a company that had "very strong profitability," and that was "one of the best-positioned, strongest performing health services companies in the United States."

45. However, immediately before and during the Class Period, Rite Aid was experiencing serious problems that undermined its ability to attain growth in line with public expectations. These problems consisted of, inter alia, the following:

(a) Rite Aid stores were suffering from increasing competition from other retail drugstore chains, many of which typically had larger, more attractive retail stores that were better able to generate sales of front-end (non-pharmacy) products, which sales were becoming an increasingly important factor to the financial success of drugstore operators. In

addition, Rite Aid was suffering from an increasingly outdated distribution system, which prevented Rite Aid from realizing economies of scale and the benefits of more modern distribution facilities and technology.

(b) Although Rite Aid attempted to address these problems by, inter alia, (1) acquiring several large regional retail drug store chains (including Thrifty, K&B and Harco), (2) embarking on a program to replace several hundred of its older pharmacies with new prototype stores emphasizing non-pharmacy sales, and (3) embarking on a program to replace its older distribution warehouses with a smaller number of substantially bigger, state-of-the-art automated distribution centers, during the Class Period Rite Aid's expansion and modernization programs were encountering significant -- but undisclosed -- problems. For example:

(i) Rite Aid was experiencing significant difficulties in its efforts to integrate its newly-acquired drug store chains. Most notably, Rite Aid's recently acquired Thrifty stores on the West Coast proved to be too large for Rite Aid to operate efficiently, with the result that these stores began to experience sharply deteriorating sales.

(ii) Rite Aid was also experiencing significant cost over-runs in connection with its store modernization. Indeed, pressures to reduce costs in connection with the Company's store modernization plan became sufficiently severe that, as described in further detail below, the Company embarked on a deliberate policy of using its store managers and assistant managers (who are classified as "exempt" employees under applicable state labor laws) to perform tens of thousands of hours of overtime work on construction and renovation in Rite Aid stores, ordinarily performed by "non-exempt" employees, as part of an improper scheme to get needed work done without having to incur the expense of overtime or additional new hires. This was not the only example of Rite Aid's efforts to illegally cut corners in order to cut costs associated with its West Coast acquisitions. For example, in May 1999 Rite Aid paid $60,000 to the Oregon Pharmacy Board for violating state regulations that require all drugstores in that state to have a managing pharmacist -- a payment that came shortly after Rite Aid had agreed to pay a $10,000 penalty in February 1999 to the Washington State Board of Pharmacy in the wake of complaints that the rate of errors by Rite Aid pharmacists in filling prescriptions in that state had noticeably increased.

(iii) The Company also experienced significant problems with the custom-designed software that was to be used in operating the first of its new, supposedly "state-of-the-art" distribution centers, located in Perryman, Maryland. As a result of these severe problems, the processing capabilities of the Perryman center were substantially impaired during the middle portion of the Class Period, thereby preventing the Company from reaping the benefits of this huge new center until fiscal 2000, and forcing Rite Aid to delay the closing of the older, inefficient warehouse that the Perryman facility was intended to replace.

Summary of Rite Aid's Improper Accounting and

Business Practices During the Class Period

46. Rather than publicly disclose these material problems, Defendants engaged in various improper practices that were designed to fraudulently manipulate and inflate its reported financial performance in an effort to fraudulently conceal the weakening state of Rite Aid's business and growth rate, and to bolster the market price of its securities. These general practices -- which were not timely disclosed to the investing public -- included the following:

(a) Improper Accounting Practices Admitted by the Company in Rite Aid's June Restatement and Announced Second Restatement. As detailed below and as subsequently admitted by the Company in the June 1999 Restatement and the second restatement announced on October 11, 1999 (the "Announced Second Restatement"), Rite Aid repeatedly inflated its balance sheet and publicly-reported earnings and financial performance during the Class Period by, among other things:

(i) Understating expenses by improperly capitalizing millions of dollars related to store planning, development, construction and other costs as "project costs," instead of reporting them as current operating expenses, in violation of GAAP. For example, according to defendants the June 1999 Restatement, in the Second Quarter of fiscal year 1999 alone improperly capitalized at least $4.4 million as project costs instead of as current operating expenses related to store planning, development, construction and other costs, thereby inflating reported earnings from operations by a corresponding amount.(1)

(ii) Understating expenses by improperly charging millions of dollars in current operating expenses against prior accruals for acquisitions, in violation of GAAP. For example, according to the June 1999 Restatement, in the second quarter of fiscal year 1999 alone defendants improperly charged at least $3.9 million in current operating expenses against a prior accrual for acquisitions, thereby inflating reported earnings from operations by a corresponding amount.(2)

(iii) Understating expenses by prematurely taking unprocessed advertising credits and purchase term discounts against the cost of supplier goods sold to Rite Aid and treating them as accounts receivable. For example, the Company prematurely included as accounts receivable reimbursements it anticipated from suppliers for advertising paid for by Rite Aid on behalf of suppliers, even before these anticipated reimbursements were processed by Rite Aid or the suppliers. These reimbursements are known in the industry as "cooperative advertising credits," and are generally given by the supplier as a credit against its invoice for goods sold to Rite Aid once it has been delivered proof of the advertising. Rite Aid also prematurely included as accounts receivable discounts suppliers are willing to accept if its products are sold in a certain time frame. These reimbursements are known in the industry as "purchase term discounts" and are generally given by the supplier later as a credit against its invoice once proof of sale has been

established. This improper accounting practice of prematurely taking unprocessed advertising credits and purchase term discounts against amounts owed suppliers had the effect of lowering the amount of current operating expenses reported by the Company. Because the credits and discounts were not currently due from the suppliers, this practice violated GAAP.

(iv) Understating expenses by improperly under-reporting the costs associated with advertising and new store openings in violation of GAAP;

(v) Understating expenses by using certain accruals taken for store closings, inventory disposal, and acquisitions of smaller drugstore chains and PCS in prior periods to manage earnings by reversing such accruals into income in later periods, frequently without disclosing such reversals, or by improperly charging current expenses against such accruals all in violation of GAAP;

(vi) Overstating earnings and understating expenses by improperly including substantial amounts of uncollectible consumer charge accounts as accounts receivable, in violation of GAAP;

(vii) Inflating the assets on the Company's balance sheet, in violation of GAAP, by including intangible assets (such as goodwill, lease acquisition costs and patient prescription file purchases) which were impaired and recoverable only in part, if at all; and

(viii) Inflating assets and earnings by failing to write down obsolete and expired merchandise.

(b) Rite Aid's Practice of Improperly Claiming Deductions from its Suppliers' Bills. In order to increase its reported profits, defendants also caused Rite Aid to implement a policy or practice of claiming unilateral, unconsented to reductions on invoices it received from its suppliers, including Bayer, Bic Corporation, Dial Corporation, and Mars, Inc. As revealed by The Wall Street Journal on March 31, 1999, a significant number of unauthorized deductions, amounting to millions of dollars, were taken just prior to the close of thefiscal year 1999 (the fiscal year ending February 27, 1999), thereby permitting the Company to report artificially inflated year-end financial results. Defendants knew that such deductions had not been agreed to and were based on improper pretextual grounds. For example, as a representative of Bayer told The Wall Street Journal, even though Bayer generally gives credit to its wholesale customers (such as Rite Aid) for damaged or outdated goods, Rite Aid's claimed allowances for "damaged goods" were running at 6% of Bayer's total annual shipments, which was "two to three times the level of other customers." After repeated false denials that it had inflated its claimed deductions in an effort to deflate its reported accounts payable and after repeatedly asserting that it would not pay the disputed amounts, in September 1999 the Company implicitly conceded that it had taken improper deductions by announcing that it would pay its vendors the vast majority of the disputed amounts from fiscal 1999.

(c) Rite Aid's Practice of Unlawfully Refusing to Pay Overtime Wages to its Store Managers. During the Class Period, the Company also failed to disclose its reliance on various improper employment practices, which allowed it to reduce costs and artificially inflate its reported earnings in the short run, but which -- unbeknownst to investors -- exposed the Company to substantial legal liability. For example, in March 1999, a class action was filed in California state court on behalf of store managers and assistant store managers of Rite Aid and/or Thrifty drug stores. This action was later certified. Pursuant to defendants' employment policies, managers and assistant managers are classified as "exempt" and are paid a fixed salary for the hours they work. A manager or assistant manager is typically on the premises at all times, resulting in a work day in excess of eight (8) hours.

(i) During the Class period it was the policy of Rite Aid to prohibit managers from authorizing the payment of overtime to non-exempt employees (i.e., those employees who are paid on the basis of the hours they actually work). Managers were told that if they authorized overtime, they would be terminated. However, due to the fact that its stores were understaffed, Rite Aid managers and assistant managers were called upon to perform many or all of the same tasks and duties of non-exempt employees in order to keep their stores in operation. Significant pressure was placed on managers and assistant managers by upper level management to compensate for the shortage of employees created by the overtime prohibition, and managers were regularly exposed to hostility, threats, and commands from their supervisors to comply with the no-overtime policy. As a result of these policies and practices, Rite Aid managers and assistant managers were required to work in excess of forty (40) hours per week and to spend as much as fifty percent or more of their working hours performing duties typically delegated to non-exempt employees (e.g., construction and renovation in Rite Aid stores).

(ii) Wage Order Numbers 7-89 and 7-98 of California's Industrial Welfare Commission ("IWC") provide for the payment of overtime wages equal to one and one-half times an employee's regular rate of pay for all hours worked over forty (40) hours in a week. The Rite Aid Defendants intentionally and wrongfully designated their managers and assistant managers as "exempt" in order to avoid payment of overtime wages and other benefits as required by the California law. Defendants' failure to pay overtime wages, which was not publicly disclosed, may result in a liability against Rite Aid in an amount between $20 and $50 million, including punitive damages.

(d) Rite Aid's Improper Practice of Selling Expired Products. As alleged in various lawsuits filed in early 1999, during the Class Period Rite Aid also engaged in the widespread and illegal practice of selling various expired products -- including children's medications, baby formula, condoms, spermicide, and pregnancy tests -- in California and several other states. Although the Company eventually agreed to pay $1.4 million to settle lawsuits arising from this conduct, defendants never disclosed to the public that Rite Aid had resorted to such unlawful business practices to avoid having to write-off the cost of expired goods and to thereby artificially inflate its reported financial results.

(e) Rite Aid's Practice of Overcharging its Uninsured Customers for Prescription Drugs. According to various press reports and legal filings, the Individual Defendants also caused Rite Aid to adopt a deliberate policy of overcharging its uninsured customers as much as $1.15 per prescription on purchases of prescription medication -- a practice that was illegal and that exposed the Company to substantial monetary liability, but which enabled the Company to further artificially inflate its reported revenue and profits. For example, as reported in The Wall Street Journal, the Florida Attorney General filed an action on September 22, 1999 accusing Rite Aid of overcharging more than 29,000 uninsured prescription drug customers in Florida over a 27-month period between 1994 and 1996, asserting claims of theft, wire fraud, deceptive trade practices and racketeering, and seeking total penalties against Rite Aid of more than $2 billion. As alleged in the Florida Attorney General's action, Rite Aid directed pharmacists to overcharge uninsured customers buying "emergency-type" drugs -- such as pain medications or antibiotics -- by as much as $1.15 per prescription. The Company even went so far as to install custom computer software so that it could monitor the profits from these improper overcharge transactions at Rite Aid's corporate headquarters. In addition, the Company tied pharmacists' performance reviews and bonuses to this price-gouging scheme. (Indeed, many pharmacists were apparently ordered by management to overcharge their customers despite their concerns about the illegality of the practice, and a number of pharmacists quit Rite Aid because they could not tolerate cheating customers anymore.) Although the Florida action was limited to conduct between 1994 and 1996 (primarily because Rite Aid exited the Florida market after 1996), a consumer class action lawsuit has been filed in Common Pleas Court in Philadelphia on behalf of Rite Aid customers in Pennsylvania who were allegedly subjected to similar overcharges during the period September 27, 1993, through the present. In addition, the Attorneys General of California, New York, and New Jersey have all announced investigations into Rite Aid's pricing practices in their respective states.

(f) Rite Aid's Failure To Disclose That It Was The Subject of a Pending Governmental Investigation by the Florida Attorney General. The Rite Aid Defendants not only concealed from investors the fact that Rite Aid was engaging in an illegal scheme to overcharge its uninsured prescription drug customers in Florida and elsewhere, but also concealed the fact that the Florida Attorney General had served the Company with a subpoena in early 1998 which sought production of documents relating to the Company's billing practices. In response, Rite Aid produced thousands of pages of documents listing each overcharge transaction, identifying the name and address of each overcharged customer, the medication involved, and the amount of the overcharge. Remarkably, when the news of the Florida lawsuit was finally disclosed in September 1999, Rite Aid admitted that (from the Company's perspective) the Florida Attorney General's action was "not unexpected." Defendants' failure to disclose the Florida Attorney General's investigation into the Company's billing practices, the related subpoena and the further material risk of legal pleadings against a Company constituted a deliberate, or at least reckless, violation of SEC and GAAP disclosure requirements.

Breakdown of Rite Aid's Internal Accounting Controls

47. In addition to the foregoing improper accounting and business practices which caused the Company's financial results to be materially misstated and inflated, throughout the Class Period the Company also suffered from a chronic and systematic breakdown of its internal accounting controls. Indeed, as Rite Aid's outside auditors, defendant KPMG privately told Rite Aid management in a letter dated June 24, 1999, the Company's internal controls were insufficient to allow the Company's management "to accumulate and reconcile information necessary to properly record and analyze transactions on a timely basis." This lack of adequate internal controls increased the opportunity for defendants to commit the fraud alleged herein, and rendered Rite Aid's Class Period financial statements inherently unreliable and non-compliant with GAAP. Nonetheless, throughout the Class Period, the Company issued numerous quarterly and annual financial statements that purported to be prepared in compliance with GAAP without ever disclosing the existence of significant and material deficiencies in its internal accounting controls.

48. Although these materially adverse factors, trends, and facts were apparent to defendants, defendants failed to timely and adequately disclose them during the Class Period. Instead, as detailed below, the Rite Aid Defendants continued to portray Rite Aid in positive terms throughout the relevant period, and any partial disclosures that they may have made of certain of these problems were materially incomplete and calculated to deceive or mislead investors as to the true nature and extent of the problems and material liabilities facing the Company.

DEFENDANTS' MATERIALLY FALSE AND MISLEADING STATEMENTS DURING THE CLASS PERIOD

49. On or about May 2, 1997, the first day of the Class Period, Rite Aid issued its 1997 Annual Report to Shareholders (the "1997 Annual Report"). This Annual Report, which was signed by defendants Grass and Noonan, reported that sales for fiscal year 1997 had increased 28% to $6.97 billion, compared to $5.45 billion for fiscal 1996, and that net earnings (before certain non-recurring charges and extraordinary items) had increased approximately 28% to $202.9 million, compared to $158.9 million for fiscal year 1996.

50. The financial statements contained in the 1997 Annual Report also represented that Rite Aid "maintains an effective internal control structure designed to provide reasonable assurance at reasonable costs that assets are safeguarded from material loss, that transactions are executed in accordance with management's authorization and that financial records are reliable for use in preparing financial statements."

51. However, as detailed herein, Rite Aid's 1997 Annual Report was materially false and misleading because, inter alia, it failed to disclose that the Company's reported earnings, sales and revenue figures for the fiscal quarter and fiscal year ending March 1, 1997, were materially and artificially inflated as a result of Rite Aid's undisclosed and improper business and accounting practices described in paragraphs 46(a)-(f) above and 153

through 161 below. In addition, the statements in the 1997 Annual Report concerning Rite Aid's internal controls were materially false and misleading for the reasons set forth in paragraph 47 above and paragraphs 144 and 145 below.

52. On May 29, 1997, Rite Aid filed its Form 10-K for its fiscal year ended March 1, 1997 (the "1997 Form 10-K"). The 1997 Form 10-K, which was signed by defendants Grass, Noonan, and Bergonzi, incorporated by reference the statements set forth in paragraphs 49 and 50 above. However, as detailed above, Rite Aid's 1997 Form 10-K was also materially false and misleading for the reasons set forth in paragraph 51 above.

53. On or about July 11, 1997, Rite Aid filed its Form 10-Q for the first quarter of fiscal 1998 (ending May 31, 1997) with the SEC. This Form 10-Q was signed by defendant Bergonzi, and reported that net income increased approximately $35.5 million or almost 108.6% during the quarter compared to the same period in fiscal 1997, and that sales for the first quarter increased 89.6% to $2,664,600,000 compared to $1,405,302,000 for the same period in the prior year. It also noted that during the first quarter the Company "opened 28 drugstores, closed 29 smaller outlets, enlarged 6 locations, and relocated 29 units" and that "[s]tores in operation at the end of the quarter totaled 3,622." The 10-Q also stated that the financial information contained therein "reflects all adjustments (consisting primarily of normal recurring adjustments) which are, in the opinion of management, necessary to a fair statement of the results for the interim periods."

54. However, as detailed herein, Rite Aid's July 11, 1997 Form 10-Q was materially false and misleading because, inter alia, it failed to disclose that the Company's reported sales, net income and earnings for the quarter were materially and artificially inflated as a result of Rite Aid's undisclosed and improper business and accounting practices as set forth in paragraphs 46(a)-(f) above and paragraphs 153 through 161 below.

55. On or about October 9, 1997, Rite Aid filed a quarterly report on Form 10-Q with the SEC containing financial results for the second quarter of fiscal 1998, ended August 30, 1997. This Form 10-Q was signed by defendant Bergonzi. Rite Aid reported that net income increased approximately $25.4 million, or almost 72% over the same period during fiscal 1997, to $60.6 million, and that sales for the second quarter of fiscal 1998 increased 85.1% to $2,634,200,000 over the same period in the prior year. The 10-Q also represented that the financial information contained therein "reflects all adjustments (consisting primarily of normal recurring adjustments) which are, in the opinion of management, necessary to a fair statement of the results for the interim periods." The 10-Q also stated that during the second quarter, the Company "added 39 drugstores, closed 28 smaller outlets, enlarged 4 locations and relocated 48 units. Rite Aid also acquired 332 stores with the Harco and K&B acquisitions. Year-to-date totals include 67 new stores, 57 closings, 10 expansions and 77 relocations."

56. However, as detailed herein, the October 9, 1997 Form 10-Q was materially false and misleading because, inter alia, it failed to disclose that the Company's reported sales, net income and earnings for the quarter were materially and artificially inflated as a result of

Rite Aid's undisclosed and improper business and accounting practices as set forth in paragraphs 46(a)-(f) above and paragraphs 153 through 161 below.

57. On or about January 12, 1998, Rite Aid filed a quarterly report on Form 10-Q with the SEC containing financial results for the third quarter of fiscal 1998, ended November 29, 1997. This Form 10-Q was signed by defendant Bergonzi. Rite Aid reported that for the third quarter net income increased approximately $30.48 million to $67.9 million, or 81.5% over the same period during fiscal 1997, and that sales had increased 94.4% to $2,885,666,000 over the same period in the prior year. The Company stated that the financial information in the Form 10-Q "reflects all adjustments (consisting primarily of normal recurring adjustments) which are, in the opinion of management, necessary to a fair statement of the results for the interim periods." The 10-Q also stated that during the third quarter the Company "added 49 drugstores, closed 33 smaller outlets, enlarged 13 locations and relocated 71 units. An additional 332 stores were acquired at the end of August with Harco and K&B. Year-to-date totals include 116 new stores, 90 closings, 23 expansions and 148 relocations."

58. However, as detailed herein, the January 12, 1998 Form 10-Q was materially false and misleading because, inter alia, it failed to disclose that the Company's reported sales, net income and earnings for the quarter were materially and artificially inflated as a result of Rite Aid's undisclosed and improper business and accounting practices as set forth in paragraphs 46(a)-(f) above and paragraphs 153 through 161 below.

59. On or about May 2, 1998, Rite Aid issued its 1998 Annual Report to Shareholders (the "1998 Annual Report"). The 1998 Annual Report, which was signed by defendants Grass and Noonan, reported that sales for the fiscal year ended March 1, 1997, increased 63% to $11.375 billion, compared to $6.97 billion for fiscal 1997, and that net income for fiscal 1998 increased 174% to $316.4 million, compared to $115.4 for fiscal year 1997.

60. The 1998 Annual Report also represented that Rite Aid "maintains an effective internal control structure designed to provide reasonable assurance at reasonable costs that assets are safeguarded from material loss, that transactions are executed in accordance with management's authorization and that financial records are reliable for use in preparing financial statements."

61. However, as detailed herein, Rite Aid's 1998 Annual Report was materially false and misleading because, inter alia, it failed to disclose that the Company's reported earnings, sales and revenue figures for the fiscal quarter and fiscal year ending February 28, 1998 were materially and artificially inflated as a result of Rite Aid's undisclosed and improper business and accounting practices described in paragraphs 46(a)-(f) above and paragraphs 153 through 161 below. In addition, the statements in the 1998 Annual Report concerning Rite Aid's internal controls were materially false and misleading for the reasons set forth in paragraph 47 above and paragraphs 144 and 145 below.

62. On or about May 18, 1998, Rite Aid filed its Form 10-K for its fiscal year ended February 28, 1998 (the "1998 Form 10-K"). The 1998 Form 10-K, which was signed by

defendants Grass, Noonan, and Bergonzi, incorporated by reference the statements set forth in paragraphs 59 and 60 above. However, as detailed above, Rite Aid's 1998 Form 10-K was also materially false and misleading for the reasons set forth in paragraph 61 above.

Rite Aid's Aggressive Expansion Program

63. Prior to the commencement of the Class Period, Rite Aid had embarked upon an aggressive expansion program, primarily through acquisitions. This expansion program continued into the class period, resulting in Rite Aid's becoming the third largest drugstore chain in the country in terms of dollar volume by 1999. For example, on December 12, 1996, the Company acquired Thrifty, a large drugstore chain in the western United States with over 1,000 stores in ten states. On August 27, 1997, Rite Aid acquired K&B and Harco. K&B operated 186 stores in Louisiana, Alabama, Mississippi, Texas, Tennessee, and Florida and, in 1996, was the thirteenth largest drugstore chain in the United States in terms of sales. Harco operated 146 stores in Alabama, Mississippi, and Florida and, in 1996, was the seventh largest drugstore chain in the United States in terms of sales.

64. In fiscal 1998 (the year ended February 28, 1998), Rite Aid had, according to its senior management, "the most challenging, exciting and profitable year in its history" as it integrated its recently acquired stores into its pre-existing operational system. As of February 28, 1998, Rite Aid operated 3,975 drugstores.

65. During fiscal 1999 (the year ended February 27, 1999) ("Fiscal 1999"), Rite Aid continued its aggressive internal expansion program. This internal expansion program was designed to (a) replace and remodel Rite Aid's existing stores with free-standing units that would more heavily emphasize front-end (non-pharmacy) sales, (b) increase Rite Aid's investment in technology, and (c) replace Rite Aid's network of old, outdated warehouses with a smaller number of larger state-of-the-art distribution centers.

66. In connection with its internal expansion program, on June 15, 1998, Rite Aid announced it would take a one-time pre-tax charge of $289.7 million ($173.8 million after tax) in the second quarter 1999 ending August 29, 1998 ("Second Quarter 1999"), to reserve for the closing of 320 stores over a 12 month period. According to the Company's Form 10-Q for the first quarter ended May 30, 1998, the Company planned to accelerate the pace of its program to replace its remaining smaller East Coast stores with its substantially larger, 12,000 square foot prototype stores that the Company believed were more successful. The Company stated that it would increase the number of stores it planned to open in Fiscal 1999 to 500, of which 300 would be replacement stores and 200 would be new stores. In addition, the Company also announced that it was planning to open new, highly automated state-of-the-art distribution centers to replace the Company's older, less efficient facilities. The effect of these new state-of-the-art distribution centers, as stated by the Company, would be to improve service to Rite Aid's stores and dramatically cut inventory costs.

67. On or about June 30, 1998, Rite Aid filed its quarterly report on Form 10-Q with the SEC containing financial results for the first quarter of fiscal 1998, ended May 30, 1998. This Form 10-Q was signed by defendant Bergonzi, and reported that net income for the quarter had increased approximately $22.6 million to $90.8 million, or 33.1% over the same period during fiscal 1997, and that sales that increased 13.8% to $3,032.7 million over the same period. The 10-Q also represented that the financial information in the Form 10-Q "reflects all adjustments (consisting primarily of normal recurring adjustments) which are, in the opinion of management, necessary to a fair statement of the results for the interim periods." The 10-Q also noted that during the third quarter, the Company "opened 50 drugstores, closed 15 smaller outlets and enlarged or relocated 79 units. Stores in operation at the end of the quarter totaled 4,010."

68. However, as detailed herein, the June 30, 1998 Form 10-Q was materially false and misleading because, inter alia, it failed to disclose that the Company's reported sales, net income and earnings for the quarter were materially and artificially inflated as a result of Rite Aid's undisclosed and improper business and accounting practices as set forth in paragraphs 46(a)-(f) above and paragraphs 153 through 161 below.

69. In September and October of 1998, the Rite Aid Defendants also made a number of public statements concerning the launch of its Perryman Distribution Center, which (as previously announced in its 1998 Form 10-K) was intended to replace the Company's "smaller, inefficient warehouse" in Shiremanstown, Pennsylvania. At 875,000 square feet, the Perryman Center would be more than twice the size of the Shiremanstown facility and would distribute goods to more than 1000 Rite Aid stores, and its launch was viewed as a crucial step in enhancing the Company's profitability. The Rite Aid Defendants' public statements concerning the launch of the Perryman facility during this time period included the following:

a. On September 7, 1998, Rite Aid issued a press release stating that it had unveiled its "new 22-acre state-of-the-art distribution facility in Perryman Md."

b. In an article in the October 5, 1998 Drug Store News entitled "Rite Aid: Reinventing A Business To Stay A Step Ahead," defendant Grass stated: "[W]e have new distribution centers that will be coming on line. A huge new one opened last month in Perryman, Md. . . . ."

c. In the article from the same edition of Drug Store News entitled "Rite Aid: Focus Is On Keeping Inventory Down, Increasing Turns," defendant Bergonzi stated:

Over the next three to four years, Rite Aid plans to affect additional savings by reducing its supply network from 10 distribution centers to five. The older, smaller distribution centers will be closed. In their place, Rite Aid will open highly automated, state-of-the-art facilities with the ability to handle twice the volume of the older facilities.

The first one, the Perryman, Md. facility, is up and running.

d. Similarly, another article in Drug Store News entitled "Rite Aid: Transforming Rite Aid Into A Retail Powerhouse," quoted defendant Noonan as stating:

These new [distribution] centers will not only improve service to the stores, but are also expected to reduce dramatically Rite Aid's inventory costs. "We are confident that we will have a substantial reduction in distribution and operating costs," [defendant] Noonan said. "Perryman [alone] will save us more than $25 million . . . a year."

e. Another article in the same issue of Drug Store News entitled "Cutting-Edge Technology Transforms Chain Strategies," which was based on information provided by Ken Whiting, Rite Aid's senior vice president of information services, stated:

Perryman opened with a new sophisticated warehouse management system that totally controls the work flow in the DC [distribution center]. Whiting said the new management system will control the entire process of the warehouse's operations, "from in-bound and receiving through putting away, picking and shipping."

Rite Aid purchased an off-the-shelf package program, but then modified it, integrating it with the way the Rite Aid operational system interfaces.

70. However, the foregoing statements regarding the Perryman Center were materially false and misleading because they gave the impression that the Perryman Distribution Center was operating as intended and that the Company was currently experiencing reductions in distribution and operating costs. At the time these statements were made, defendants knew that the Perryman Distribution Center was only marginally operating and was far from being "up and running." Indeed, as defendants finally disclosed on March 12, 1999, due to software problems with its warehouse management system, the Perryman Distribution Center was not fully operational until March 1, 1999, precluding the Company from closing its older Shiremanstown, Pennsylvania distribution center as planned in October 1998, and preventing it from realizing any efficiencies from the Perryman Distribution Center in Fiscal 1999. Indeed, the existence of these software problems, which required the Company to operate both the Perryman and Shiremanstown

distribution centers simultaneously during the fourth quarter, resulted in substantial duplicative costs and was one of the reasons Rite Aid later failed to meet Wall Street earnings estimates for the fourth quarter of fiscal 1999.

Rite Aid's Materially False and Misleading Second Quarter 1999 Form 10-Q

71. On October 13, 1998, the Company filed its Form 10-Q for the Second Quarter 1999 (the quarter ended August 29, 1998). Sales for the thirteen and twenty-six week periods ended August 29, 1998, were reported to have increased 14.3% and 14.1%, respectively, over the same periods from the previous year. Inventory was reported to have been reduced by over $63 million from the start of fiscal 1999. During the Second Quarter 1999, the Company recorded pre-tax charges of $289.7 million for the closing of 379 stores (which closings were to be completed by the end of fiscal 1999), and for other charges. The Second Quarter 1999 Form 10-Q stated:

These charges principally relate to a strategic exit plan which includes vacating certain markets, closing bantam East Coast stores and consolidating certain other store locations. As of August 29, 1998, 155 stores were closed. Costs associated with the disposal of the inventory in the closed stores only, including the use of liquidators, amounted to $25.5 million and is included in with cost of goods sold in the statement of income.

The remaining pretax charges of $264.2 million are included with selling, general and administrative expenses in the statement of income and consist of (i) $144.8 million for the present value of non-cancellable lease payments and related contractual obligations; (ii) $94.2 million for impairment losses associated with land, buildings, fixtures, leasehold improvements, prescription files, lease acquisition costs and goodwill; and (iii) $25.2 million for other costs including expenses associated with previously closed stores.

In all, Rite Aid stated that it planned to close 224 additional store locations by the end of the fiscal year ending February 27, 1999. Including these pre-tax charges of $289.7 million, the Company's net loss for the Second Quarter 1999 was $92.7 million, compared to $60.6 million net income in the comparable quarter one year earlier. The Second Quarter 1999 Form 10-Q further represented that the financial information "reflects all adjustments (consisting primarily of normal recurring adjustments) which are, in the opinion of management, necessary to a fair statement of the results for the interim periods." Defendant Bergonzi signed the Second Quarter 1999 Form 10-Q.

72. However, as detailed herein, the Second Quarter 1999 Form 10-Q was materially false and misleading because, inter alia, it failed to disclose that the Company's reported sales, net income and earnings for the quarter were materially and artificially inflated as a

result of Rite Aid's undisclosed and improper business and accounting practices as set forth in paragraphs 46(a)-(f) above and paragraphs 153 through 161 below. More specifically, defendants misrepresented or failed to disclose, inter alia, that:

(a) The pre-tax charge of $289.7 million for the closing of 379 stores was arbitrary and defendants misled the market into believing that defendants knew the costs related to such closings, had properly reserved for those costs, and had thoroughly formulated a "strategic exit plan," when, in reality, the charge was partially intended to manage future earnings, as later revealed by the June 1999 Restatement;

(b) Defendants had overestimated the pre-tax charge of $25.5 million for the costs associated with the disposal of inventory of previous closed stores by at least $16.9 million as admitted in the June 1999 Restatement, and included material amounts which the Company intended to charge back to suppliers over time, thus dramatically overstating cost of goods sold in the Second Quarter 1999 in order to enhance earnings in later periods;

(c) Defendants overstated earnings from operations in the Second Quarter 1999, exclusive of the $289.7 million one-time charge, by improperly capitalizing at least $4.4 million as project costs instead of as current operating expenses related to store planning, development, construction, and other costs, as admitted by the defendants in the June 1999 Restatement;

(d) Defendants overstated earnings from operations in the Second Quarter 1999, exclusive of the $289.7 million one-time charge, by improperly charging at least $3.992 million in current operating expenses against a prior accrual for acquisitions, as admitted by the defendants in the June 1999 Restatement; and

(e) Defendants overstated earnings from operations in the Second Quarter 1999, exclusive of the $289.7 million one-time charge, by improperly including at least $1.373 million in unprocessed advertising credits and purchase term discounts from suppliers and uncollectible consumer charge accounts as accounts receivable, as admitted by defendants in the June 1999 Restatement.

73. In addition, the Company's Second Quarter 1999 Form 10-Q was materially false and misleading for failing to disclose (a) the existence of the Florida Attorney General's racketeering investigation into its billing practices, and (b) the Company's various other illegal and improper business practices as described in paragraphs 46(a)-(f) above.

The Announcement of The PCS Acquisition

74. On November 17, 1998, Rite Aid issued a press release announcing that it had entered into an agreement with Eli Lilly and Company ("Lilly") for Rite Aid to acquire Lilly's subsidiary, PCS, for $1.5 billion in cash (the "PCS Acquisition"). With regard to the financing for the PCS Acquisition, the Company stated:

The purchase, which is anticipated to close in the first quarter of 1999, is expected to be financed with a sufficient amount of common equity and equity-linked securities to allow Rite Aid to maintain its credit rating and its strategic and financial flexibility. A bank commitment for $1.5 billion is in place to provide backup interim financing with respect to the timing to the equity sale.

75. The PCS Acquisition was extremely valuable to Rite Aid because it meant that, through PCS, Rite Aid could direct huge amounts of pharmacy business to itself. In combination with Eagle Managed Care, Rite Aid's own PBM subsidiary, the PCS Acquisition would give Rite Aid control over 54 million prescription plan members who purchase more than 300 million prescriptions annually, representing $10 billion in prescription drug sales. Although PCS was extremely expensive, Rite Aid intended to finance the PCS Acquisition with artificially inflated Rite Aid stock.

76. Analysts reacted favorably to the announcement of the PCS Acquisition. For example, on November 18, 1998, Salomon Smith Barney analyst Jonathan Ziegler issued a report characterizing the acquisition as "a major positive" for Rite Aid's existing drug store business. His report also stressed that in the post-announcement conference call with analysts (during which defendant Grass spoke for the Company), Rite Aid represented that the transaction "will be financed through 2/3 common equity and 1/3 equity linked securities without altering Rite-Aid's credit rating."

77. Similarly, on November 18, 1998, Bear Stearns raised its rating on Rite Aid stock from attractive to "Buy." Bear Stearns's investment thesis was based on the belief that "very compelling demographic trends would enable the stock to outperform the market. Our upgrade is based upon increasing confidence that the company's large investment to relocate stores on the East is paying off, the West Coast stores will improve, and our belief that the PCS acquisition will add to the value of Rite Aid over the long term."

78. Shortly thereafter, based on Rite Aid's commitment to maintain its balance sheet strength and not incur additional debt, Standard & Poor's affirmed its credit ratings on Rite Aid.

Rite Aid's Materially False And Misleading Third Quarter 1999 10-Q

79. On December 14, 1998, defendants issued a press release announcing financial results for the Third Quarter 1999 ended November 28, 1998 ("Third Quarter 1999"). The Company reported that net income rose 27.9% to $86,857,000, compared to $67,894,000 in Fiscal 1998. The release also noted that during the Third Quarter 1999 the Company had "added 52 drugstores, closed 123 smaller outlets, remodeled 64 locations and

relocated and expanded 80 units." Year to date, Rite Aid added 145 new stores, closed 293 stores, remodeled 151 locations and relocated and expanded 227 units.

80. Based on these financial results and the Company's continued commitment to its expansion plans, analysts reaffirmed their positive assessments on Rite Aid stock. For example, (a) On December 15, 1998, Bear Stearns, citing the Company's purported progress in implementing its modernization and expansion programs, reiterated its "Buy" rating on Rite Aid stock and its 12-month target price of $63.

(b) On December 29, 1998, Raymond James issued an analyst report giving Rite Aid a "Buy" rating, and reaffirming the firm's FQ4 and fiscal year 1998 EPS estimates of $0.53 and $1.51. The report stated, "We spoke to management on [December 28, 1998]. Early indications are that the Christmas season was strong and the company is on track to meet its short-term sales/inventory goals."

(c) Similarly, on January 4, 1999, DLJ rated Rite Aid stock as a "Buy" with a 12-month price target of $55.00. Based on information provided by the Rite Aid Defendants, the report stated "trends appear to have strengthened during the last two weeks of the month allowing Rite Aid to meet plan. In addition, front-end sales on the east coast remain very solid. Although there is still two months to go, Rite Aid appears to have cleared the greatest burden in achieving its fourth quarter expectations."

81. On January 8, 1999, Morgan Stanley issued an analyst report written by Debra J. Levin continuing to rate Rite Aid a "Strong Buy" and raising their price target on shares of Rite Aid by $6 to $60.

82. That same day, January 8, 1999, the stock hit an intra-day 52 week high of $51 1/8, and closed at $50 15/16. Under the terms of the Company's lucrative executive incentive plan, the Individual Defendants collectively stood to receive $190 million in stock or cash if the price of Rite Aid stock averaged above $49.50 for 30 days during fiscal years 1999 to 2001.

83. On January 12, 1999, the Company filed its Third Quarter 1999 Form 10-Q for the quarter ended November 28, 1998. Sales for the thirteen week period and thirty nine week periods were reported to have increased 8% and 12% over the same periods from the previous year. Net income for the Third Quarter 1999 was reported at $86.9 million, compared to $67.9 million for the third quarter a year earlier. The Company also reported that, during the period, the Company had opened 52 drug stores, closed 123 outlets and enlarged or relocated 144 units. Stores in operation at the end of the Third Quarter 1999 totaled 3,827. The Third Quarter 1999 Form 10-Q further represented that the financial information "reflects all adjustments (consisting primarily of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of the results for the interim period." Defendant Bergonzi signed the Third Quarter 1999 Form 10-Q.

84. However, the statements identified above in paragraphs 79 and 83 were materially false and misleading because they misrepresented or failed to disclose, inter alia, that:

(a) Third Quarter 1999 net income was overstated by at least $6.299 million, as admitted by defendants in the June 1999 Restatement;

(b) Defendants overstated earnings from operations in the Third Quarter 1999 by improperly capitalizing at least $4.4 million as project costs instead of as current operating expenses related to store planning, development, construction and other costs, as admitted by defendants in the June 1999 Restatement;

(c) Defendants overstated earnings from operations in the Third Quarter 1999 by improperly charging at least $2.657 million in current operating expenses against a prior accrual for acquisitions, as admitted by defendants in the June 1999 Restatement;

(d) Defendants overstated earnings from operations in the Third Quarter 1999 by improperly including at least $1.373 million in unprocessed advertising credits and purchase term discounts from suppliers and uncollectible consumer charge accounts as accounts receivable, as admitted by defendants in the June 1999 Restatement;

(e) Although the Company announced that it had opened or relocated 196 stores in the Third Quarter 1999, defendants did not disclose that the costs associated with advertising and opening the 196 stores being currently incurred in the Third Quarter 1999 were actually higher than reported;

(f) Although the Company had closed 123 stores in the Third Quarter 1999 for a total of 293 store closures in Fiscal 1999, it had - undisclosed to the public but known to the defendants - decided not to close certain store locations in the Third Quarter which were part of the 379 stores already included in the strategic exit plan. This created a favorable variance of $7.3 million in the Third Quarter 1999 against the $264 million Second Quarter 1999 charge, which was not disclosed until the June 1999 Restatement. This practice permitted the defendants to manage the Company's earnings in the Third Quarter; and

(g) Defendants failed to disclose that 24 more stores than the 55 previously announced would open in the Fourth Quarter 1999, thereby increasing costs in the Fourth Quarter 1999. Defendants knew this because at least 79 stores were under construction or would immediately start construction in the Fourth Quarter 1999. Defendants knew the opening of these 24 more stores would negatively impact Fourth Quarter 1999 earnings.

85. In addition, the Company's Third Quarter 1999 Form 10-Q was materially false and misleading for failing to disclose (a) the existence of the Florida Attorney General's racketeering investigation into its billing practices, and (b) the Company's various other illegal and improper business practices as described in paragraphs 46(a)-(f) above.

86. Further, in speaking with analysts on December 28, 1998, and January 4, 1999, regarding the strength of the Christmas season, as reflected in paragraph 80, defendants misrepresented or failed to disclose what they already knew or were reckless in not knowing, namely that the merchandising strategy of selling Christmas-oriented items to increase front-end sales in Eastern and Southern stores during the Christmas season had not been successful. Defendants knew or recklessly disregarded that this failed merchandising strategy would force markdowns on the merchandise that would negatively impact Fourth Quarter 1999 results by several million dollars.

87. On January 22, 1999, Rite Aid announced it had completed the PCS Acquisition. In connection with Rite Aid's plans to finance the PCS Acquisition through a secondary stock offering, on January 19, 1999, while the Company's common stock was artificially inflated at almost $50 per share, the Company filed a Form S-3 for a shelf registration with the SEC, and on January 23, 1999, it filed a proxy statement and notice of special stockholder meeting to approve an increase in the number of authorized shares of the Company's common stock. On February 22, 1999, the Company announced that its stockholders had approved the proposed increase in the number of authorized shares of the Company.

Rite Aid's March 12, 1999, Pre-Announcement Of Fourth Quarter 1999 Earnings

88. On March 12, 1999, defendants announced that Rite Aid had preliminarily estimated Fourth Quarter 1999 earnings of $0.30 to $0.32 a share, well below Wall Street expectations of $0.52. According to the defendants:

During the year, the company opened 578 new and relocated stores. Thirty five percent of these units, or 206 stores, were opened in the last 45 days of the fourth quarter. The costs and expenses associated with the opening or relocation of those 206 stores accounted for approximately $0.07 of the shortfall, which includes $.02 in greater than anticipated grand opening advertising expenses. In addition, the fourth-quarter loss on the liquidation of inventory in the 208 stores closed during the third and fourth quarters exceeded expectations by about $.04.

Rite Aid's new 875,000 square foot, state-of-the-art distribution center in Perryman, Maryland, became fully operational this week, supplying 760 stores in the mid-Atlantic region. Start-up software problems at Perryman delayed the closing of the older Shiremanstown, Pennsylvania, distribution for 11 weeks. The incremental costs incurred in running both facilities for that time period were approximately $.03 per share.

The acquisition of PCS Health Systems on January 22, 1999, five weeks earlier than anticipated, did not allow sufficient time for the company to realize any fourth quarter benefits from synergies. This was responsible for approximately $.02 of the shortfall.

Rite Aid also implemented a revised merchandising strategy during the quarter to reduce the selection of certain seasonal categories primarily in the eastern and southern stores. The markdowns associated with this strategy were responsible for approximately $.02 of the shortfall. Certain unanticipated costs and settlements were responsible for the balance of the shortfall.

89. In response to this unexpected shortfall in the Company's earnings results, Rite Aid shares tumbled 39 percent from $37 the day before to close at $22- 9/16, a decline of over $14 - - and a 56 percent drop from its closing high of $50-15/16 on January 8, 1999.

90. The earnings warning surprised analysts, many of whom had "Buy" ratings on Rite Aid stock. For example, on March 17, 1999, Salomon Smith Barney's Jonathan Ziegler wrote: "Of the $0.22 shortfall, the Street was aware of only the $0.02 related to the integration of the PCS acquisition. Therefore, there was a major debacle in the stock on Friday." Edward Comeau, an analyst at DLJ, stated to The Wall Street Journal on March 15, 1999, that he "talked to the Company just over a week [before] and they assured me the numbers were OK for the quarter."

91. The Company held a telephone conference call with analysts and major investors on March 12 (without conducting a question and answer session). On March 15, 1999, The Wall Street Journal reported that during the conference call defendant Grass had portrayed the earnings shortfall as resulting from one-time problems tied to the Company's rapid fire growth (i.e., the Company opening 578 stores, 78 more than planned, and acquiring PCS for $1.5 billion). Following defendant Grass's lead, analysts attributed the shortfall to out-of-control operations. According to a March 12, 1999 Bloomberg article, Merrill Lynch analyst Mark Husson stated that the Company needed to "slow down and establish a greater level of control. There appears to be an accounting black hole here. There's been a shortfall in their ability to forecast." Similarly, The Wall Street Journal quoted DLJ analyst Edward Comeau as saying "[v]ery possibly the operations have gotten out of control."

92. In discussing "what went wrong" during the conference call, according to a Raymond James report issued on March 15, 1999, management also admitted that the

Shiremanstown center, which should have been replaced by the new Perryman Distribution Center, still had $26.2 million in unsold inventory, and that the Company had overstocked eastern and southern stores with seasonal inventory during the Christmas season.

93. As part of a concerted effort to minimize investors' concerns and repair the damage to the Company's stock price, defendants did not disclose that the March 12, 1999 announcement and management's explanation in the March 12 ,1999 conference call were materially false and misleading. Defendants misrepresented or failed to disclose, inter alia, that:

(a) Only 142 stores were opened or relocated by Rite Aid in Fourth Quarter 1999, as disclosed on June 1, 1999, in the Company's Fiscal 1999 Form 10-K, not 206 stores as represented in the March 12 announcement;

(b) In violation of GAAP and the Company's own accounting policies, net income during Fiscal 1999 was being systemically overstated, as admitted by defendants in the June 1999 Restatement and Announced Second Restatement;

(c) Defendants understated expenses in Fiscal 1999 by using certain accruals, taken by Rite Aid in connection with store closings, inventory disposal and earlier acquisitions of smaller drugstore claims and PCS in prior periods, to manage earnings by reversing such accruals into income in later periods without disclosing such reversals, or improperly charging current expenses against such accruals, as admitted by defendants in the June 1999 Restatement and Announced Second Restatement;

(d) Defendants understated expenses in the Fourth Quarter 1999 by taking at least $11.4 million in unprocessed advertising credits and purchase term discounts against the cost of supplier goods sold to Rite Aid and treating them as accounts receivable, as admitted by defendants in the June 1999 Restatement. Defendants also understated expenses by wrongfully claiming lower agreed terms and damaged goods on supplier invoices, which defendants admitted was wrongful as evidenced by the Company later repaying such deductions;

(e) $35 million of the Company's Fourth Quarter 1999 pre-tax income came not from operations, but from one-time gains relating to the settlement of two lawsuits, as admitted by defendants in the June 1999 Restatement; and

(f) Rite Aid's assets on the Fiscal 1999 balance sheet were inflated by including intangible assets (such as goodwill, lease acquisition, and prescription plan file purchases) that were impaired and not fully recoverable, as admitted by defendants in the Announced Second Restatement.

94. Moreover, according to a March 15, 1999 article in The Wall Street Journal, a Rite Aid spokeswoman stated that the 208 store closings referenced in the Company's March 12 pre-announcement belonged to the store closings on which Rite Aid took the $290

million charge during the Second Quarter. This statement by the Company was materially false and misleading because defendants failed to disclose that the Company had actually recorded an additional accrual for closing expenses of $42.8 million in the Fourth Quarter 1999, which included store closings in addition to the 379 closings covered by the Second Quarter 1999 charge. These additional charges were not disclosed until the June 1999 Restatement.

95. Meanwhile, concerns about the state of Rite Aid's financial controls persisted after the March 12 pre-announcement, particularly in the wake of reports that the SEC was reviewing Rite Aid's accounting practices. For example, on March 16, 1999, a Raymond James report noted:

Following the company's shelf filing this winter, the SEC chose to do a comprehensive review of Rite Aid's filings. The SEC has focused on three issues: (1) the rationale behind the 40-year amortization period on the PCS purchase; (2) the $290 million charge taken in second quarter 99 triggered by the closing of nearly 400 stores with longer lease terms, and (3) plain English requirements. The company believes the SEC review should be done in 4-8 weeks. With the volume of rumors and speculation around these issues, we do not believe that there is any comment that can be made to allay all of the fears until the review is completed.

96. On March 29, 1999, the Company reported net income of $158 million, or 60 cents per share, for Fiscal 1999. For the Fourth Quarter 1999 ending February 27, 1999, Rite Aid reported net income of $73 million or 28 cents per diluted share. This was even lower than the earnings pre-estimate that was reported on March 12, 1999.

97. Defendant Grass also made several materially false and misleading statements during the March 29, 1999 conference call in regard to Rite Aid's accounting practices.

Q. . . . The sentiment out there is rather negative towards Rite Aid and they're giving the investor fear of aggressive accounting in current marketplace. You know other than holding conference calls, that you know, is there any other step you can take to, um, give us more confidence in the numbers you're providing either through a separate reporting or a separate out of those issues, ah, that's being identified not just in the Journal articles and also more clear identification of issues involving the fourth quarter. Thank you.

A. Well, I would dispute that we're doing anything aggressive accounting wise. We are not doing anything aggressive accounting wise. This issue is no different than anybody else in this industry. No different from anybody else in the supermarket industry. Probably not as aggressive as some of the people in the discount department store

industry. We are not anxious to have weekly conference calls to discuss newspaper articles but we believe it's important for people to understand what's involved here, and there is nothing involved here other than normal ordinary industry business practices and we have been doing the accounting here the same way for the last twenty years.

98. However, even the disappointing figures contained in the March 29, 1999 earnings release, and defendant Grass's comments during the conference call, were materially false and misleading, and were designed to minimize investors' concerns. Defendants misrepresented or failed to disclose, inter alia, that:

(a) In violation of GAAP and the Company's own accounting policies, defendants had overstated Rite Aid's net income in Fiscal 1999 by at least 9%, as admitted by defendants in the June 1999 Restatement;

(b) During Fiscal 1999, as admitted in the June 1999 Restatement and Announced Second Restatement, defendants had understated expenses by using certain accruals, taken by Rite Aid in connection with store closings, inventory disposal and acquisitions of smaller drugstore chains and PCS in prior periods, to manage earnings by reversing such accruals into income in future periods without disclosing such reversals, or improperly charging current expenses against such accruals;

(c) Defendants understated expenses and inflated Fourth Quarter 1999 net income by taking at least $11.4 million in unprocessed advertising credits and purchase term discounts against the cost of supplier goods sold to Rite Aid and treating them as accounts receivable, as admitted by defendants in the June 1999 Restatement. Defendants also understated expenses by wrongfully claiming lower agreed terms and damaged goods on supplier invoices, which defendants admitted was wrongful as evidenced by the Company repaying such deductions in the first half of fiscal 2000;

(d) $35 million of the Company's purported $73 million Fourth Quarter 1999 net income came not from operations, but from one-time gains relating to the settlement of two lawsuits, as admitted by defendants in the June 1999 Restatement; and

(e) Defendants inflated the assets on the Company's balance sheet by including intangible assets (such as goodwill from its acquisitions of other drugstore companies and PCS, lease acquisitions and prescription plan file purchases) that were impaired and not fully recoverable, as admitted by defendants in the Announced Second Restatement.

99. These statements were also materially false and misleading for failing to disclose (a) the existence of the Florida Attorney General's racketeering investigation into its billing practices, and (b) the Company's various other illegal and improper business practices as described in paragraphs 46(a)-(f) above.

THE TRUTH BEGINS TO EMERGE

A. The Wall Street Journal Exposes Rite Aid's Improper

Deductions from Supplier Invoices

100. On March 31, 1999 The Wall Street Journal reported that Rite Aid had taken arbitrary and improper deductions from vendor bills at the end of fiscal 1999 (the year ended February 27, 1999) in order to boost its fourth quarter earnings. According to The Wall Street Journal article, of two dozen suppliers contacted, three-quarters said Rite Aid "cut their payments in the February pay period, by amounts ranging from under 1% to 16% of their annual sales to the [Company]."

101. One example cited by The Wall Street Journal was Bayer AG. The U.S. consumer unit of Bayer AG received an "unusual notice" from Rite Aid in March 1999. As reported by The Wall Street Journal:

[Rite Aid] said it had deducted about $300,000 from money due Bayer for aspirin and other goods. The deduction was from a payment Rite Aid sent in February, just as its fiscal year was ending. The notice gave only a sketchy indication of what the deduction was for, says a Bayer manager; it cited damaged and outdated merchandise removed from acquired and remodeled stores.

102. Bayer's sales manager told The Wall Street Journal that Bayer never authorized any of the deductions, and stated, "I've never seen anything as blatantly large." The sales manager also told The Wall Street Journal that Bayer "generally will give credit for damaged or outdated goods. But she [said] Rite Aid's claimed damages are running at 6% of Bayer's total annual shipments, two to three times the level of other customers." In addition, the sales manager told The Wall Street Journal that "the situation has become so serious that Bayer managers are planning a visit to Rite Aid in coming weeks, intending to deliver the message that 'either we get the merchandise back or we can't authorize this' any longer."

103. The Wall Street Journal reported that Bayer was not the only supplier that received a unilateral deduction from Rite Aid. Bic Corporation, Dial Corporations and the M&M/Mars unit of Mars Inc. said they were hit with deductions, ranging from $45,000 at Bic to $100,000 at Mars.

104. As reported by The Wall Street Journal, "a deductions manager for Dial in Scottsdale, Ariz., [said] Rite Aid's $50,000 February deduction not only was the biggest it

has ever taken from Dial, but also 'was very unusual because Rite Aid usually documents' its deductions."

105. The Wall Street Journal also reported that:

At Parfums de Coeur Ltd., a Darien, Conn., maker of perfume and cosmetics, Rite Aid's damaged-goods claims equaled 4.5% of its purchases last year, compared with about a 1% level from most other retailers . . . . Parfums de Coeur's chief financial officer, also [said] that "we're experiencing a problem" with Rite Aid in fees and return-related charges . . . .

106. An official from Creditek, a company that assists Rite Aid suppliers with their billings, told The Wall Street Journal that taking deductions from bills is "something we've seen from other retailers, but not on this scale." According to The Wall Street Journal, a random check performed by Creditek of 15 clients found that Rite Aid "had recently claimed deductions from all, ranging from small amounts to nearly $200,000."

107. Acknowledging the suspicious nature of the timing of the deductions, The Wall Street Journal reported:

Many of Rite Aid's deductions were dated just before the Feb. 27 close of its 1999 fiscal year. "I believe they were doing everything they could to make their financials look better," [the Creditek official said]. After a quarter ends, he add[ed], retailers that have claimed big deductions from bills often back off, explaining that "it's an error, and we'll repay it."

108. The president of Internal Audit Bureau, a Creditek rival, told The Wall Street Journal that "several of his clients also received notices from Rite Aid. In his opinion, these deductions function 'in some ways as a profit center.'"

109. Defendants' response to these allegations was to falsely deny that they had done anything improper. For example, as reported in The Wall Street Journal, defendant Bergonzi, Rite Aid's chief financial officer stated that "some of the fourth-quarter deductions had the effect of lowering costs," but asserted that "most related to obtaining credit for damaged or otherwise unsuitable goods, which reduces inventory and has no earnings impact." The article also quoted Bergonzi as stating that, "[a]ny deductions we've taken we believe are legitimate," and that Rite Aid's behavior toward its 5,600 suppliers was "in line with industry practice."

110. Defendant Grass also denied that Rite Aid had taken any deductions to improve its year-end earnings, and attributed the Company's activities to common industry practice. According to The Wall Street Journal, Grass stated: "We are not better, worse or different than our competitors in taking deductions."

111. Defendants' statements in paragraphs 109 and 110 regarding the March 31, 1999 article in The Wall Street Journal were materially false and misleading because defendants misrepresented or failed to disclose that the deductions were part of a scheme to inflate Fourth Quarter 1999 earnings by reducing expenses, and were not legitimate as represented by defendants, as evidenced by Rite Aid's repayment of the deductions as reported by The Wall Street Journal on September 9, 1999.

B. The Company's Credit Rating Is Placed Under Review

112. On April 9, 1999, Standard & Poor's placed Rite Aid's credit rating under review with "negative implications." The rating agency said the move was prompted by concerns with the Company's earnings and doubts that it would be able to issue equity to refinance its $1.5 billion acquisition of PCS earlier that year. In total, $7 billion of Rite Aid's outstanding debt was placed under review, with the possibility of a downgrade of its triple B+ credit rating.

C. The June 1999 Restatement

113. On June 1, 1999, the rumors and speculation concerning accounting problems at Rite Aid, which by this time had already begun to be factored into Rite Aid's declining stock price, proved correct when Rite Aid announced a restatement of its historic financial results for the past three fiscal years. In filing its Form 10-K with the SEC for fiscal 1999 (the "1999 Form 10-K"), Rite Aid restated its Fiscal 1999 profit downward by 9% from the earnings reported on March 29, as it reported earnings for Fiscal 1999 of $143.7 million or 54 cents per diluted share, versus the previously reported $158 million or 60 cents per diluted share. Rite Aid also restated its fiscal 1998 earnings downward by $10.5 million (or 4 cents per share) to $305.9 million (or $1.18 per share), and restated its fiscal 1997 earnings upward by $1.4 million to $116.7 million (or 63 cents per diluted share).

114. Rite Aid's restatement included each of the interim quarters of Fiscal 1999. For the Second Quarter 1999, the Company restated its net loss from the previously reported $92.7 million to $88.7 million. Although as a result of the June 1999 Restatement the Company reported a positive increase in income of $3.9 million, this increase in income was not from operations. Defendants had, in fact, understated its operating expenses in its previously reported results by $10.4 million. Instead, the positive income resulted from a $16.9 million reversal of a portion of the previously reported Second Quarter 1999 charge of $289.7 million. This overcharge, originally taken by Rite Aid in the Second Quarter

1999, had always been intended by defendants to be used by the Company to manage earnings in periods following the Second Quarter 1999 by reversing out these expenses in future periods, thereby enhancing income from operations in those later periods.

115. For the Third Quarter 1999, the Company restated its net income from the previously reported $86.7 million to $80.6 million. Defendants understated its previously reported costs in the Third Quarter 1999, excluding one-time charges, by $17.8 million. Positive income of $7.3 million in the Third Quarter 1999 resulted from a $7.3 million reversal of a portion of the previously reported Second Quarter 1999 charge of $289.7 million, resulting in a negative variance of $6.3 million between previously reported and restated net income in the Third Quarter 1999. As was the case with the reversal in the Second Quarter 1999, these overcharges were always intended by defendants to manage the Company's earnings.

116. According to the 1999 Form 10-K, intangible assets on Rite Aid's balance sheet include goodwill, which is amortized over 40 years; lease acquisition costs, which are amortized over the term of the lease on a straight line basis; and patient prescription file purchases (equivalent to purchasing a customer list), which are amortized over their estimated useful lives.

117. Rite Aid's consolidated balance sheets in the 1999 Form 10-K reflected total intangible assets at year-end 1999 of $3.5 billion. Goodwill was shown as $3.1 billion. In connection with the PCS Acquisition in early 1999, "goodwill of approximately $1.64 billion was recorded on the Company's consolidated balance sheet." Previously, in connection with the acquisition of Thrifty, the Company recorded goodwill of approximately $1.12 billion and in connection with the acquisitions of Harco and K&B, Rite Aid recorded goodwill of approximately $271 million. Lease acquisition costs and other intangible assets were $440 million (not including accumulated amortization).

118. Rite Aid's 1999 Form 10-K, issued June 1, 1999, also revealed the following facts, inter alia, for the first time:

(a) During the Fourth Quarter 1999, the Company reevaluated certain store closings and made a determination to keep certain of these stores open. The reversal of the accrued liability associated with keeping these stores open was approximately $7.3 million resulting in $7.3 million of revenues in the Third Quarter 1999 not from operations.

(b) During the Fourth Quarter 1999, the accrued liability for the 1999 strategic exit plan closings was reduced by $27.5 million as a result of favorable store lease terminations and closing costs. The Company also reduced this accrued liability by $21.9 million as a result of revisions to the 1999 strategic exit plan based on favorable store termination experience.

(c) During the Fourth Quarter 1999, the Company recorded additional store closing expenses of $42.8 million up and above the prior $287.9 million charge taken in the Second Quarter 1999 due to additional store closings.

(d) During the Fourth Quarter, $35 million or 42% of the Company's restated Fourth Quarter 1999 pre-tax income came not from operations but from one-time gains relating to the settlement of two lawsuits.

119. However, despite these disclosures, the Company's 1999 Form 10-K was materially false and misleading because, inter alia, it failed to disclose that the Company's reported earnings, sales and revenue figures for the fiscal quarter and fiscal year ending February 27, 1999 were materially and artificially inflated as a result of Rite Aid's undisclosed and improper business and accounting practices described in paragraphs 46(a)-(f) above and 153 through 161 below, and to the extent that the June 1999 Restatement revealed that Rite Aid had overstated its income and earnings in the past, these disclosures would later be dwarfed by the enormous $500 million in restatements that the Company did not disclose until October 1999.

120. Rite Aid's 1999 Form-K also represented that:

The Company maintains an effective internal control structure designed to provide reasonable assurance at reasonable costs that assets are safeguarded from material loss, that transactions are executed in accordance with management's authorization and that financial records are reliable for use in preparing financial statements. In addition, the [C]ompany maintains an internal audit department to review the adequacy, application and compliance of internal accounting controls.

However, these statements concerning Rite Aid's internal controls were materially false and misleading for the reasons set forth in paragraph 47 above and paragraphs 144 and 145 below.

D. The Belated Disclosure That Rite Aid Sold Expired Products

Exposing The Company To Undisclosed Contingent Liability

121. Shortly after the announcement of the June 1999 Restatement, on June 9, 1999, The San Diego Union-Tribune reported that prosecutors from Merced, Alameda and Santa Barbara counties and the City of San Diego had filed a consumer protection lawsuit alleging that Rite Aid was selling expired infant formula, children's medications, pregnancy tests, and condoms and other merchandise. According to the article, a customer complaint regarding Rite Aid's sale of expired baby formula in January 1999 had prompted an investigation by local officials which revealed more than 200 expired products in approximately 50 Rite Aid stores in California. Despite the Company's promise to remove the expired products from its shelves by February 22, 1999, a follow-

up investigation found the same expired products on the shelves, resulting in the filing of the lawsuit. On July 3, 1999, the Company reported that it agreed to pay $1.4 million to settle the consumer protection lawsuit in California. In June 1999, it was also disclosed that Rite Aid agreed to remove outdated baby formula, condoms and spermicide from the Company's 132 drug stores in West Virginia in response to the threat of a similar lawsuit.

122. On June 30, 1999, Rite Aid held its annual meeting. According to at least one press report, defendant Grass spent considerable time explaining the causes behind the retailer's recent sub-par performance and very public criticism at the hands of the media. He claimed some lapses of judgment, but denied any ethical or moral wrongdoing, and insisted that any questionable practices "have been corrected." However, the assertion that any questionable practices at Rite Aid "have been corrected" was materially false and misleading for the reasons set forth at paragraphs 46(a)-(f) above and paragraphs 153 through 161 below, including, without limitation, the fact that Rite Aid had yet to announce that its June 1999 Restatement was just a preclude to a far more massive $500 million earnings restatement that would not be announced until October.

123. On July 13, 1999, the Company filed its Form 10-Q for the first quarter of fiscal 2000 ended May 29, 1999 ("First Quarter 2000 Form 10-Q"). Net income for the First Quarter 2000 was reported at $81 million. The First Quarter 2000 Form 10-Q also stated that the Company made adjustments to the total accrued liability for closed stores, which total accrued liability at February 27, 1999 had been $136,712,000:

During the first quarter of fiscal 2000, the company recorded a charge for stores closed during the quarter of $17,890,000, which consisted of (i) $14,057,000 for the present value of noncancellable lease obligations and related contractual obligations, and (ii) $3,833,000 for impairment losses associated with lease acquisition costs, leasehold improvements and furniture and fixtures. The company also made the determination to keep certain other stores open which were a part of the strategic exit plan to close 379 stores which resulted in a favorable adjustment of $10,994,000 for a net pre-tax charge to income for the First Quarter of approximately $6,896,000. During the quarter, the company also utilized $17,177,000 for lease terminations, lease payments and other ancillary costs, and increased the reserve by $1,331,000 for stores which the Company does not intend to operate that were acquired in the Edgehill acquisition. The accrued liability for closed stores, including the charge taken in fiscal 1999 for the strategic exit plan as well as the accrued liability for previously closed stores was $123,929,000 at May 29, 1999.

124. However, the First Quarter 2000 Form 10-Q was materially false and misleading for the reasons set forth in paragraphs 46(a)-(f) above and paragraphs 153 through 161 below.

E. The Stunning Partial Disclosures in September 1999

125. On August 25, 1999, some of the gloom surrounding Rite Aid stock dissipated when the Company announced that it was having discussions about "corporate transactions that could be material in scope." Rite Aid's shares rose as much as 17% on speculation that the Company would sell a significant portion of its West Coast stores, which did not fit the Company's prototype model, thereby boosting the Company's earnings and raising cash to pay down the PCS Debt. The next day, Rite Aid stock continued to move and closed at $21.375 on August 26, 1999, on heavy volume.

126. On September 9, 1999, The Wall Street Journal reported that Rite Aid had repaid almost in full substantial amounts it had previously deducted from suppliers' invoices in February just before the end of Rite Aid's fiscal year. As The Wall Street Journal reported:

Rite Aid Corp., in a move that could calm anger among its suppliers, repaid some of the money it deducted from their bills at the end of its previous fiscal year, according to suppliers and their consultants.

The repayments in some cases amounted to substantial sums and seem to mark a reversal from Rite Aid's statements earlier this year that the big drugstore chain was unlikely to repay any significant amount of the disputed deductions.

127. One supplier received more than three-quarters of the amount in dispute, or more than $600,000. When the supplier asked Rite Aid to produce proof that the Company had destroyed large quantities of damaged or out-dated merchandise, Rite Aid could not produce such proof.

128. The September 9, 1999 article in The Wall Street Journal also quoted Douglas Carmichael, an accounting professor at Baruch College, as stating that a company that claimed deductions from vendors, then repaid them in subsequent quarters, would likely have overstated profits for the first period and understated them for the following periods. "The effect is of moving income between periods," he said. This is a clear indication that this improper conduct was intended by defendants to manage the Company's earnings.

129. Rite Aid canceled an already twice-postponed meeting with analysts on September 22, 1999, during which defendants were supposed to provide guidance about Rite Aid's earnings for at least the rest of the year. According to Debra Levin, an analyst with Morgan Stanley Dean Witter, "[t]his cancellation further hurt[] management's credibility after a string of negative events since the company first pre-announced disappointing fourth-quarter results in March."

130. On September 22, 1999, the market was hit with further stunning disclosures when it was reported that the Florida Attorney General had filed a RICO lawsuit in state court charging the Company with racketeering, wire fraud, theft and deceptive trade practices. The lawsuit alleges that Rite Aid overcharged more than 29,000 customers on more than 80,000 prescriptions during a 27-month period, and seeks restitution and penalties of between $10,000 and $15,000 per incident, exposing the Company to liability in excess of $2 billion.

131. On September 23, Florida Attorney General Bob Butterworth told a news conference that between 1994 and 1996, "it was a corporate policy of Rite Aid to overcharge the uninsured." According to Butterworth, Rite Aid pharmacists were under orders to both raise the prices of medication and add a surcharge for those customers who were the least likely to object by pressing separate pre-programmed keys on the Company's cash registers. According to the lawsuit, the Company had installed custom-designed software on its registers to hike prescription prices to uninsured customers in two ways. One pre-programmed key would increase the prescription price by a surcharge amount predetermined by Rite Aid management. A second pre-programmed key allowed the pharmacist to override any preset amount so that the pharmacist could increase the retail price of the prescription and set a new one of any amount. The pharmacist received training on using the software for the cash registers. Information on the transactions entered by the pharmacist would be transmitted by modem, either through land lines or by satellite, to corporate headquarters. Stores that lagged behind were contacted by managers to increase profits, and pharmacists' performance reviews and bonuses were tied to their success in implementing this price-gouging scheme.

132. The lawsuit alleged that pharmacists were given explicit instructions on who to target. Insured customers were not targeted because their insurance plans pre-negotiated prices with Rite Aid. Initially, only cash-paying customers coming from emergency rooms or seeking medication for an acute condition were targeted. The lawsuit alleged that the practice was subsequently expanded to other uninsured customers, especially the elderly.

133. As reported in The Wall Street Journal on September 23, 1999, neither the existence of the underlying conduct nor the existence of the Florida investigation was a surprise to Rite Aid. To the contrary, unbeknownst to investors, the Company had been served with a subpoena from the Florida Attorney General's office in the first half of 1998, and had produced nearly 4,000 pages of documents listing each over-charged transaction complete with the customers' name, address, medication and amount of overcharge in response to the subpoena. Indeed, Rite Aid admitted in a September 22, 1999, press release that the Florida Attorney General's lawsuit was "not unexpected." The Florida Attorney General's office indicated based on information provided by the Company that similar overcharges occurred in Rite Aid stores throughout the United States.

134. Meanwhile, on September 23, 1999, two major credit rating agencies said they were again re-evaluating the Company's debt rating. Moody's Investors Services said it placed Rite Aid on review for a downgrade because it had "concerns about Rite Aid's weak

operating profitability and high leverage, as well as uncertainty about the company's future business configuration." Standard & Poor's placed Rite Aid on "credit watch," citing concerns over profit pressures from flat same-store sales in the Company's West Coast stores. These revelations by the credit-rating agencies effectively cut off Rite Aid's ability to refinance the commercial paper used to finance the PCS Acquisition.

135. The possibility of additional lawsuits against Rite Aid regarding the Company's systematic overcharging practice clearly concerned investors. New York Attorney General Eliot Spitzer announced he was "assessing whether Rite Aid's practices are affecting New York consumers." California Attorney General Bill Lochyer and the New Jersey Attorney General's office commenced investigations into Rite Aid's pricing policies. A consumer class action lawsuit was filed in Common Pleas Court in Philadelphia on behalf of Pennsylvania customers of Rite Aid during the period of September 27, 1993 through the present who had been overcharged on prescriptions not covered by an insurance plan. Although the Florida Attorney General's action was dismissed in the trial court, press reports suggest that decision will be appealed, and, on information and belief, legal proceedings and investigations arising out of Rite Aid's overcharge practices are continuing against the Company in numerous other jurisdictions.

136. As a result of these September 1999 partial disclosures, on September 22, 1999, Rite Aid shares plummeted 17% to close at $14 - - representing a decline of over 26% since the beginning of the month and the lowest price that the Company's stock had traded at in more than three years.

137. On September 23, 1999, the shares of Rite Aid continued to reel from the partial disclosures, closing at $12, off $2.00 or 14.3%, as the most actively traded stock on the NYSE -- representing a two day drop of over 28% and an overall decline of 76% from the Class Period high of $50.94 on January 8, 1999.

G. The Final Shockers: Rite Aid Announces An Additional Negative $500 Million Restatement of Its Earnings, Defendant Grass Resigns as CEO, and KPMG's Conclusions Concerning the True Nature of Rite Aid's Internal Accounting "Controls" Are Finally Disclosed

138. On October 11, 1999, the Company issued a press release on the Business Wire announcing, in conjunction with its disclosure of a loss of approximately $67.9 million for the Second Quarter ended August 28, 1999, that the Company -- for the second time in less than six months -- was "planning to restate its financial statements for prior years and interim periods to account for, among other things, adjustments required to reflect a change in the accrual for non-cancellable lease obligations relating to closed stores and to reflect non-cash charges related to a change in the Company's method of accounting for impaired assets."

139. The Company announced soon after that this second restatement was so large that it would result in a $500 million reduction in Rite Aid's previously reported pre-tax earnings for the period covering fiscal years 1997, 1998 and 1999. Accordingly, the Announced Second Restatement will eradicate more than half of Rite Aid's last three years in earnings. In response to this extraordinary announcement, on October 11, 1999 the price of Rite Aid stock fell another $2.50, from $12.50 to $10.00 per share - reflecting a further one day decline of over 20%, and a total decline of over 80% from the stock's inflated Class Period high.

140. In the aftermath of these negative disclosures, Rite Aid announced that defendant Grass had resigned as Chairman of the Board of Directors, Chief Executive Officer and Director. According to an October 20, 1999 article in The Wall Street Journal, the Company's bankers, rather than its Board of Directors, led a concerted push to oust defendant Grass. On October 29, 1999, Rite Aid faced the maturity of its PCS Debt, forcing it to seek to renegotiate the back-up line of credit with its bankers, which included J.P. Morgan & Co. and others. The Wall Street Journal reported: "Although those lenders ultimately did agree to extend the credit for a year beyond the October 29 deadline, they weren't inclined to grant the extension unless there was a change at the top." According to the September 25, 1999 edition of The New York Post, analysts had faulted defendant Grass for his "secrecy," noting that Rite Aid had "endured a series of embarrassments this year, which Grass [had] denied until the last possible moment."

141. On November 10, 1999, the last day of the Class Period, Rite Aid issued a final jolt to the markets when it warned analysts and investors not to rely on forecasts for profit and cash flow made by defendant Grass during a conference call on October 11, 1999. Rite Aid stated that it was "no longer comfortable" with Grass's forecast that earnings before interest, taxes and amortization for fiscal 2000 would be $1.01 billion, and that cash flow was projected to be $1.27 billion and $1.46 billion, respectively, over the next two years. In addition, Rite Aid confirmed in a separate press release that it had been contacted by the enforcement arm of the SEC, but declined to provide any details regarding the nature of the contact.

142. These stunning disclosures prompted David Dreman of Dreman Value Management, which owned 8.8 million shares of Rite Aid stock in September, to state:

The only question that remains is: Is the stock going to go bankrupt at these prices? Is there other accounting being uncovered that's even worse than what's already known? Nobody knows yet. . . . The SEC is going to go through their books - that's not good . . . . [Rite Aid] canceled their analyst meeting, and that's a doomsday move.

Defendants' shocking news that the Company's own management could not be trusted with Rite Aid's financial reporting caused the price of Rite Aid stock to plunge an additional 32 percent to $5.375, the lowest level during the Class Period and the

lowest price for the previous 14 years. This represents a startling 89% percent drop from the Class Period high of $50 15/16.

POST-CLASS PERIOD DISCLOSURES

143. In the wake of these revelations, Rite Aid announced on November 15, 1999 that it had been notified by KPMG that the accounting firm was resigning as the Company's auditors, and would therefore not be available to perform the re-audit that was anticipated by Rite Aid. The Company also announced on November 15, 1999 that its Board of Directors elected Leonard Green as Chairman of the Board. In this press release, Mr. Green acknowledged that Rite Aid made several critical errors under the leadership of defendant Grass:

Clearly, [Rite Aid] is also facing some significant challenges at this time, particularly the need for tighter discipline and procedures in the financial management of the company. I believe, however, that issues arose from Rite Aid's attempting to do too much too quickly, particularly in its fast-paced acquisition program, the widespread refurbishment of its stores and the redirection of its marketing and advertising. All of these actions were clearly well intentioned but stretched management too thinly.

144. On November 19, 1999, Rite Aid filed a Form 8-K with the SEC that contained several additional disclosures regarding the nature of the Company's fraudulent conduct -- and of KPMG's culpable conduct. For example, the November 19 Form 8-K disclosed that:

At an Audit Committee meeting on June 30, 1999, KPMG delivered a letter to the Audit Committee dated June 24, 1999 describing the following material weakness in [Rite Aid's] internal controls. The letter stated that the [Company's] internal controls were insufficient to allow the [Company's] management "to accumulate and reconcile information necessary to properly record and analyze transactions on a timely basis."

The 8-K also disclosed the fact that KPMG suggested that Rite Aid implement the following suggestions to "significantly enhance the quality of the [Company's] financial accounting and reporting function":

(a) adding sufficient qualified accounting personnel;

(b) improving the financial accounting systems, which produce the necessary data;

(c) analyzing the data on a timely basis; and

(d) significantly improving documentation supporting transactions, journal entries, and business decisions on a timely basis.

The 8-K revealed that KPMG informed the Company in June 1999 that it would not be in a position to issue quarterly review reports until Rite Aid addressed these issues.

145. The 8-K also disclosed that, according to KPMG, the auditors informed Rite Aid's management and audit committee no later than June 1999 that it "was no longer willing to rely on representations made by the then serving Chief Financial Officer," defendant Bergonzi.

146. The 8-K further revealed that, in connection with its audit of Rite Aid's financial statements for the fiscal year ended February 27, 1999, KPMG reported to the Audit Committee the following three disagreements between KPMG and the Company:

(1) KPMG disagreed with Rite Aid's view that certain amounts could be reflected as income based upon estimates of recoveries from vendors;

(2) KPMG disagreed with Rite Aid's accounting for certain deferred costs; and

(3) KPMG disagreed with Rite Aid's accounting for certain expenses charged against its acquisition accruals.

Simultaneously with their resignation on November 11, 1999, KPMG also advised Rite Aid's management and its audit committee that KPMG had concerns about the amounts that Rite Aid charged certain vendors relating to damaged or outdated products, as set forth above in paragraphs 100 through 111. The 8-K also revealed that the SEC had commenced a formal investigation of the Company.

147. As noted by Claire Kendrick, an analyst with Prudential, in her report dated November 15, 1999:

It is not common for accounting firms to resign, in that usually if there is just a difference of opinion then the accounting firm is fired. Although there are a variety of scenarios under which an accounting firm might resign, we are inclined to think that there is something seriously askew for this to have occurred. Note that KPMG stuck with RAD in recent months - seeing RAD through one round of restating finances and through the turning over of document to the SEC for various investigations that are on-going there. Thus, to have KPMG throw in the towel at this time does not bode well. As we have noted in the past, RAD faces an array of legal entanglements, which appears to be larger than we would customarily expect to find in the normal course of business.

148. However, KPMG did not disclose these severe accounting concerns to the investing public at the time of its audit. Rather, even in the face of blatantly false affirmative representations in the Company's Form 10-K's and audited financial statements during the Class Period that Rite Aid "maintain[ed] an effective internal control structure," KPMG, acting with deliberate or at minimum reckless disregard for the truth, issued "clean" audit opinions on those financial statements.

149. Continuing to be "plagued by accounting turmoil," Rite Aid announced on January 11, 2000 that it could delay filing any further quarterly financial statements until July 11, 2000. Rite Aid explained that the lengthy delay was necessary to provide its new auditors (Deloitte & Touche) and new management more time to review the books for the 1997, 1998, and 1999 fiscal years and for the current fiscal year ending February 26, 2000. Rite Aid made the announcement about delayed reporting late in the day as it was about to miss the regulatory deadline for filing its quarterly report for the third fiscal quarter ending November 27, 1999.

150. The problems for Rite Aid, however, may only be getting worse. On February 18, 2000, The Wall Street Journal reported that the U.S. Attorney's Office is investigating whether Rite Aid inflated its profit in the fourth quarter of fiscal 1999 by improperly claiming credits from suppliers for goods that were purportedly damaged or outdated. The U.S. Attorney is also investigating whether Rite Aid boosted earnings by over-aggressively estimating gross margins. The Journal further stated that defendant Bergonzi, Rite Aid's former CFO, had been served with a subpoena from the U.S.

Attorney's Office in Harrisburg to produce documents relating to the investigation and that the U.S. Attorney has already questioned at least one other person.

151. As of March 10, 2000, the specifics of the Announced Second Restatement have not been revealed, and will not be fully disclosed until the Company actually files its restated financials for fiscal years 1997, 1998, and 1999 with the SEC.

152. At all relevant times, the material misrepresentations and omissions particularized in this Complaint directly or proximately caused or were a substantial contributing cause of the damages sustained by plaintiff and other members of the Class. As described herein, during the Class Period, defendants made or caused to be made a series of materially false or misleading statements about Rite Aid's business, prospects, operations and financial condition. These material misstatements and omissions had the cause and effect of creating in the market an unrealistically positive assessment of Rite Aid and its business, prospects and operations, thus causing the Company's securities to be overvalued and artificially inflated at all relevant times. Defendants' materially false and misleading statements during the Class Period resulted in plaintiffs and other members of the Class purchasing the Company's securities at artificially inflated prices, thus causing the damages complained of herein.

RITE AID'S MATERIALLY FALSE AND MISLEADING FINANCIAL STATEMENTS

153. At all relevant times during the Class Period, defendants represented that Rite Aid's financial statements when issued were prepared in conformity with GAAP, which are recognized by the accounting profession and the SEC as the uniform rules, conventions, and procedures necessary to define accepted accounting practice at a particular time. However, in order to artificially inflate the price of Rite Aid stock, defendants used improper accounting practices in violation of GAAP and SEC reporting requirements to falsely inflate its balance sheet and to falsely report income and expenses in the interim quarters and fiscal years during the Class Period.

154. As set forth in Statement of Financial Accounting Concepts ("Concepts Statement") No. 1, Objectives of Financial Reporting by Business Enterprises, one of the fundamental objectives of financial reporting is to provide accurate and reliable information concerning an entity's financial performance during the period being presented. According to Paragraph 42 of Concepts Statement No. 1:

Financial reporting should provide information about an enterprise's financial performance during a period. Investors and creditors often use information about the past to help in assessing the prospects of an enterprise. Thus, although investment and credit decisions reflect investors' and creditors' expectations about future enterprise performance, those expectations are commonly based at least partly on evaluations of past enterprise performance.

Rite Aid violated this provision of GAAP because, as set forth in paragraphs 113 through 117 above, and as announced by Rite Aid on June 1, 1999, the Company's reported pre-tax earnings for the past three fiscal years were materially overstated by $500 million, or 57% of its pre-tax earnings.

155. As set forth in SEC Rule 4-01(a) of SEC Regulation S-X, "[f]inancial statements filed with the [SEC] which are not prepared in accordance with [GAAP] will be presumed to be misleading or inaccurate." 17 C.F.R. § 210.4-01(a)(1). Management is responsible for preparing financial statements that conform with GAAP. As noted by the American Institute of Certified Public Accountants' ("AICPA") professional standards:

financial statements are management's responsibility . . . . [M]anagement is responsible for adopting sound accounting policies and for establishing and maintaining internal control that will, among other things, record, process, summarize, and report transactions (as well as events and conditions) consistent with management's assertions embodied in the financial statements. The entity's transactions and the related assets, liabilities and equity are within the direct knowledge and control of management . . . . Thus, the fair presentation of financial statements in conformity with Generally Accepted Accounting Principles is an implicit and integral part of management's responsibility.

AU § 110.03 (1998). As set forth in paragraphs 113 through 117, Rite Aid violated GAAP because its financial statements were materially misleading since the Company's reported pre-tax earnings for the past three fiscal years were overstated by $500 million.

156. As a result of accounting improprieties, particularly with respect to the Company's severely deficient internal controls, defendants caused Rite Aid's reported financial results also to violate at least the following provisions of GAAP for which each defendant is necessarily responsible:

(a) The principle that financial reporting should provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit, and similar decisions. (Concepts Statement No. 1, ¶ 34);

(b) The principle that financial reporting should provide information about how management of an enterprise has discharged its stewardship responsibility to owners (stockholders) for the use of enterprise resources entrusted to it. To the extent that management offers securities of the enterprise to the public, it voluntarily accepts wider responsibilities for accountability to prospective investors and to the public in general. (Concepts Statement No. 1, ¶ 50);

(c) The principle that financial reporting should provide information about an enterprise's financial performance during a period. Investors and creditors often use information about the past to help in assessing the prospects of an enterprise. Thus, although investment and credit decisions reflect investors' expectations about future enterprise performance, those expectations are commonly based at least partly on evaluations of past enterprise performance. (Concepts Statement No. 1, ¶ 42);

(d) The principle that financial reporting should be reliable in that it represents what it purports to represent. The notion that information should be reliable as well as relevant is central to accounting. (Concepts Statement No. 2, ¶¶ 58-59);

(e) The principle of completeness, which means that nothing is left out of the information that may be necessary to ensure that it validly represents underlying events and conditions. (Concepts Statement No. 2, ¶ 79);

(f) The principle that conservatism be used as a prudent reaction to uncertainty to try to ensure that uncertainties and risks inherent in business situations are adequately considered. The best way to avoid injury to investors is to try to ensure that what is reported represents what it purports to represent. (Concepts Statement No. 2, ¶¶ 95, 97); and

(g) The principle that contingencies that might result in gains are not reflected in accounts since to do so might be to recognize revenue prior to its realization and that care should be used to avoid misleading investors regarding the likelihood of realization of gain contingencies. (FASB Financial Accounting Standard No. 5).

157. Rite Aid was required to restate its financial statements for fiscal 1997, 1998, and 1999 and all interim periods, as set forth in the June 1999 Restatement and in the Announced Second Restatement, because those financial statements had not been prepared in conformity with GAAP and SEC accounting requirements when they were issued. In view of "the potential dilution of public confidence in financial statements resulting from restating the financial statements of prior periods," according to GAAP, a retroactive restatement of financial statements is reserved for material accounting errors that existed at the time the financial statements were prepared. See APB Opinion No. 20, Accounting Changes, ¶¶ 18, 27, 34-38. Since GAAP only allows for correction of errors that are "material," by restating its financial statements, Rite Aid admitted the materiality of the errors in its previously issued financial statements for fiscal years 1997, 1998, and 1999, and all interim quarters.

158. GAAP also requires that financial statements disclose contingencies when it is at least reasonably possible (e.g., a greater than slight chance) that a loss may have been incurred. FASB Statement of Financial Accounting Standards No. 5, ¶ 10. The disclosure shall indicate the nature of the contingency and shall give an estimate of the possible loss, a range of loss or state that such an estimate cannot be made. Id. The SEC considers the disclosure of loss contingencies to be so important to an informed investment decision that it promulgated Regulation S-X, which provides that disclosures in interim period

financial statements may be abbreviated and need not duplicate the disclosure contained in the most recent audited financial statements, except that, "where material contingencies exist, disclosure of such matters shall be provided even though a significant change since year end may not have occurred." 17 C.F.R. § 210.10-01.

159. FASB Emerging Issues Task Force Issue No. 94-3 (i) restricts the circumstances under which a company may recognize a liability for involuntary termination benefits, and (ii) limits the recognition of a liability for costs resulting from an exit plan which have no further economic benefit. GAAP generally defines an asset as a probable future economic benefit obtained or controlled by a particular entity as a result of a past transaction. Concepts Statement No. 7, ¶ 25. As revealed by the June 1999 Restatement, Rite Aid violated GAAP by taking arbitrary charges for the closing of stores in an effort to manage future earnings.

160. In addition, the SEC's Accounting and Auditing Enforcement Releases provide that pre-opening costs may be deferred if (i) the costs are identifiable and segregated from ordinary operating expenses, (ii) the costs provide a quantifiable benefit to a future period, and (iii) the costs deferred as assets are recoverable from future revenues. Accordingly, the deferral of store pre-opening costs as an asset to be expensed at a later date is only acceptable in limited circumstances. Nonetheless, Rite Aid violated GAAP and its disclosed policy of accounting for the costs associated with new or relocating store openings by failing to expense such costs as incurred.

161. Accounting Principles Board ("APB") No. 22 indicates that a description of significant accounting policies of a reporting entity should be included as an integral part of the financial statements. It is not necessary to include a description of significant accounting policies in interim financial statements issued between annual financial statements, if the reporting entity has not changed its accounting policies since the preceding annual report. According to Rite Aid's 1998 Form 10-K, the Company's accounting policy called for pre-opening expenses of a non-capital nature incurred prior to opening of a new store or associated with a renovated store to be charged against earnings as administrative and general expenses when incurred. Similarly, the Company's accounting policy called for advertising costs to be expensed as incurred. The same language appears in Rite Aid's 1999 Form 10-K. Such accounting policies are in accordance with APB No. 28 "Interim Financial Reporting" indicating generally that costs and expenses should be charged to income in interim periods as incurred. However, Rite Aid violated GAAP by failing to charge the costs associated with opening or relocating stores in the proper quarters.

KPMG'S PARTICIPATION IN THE FRAUD

162. KPMG continuously served as Rite Aid's auditor at all relevant times until its auditor-client relationship with Rite Aid was terminated in November 1999. Rite Aid engaged KPMG to provide independent auditing and accounting services throughout the Class Period. KPMG examined and opined on Rite Aid's financial statements for fiscal

1997, 1998 and 1999 and performed quarterly reviews of Rite Aid's interim financial results.

163. During its yearly audits and quarterly review of Rite Aid's financial statements, members of KPMG's engagement team had virtually limitless access to information concerning Rite Aid's true financial condition:

- KPMG was present at Rite Aid's headquarters frequently throughout the year.

- KPMG performed review, audit and other services.

- KPMG had unfettered access to documents and employees at all Rite Aid offices.

- KPMG had frequent conversations with Rite Aid management and employees about the Company's accounting practices.

- KPMG consulted continuously with the Company's senior management about various accounting issues.

- KPMG attended Audit Committee meetings and answered the Committee's questions about the Company's financial statements and internal controls.

164. In separate reports, KPMG issued unqualified audit opinion letters which stated: (1) that Rite Aid's fiscal 1997, 1998 and 1999 financial statements, respectively, were presented in accordance with GAAP; and (2) that KPMG conducted its audits of those financial statements in accordance with GAAS. The "clean" audit opinion letters were false and misleading when issued. KPMG knew or recklessly disregarded numerous facts which indicated that Rite Aid's fiscal 1997, 1998 and 1999 financial statements were not presented in conformity with GAAP and that the net income and earnings per share as presented in those financial statements were materially overstated. KPMG failed to

comply with GAAS in performing its audit work and in certifying those financial statements. As particularized herein, KPMG persistently refused to see the obvious, to investigate the doubtful, and its accounting judgments were such that no reasonable accountant would have made the same decisions if confronted with the same facts. This was not a mere misapplication of accounting principles. KPMG's audit work on Rite Aid's fiscal 1997, 1998 and 1999 financial statements were so deficient that it amounted to no audit at all.

165. KPMG continuously served as Rite Aid's auditor from at least as early as 1989 until November 11, 1999, when public revelations concerning the scope of Rite Aid's accounting improprieties and concerns about its own exposure to legal liability compelled KPMG to resign. Rite Aid had retained KPMG to audit its annual financial statements throughout the Class Period, as well as to review its quarterly financial statements.

166. KPMG had a lucrative, long-standing relationship with Rite Aid which generated huge fees each year. The KPMG partners responsible for the Rite Aid engagement were particularly motivated to appease the client because their remuneration was directly tied to the fees generated from Rite Aid. This circumstance, coupled with the fact that Rite Aid was among the Harrisburg office's largest and most lucrative engagements, created even additional motivation to appease the client. Maintaining this client relationship was highly dependent on bending to the wishes of the client, particularly Rite Aid's strong-willed CEO, defendant Grass, and KPMG compromised its independence to do so.

167. KPMG's Harrisburg office had primary responsibility for the Rite Aid engagement. However, since KPMG's Harrisburg office is a much smaller satellite office of KPMG's larger Philadelphia office, KPMG partners from the Philadelphia office were also involved in a supervisory fashion. Throughout KPMG's Harrisburg and Philadelphia offices, it was well known among the partners that Rite Aid had historically been considered a "problem" client. This characterization was the result of Rite Aid's efforts to maximize earnings by aggressively interpreting the provisions of GAAP and domineering behavior in dealing with the auditors by management, particularly defendant Grass.

168. KPMG's audit of Rite Aid's annual financial statements for the fiscal year ended February 27, 1999, was particularly troubling and included lengthy and heated discussions with Rite Aid concerning disagreements regarding Rite Aid's overstatement of earnings and aggressive interpretation of various provisions of GAAP. These heated discussions prevented the audit from being completed on a timely basis and continued until the due date for the filing of Rite Aid's annual Form 10-K with the SEC -- and even precluded its filing by the May 28, 1999, due date. Rite Aid notified the SEC of the late filing on Form 12b-25 -- without describing the true nature of the reason -- as follows:

Additional year end work was necessary to complete the audited financial statements for the fiscal year ended February 27, 1999. The additional time needed created delays in closing the financial records for the year ended February 27, 1999. This made it impractical to complete the Form 10-K filing by the due date.

169. KPMG played a significant role in preparing the financial results announced by Rite Aid for the fiscal year ended February 27, 1999, auditing, commenting on, and approving the financial results prior to their public release on June 1, 1999.

170. During the course of the audit, KPMG knew or deliberately turned a blind eye to numerous red flags indicating that Rite Aid's year end results were materially overstated, including at least the following specific items:

(a) KPMG learned during the audit that Rite Aid's internal control structure was insufficient to accumulate, record and analyze transactions on a timely basis in violation of SEC rules and regulations;

(b) KPMG learned during the audit that Rite Aid's Chief Financial Officer, defendant Bergonzi, was not trustworthy, and concluded by the end of the audit that his representations could no longer be relied upon;

(c) KPMG decided at the end of the audit that it was no longer willing to issue review reports in connection with Rite Aid's quarterly financial statements;

(d) KPMG learned during the audit that Rite Aid had prematurely taken "cooperative advertising credits" and "purchase term discounts" in violation of GAAP;

(e) KPMG learned during the audit that, according to the June 1999 Restatement, Rite Aid violated GAAP by improperly charging millions of dollars in current operating expenses against a prior accrual for acquisitions, thereby inflating reported earnings from operations by a corresponding amount;

(f) KPMG learned during the audit that Rite Aid was claiming unilateral, unconsented to reductions on invoices received from suppliers for damaged or outdated products in violation of GAAP. As set forth above, a significant number of unauthorized deductions, amounting to millions of dollars, were taken just prior to the close of fiscal 1999, thereby permitting the company to report artificially inflated year-end financial results; and

(g) KPMG learned during the audit that Rite Aid had improperly accounted for certain deferred costs in violation of GAAP.

171. In addition to the factors set forth above, which became known to KPMG during the course of the audit, GAAS also requires the auditor to assess the risk that financial statements are materially misstated and provides the auditor with specific factors to be considered in connection with the auditor's assessment. During the annual audit, KPMG noted or deliberately turned a blind eye to the existence of at least the following specific factors:

(a) Rite Aid management failed to display and communicate appropriate attitude regarding internal control and the financial reporting process;

(b) Rite Aid management was dominated by a single person or small group without compensating controls such as effective oversight by the board of directors or audit committee;

(c) Rite Aid inadequately monitored significant controls;

(d) Rite Aid management failed to correct known reportable conditions on a timely basis;

(e) Rite Aid's nonfinancial management, including CEO Martin Grass, had excessive participation in, or preoccupation with, the selection of accounting principles or the determination of significant estimates; and

(f) There was a strained relationship between Rite Aid and KPMG, which included frequent disputes on accounting, auditing and reporting matters, unreasonable demands on the auditor and domineering management behavior in dealing with the auditor.

172. GAAS, as approved and adopted by the AICPA, defines the conduct of auditors in performing and reporting on audit engagements. Statements on Auditing Standards ("SAS") are recognized by the AICPA as the authoritative interpretation of GAAS.

173. KPMG's failure to qualify, modify or abstain from issuing its audit opinions on Rite Aid's fiscal 1997, 1998 and 1999 financial statements when it knew or deliberately turned a blind eye to the numerous adverse facts and "red flags" set forth herein caused KPMG to violate at least the following provisions of GAAS:

(a) KPMG violated GAAS Standard of Reporting No. 1 which requires the audit report to state whether the financial statements are presented in accordance with GAAP. KPMG's opinion falsely represented that Rite Aid's fiscal 1997, 1998 and 1999 financial statements were presented in accordance with GAAP when they were not for the reasons stated herein.

(b) KPMG violated Standard of Reporting No. 4 which requires that, when an opinion on the financial statements taken as a whole cannot be expressed, the reasons therefore must be stated. KPMG should have stated that no opinion could be issued by it on Rite Aids's fiscal 1997, 1998 and 1999 financial statements or issued an adverse opinion stating that those financial statements were not fairly presented. KPMG also failed to require Rite Aid to timely restate its previously issued materially false and misleading class period financial statements and allowed Rite Aid to make material misrepresentations regarding the Company to its shareholders and to the investing public during the Class Period. The failure to make such qualification, correction, modification and/or withdrawal, was a violation of GAAS, including the Standard of Reporting No. 4.

(c) KPMG violated GAAS General Standard No. 2, which requires an auditor to maintain an independence in mental attitude in all matters related to the assignment. As noted above, the fees generated by Rite Aid were huge relative to the small size of KPMG's Harrisburg office, which made Rite Aid an extremely important client and caused KPMG's independence to be compromised.

(d) KPMG violated GAAS and the standards set forth in SAS No. 1 and SAS No. 53 by, among other things, failing to adequately plan and supervise the work of its staff and to establish and carry out procedures reasonably designed to search for and detect the existence of errors and irregularities which would have a material effect upon the financial information statements.

(e) KPMG violated GAAS General Standard No. 3, which requires that due professional care must be exercised by the auditor in the performance of the audit and the preparation of the report.

(f) KPMG violated GAAS Standard of Field Work No. 2, which requires the auditor to make a proper study of existing internal controls, including accounting, financial and managerial controls, to determine whether reliance thereon was justified, and if such controls are not reliable, to expand the nature and scope of the auditing procedures to be applied. In the course of auditing Rite Aid's financial statements, KPMG either knew or recklessly disregarded facts which evidenced that it failed to sufficiently understand Rite Aid's internal control structure and/or it disregarded weaknesses and deficiencies in Rite Aid's internal control structure, and failed to adequately plan its audit or expand its auditing procedures.

(g) KPMG violated Standard of Fieldwork No. 3, which requires sufficient competent evidential matter to be obtained through inspection, observation, inquiries and confirmations to afford a reasonable basis for an opinion regarding the financial statements under audit.

ADDITIONAL ALLEGATIONS OF SCIENTER

The Individual Defendants' Scienter Is Also Supported By Their Motive And Opportunity To Inflate Rite Aid's Stock Price In Order To Receive Lucrative Incentive Pay

174. According to a Proxy Statement filed by Rite Aid with the SEC on or about May 15, 1998 ("1998 Proxy Statement"), Rite Aid adopted a Long-Term Incentive Plan in 1998. Under this lucrative incentive plan, the Individual Defendants, collectively, stood to receive about $190 million in stock or cash if the price of Rite Aid stock averaged above $49.50 for 30 days or more during fiscal years 1999 through 2001.

175. The Proxy Statement discloses that under the Long-Term Incentive Plan defendant Grass was entitled to receive 1,000,000 Rite Aid shares, defendant Noonan was entitled to receive 600,000 shares and defendant Bergonzi was entitled to receive 300,000 shares. These numbers "represent the number of shares of the Company's Common Stock which will be issued to the named person (or, at the discretion of the Board of Directors, the equivalent value of such shares paid in cash) depending upon the percentage increase in the earnings per share of the Company over the measurement period calculated at 9% per annum for the Threshold Payout and at 12% per annum for the Maximum Payout." More importantly, the number of shares awardable may be increased 100% if the 30 day average closing price of the Company's common stock on the New York Stock Exchange reaches $49.50 during fiscal years 1999 to 2001.

176. By tying long term incentive compensation to the Company's reported earnings per share and trading price, this provided a strong incentive for these Individual Defendants to participate in, or at a minimum, turn a blind eye toward the fraudulent scheme to inflate Rite Aid's reported earnings and balance sheet and thus artificially inflate the market value of Rite Aid's securities.

177. The Wall Street Journal, in an article on October 20, 1999, reporting on the resignation of defendant Grass one week after the announcement of the Second Restatement, quoted DLJ analyst Comeau with regard to the Long Term Incentive Plan as saying: "It was ludicrous," and stating with regard to defendant Grass, "I think that it contributed to his being aggressive on accounting."

Defendant Grass's Insider Selling During the Class Period

178. While defendants were issuing materially false favorable statements about the Company's financial condition and business prospects, and concealing or obscuring negative information, defendant Grass, who had access to confidential information and was aware of the truth about the Company and its financial condition, was benefitting from the illegal course of business or course of conduct described in this complaint by selling large blocks of the Company's stock at artificially inflated prices without disclosing the material adverse facts about the Company to which he was privy. Such sales were unusual in their amount and in their timing. The numerous and repeated insider sales of Rite Aid common stock by defendant Grass imposed upon him an additional duty of full disclosure of all of the material facts alleged in this complaint.

179. The following table shows the heavy insider selling of defendant Grass during the Class Period:

NAME DATE NUMBER OF SHARES PRICEMartin L. Grass 9/30/97 30,100 $1,671,850.00Martin L. Grass 10/01/97 73,000 $4,051,887.50Martin L. Grass 10/02/97 141,700 $5,382,981.20Martin L. Grass 12/17/98 12,690 unknown

Total 257,490 $11,106,718.70

Defendants' Scienter Is Further Supported By The Intent To

Use Rite Aid Stock as Currency To Finance The PCS Acquisition

180. During the Class Period, Rite Aid announced its intention to acquire PCS and finance the PCS Acquisition with "a sufficient amount of common equity and equity linked securities to allow Rite Aid to maintain its credit rating and financial flexibility." By using its artificially inflated shares, Rite Aid would be able to make the acquisition for less shares than it would otherwise have had to use. Thus, the ability to make the PCS Acquisition for less value provided another powerful motive for the Individual Defendants to engage in their scheme to inflate artificially the market price of Rite Aid's securities.

181. Although Rite Aid altered its intended financing plan of the PCS Acquisition during the Class Period, the new plan revealed in the Third Quarter 1999 Form 10-Q was also dependent on refinancing the bank borrowings "with proceeds from offerings of the registrant's common stock and equity linked securities."

182. Accordingly, on January 19, 1999, Rite Aid filed a Form S-3 Registration Statement for a shelf registration of its securities. On January 23, 1999, Rite Aid filed a Proxy Statement regarding a special meeting of stockholders to approve an amendment to increase the member of authorized shares of Rite Aid common stock from 300 million shares to 600 million shares. The Proxy Statement stated:

If market conditions are favorable, the Company intends to refinance the commercial paper issuances used to fund the PCS Acquisition with the net proceeds it anticipates realizing from a public offering of securities (the "Offering") consisting of shares of common stock and equity linked securities based on the last reported sale price of the common stock on the New York Stock Exchange on January 19, 1999 of $47.25 per share the Offering to refinance the commercial paper issuances to fund the PCS Acquisition (excluding fees and expenses related to the Offering and the PCS Acquisition) would consist of approximately 31,800,000 shares of Common Stock (assuming that the Offering consisted solely of shares of Common Stock).

183. Thus, the ability of Rite Aid to refinance the PCS Debt for fewer shares at higher values provided another powerful motive for the Individual Defendants to engage in their scheme to inflate artificially the market price of Rite Aid's securities.

184. In addition, the acquisition of PCS in January provided Rite Aid with a business opportunity to control prescription drug purchases. PCS, as a middle-man selling health care services to employers, could dictate what prices pharmacies received as reimbursement payment and where participating members could fill their prescriptions. Through aggressive business tactics, Rite Aid, acting through PCS, could shift participating PCS plan members to Rite Aid retail locations or PCS mail order.

185. For instance, in an aggressive and improper business practice, Rite Aid used its control of PCS to offer an improper incentive to PCS referrals. On July 23, Rite Aid sent an e-mail message to all pharmacists with procedures to follow when patients are referred by PCS. The message informed pharmacists that when a prescription was transferred by PCS to Rite Aid, that PCS "will enter a Management Access Override for this patient to allow up to 90-day supplies with no co-pay," thereby unilaterally eliminating the co-pay requirement established by the plans only for plan members who purchased prescriptions at Rite Aid. The e-mail further authorized the pharmacist to offer new customers a $50 "Smart Card" to use at Rite Aid.

186. The desire to finance the PCS Debt also motivated defendants to engage in the alleged scheme. Faced with a $1.3 billion line of credit expiring on October 29, 1999, Rite Aid strove to complete its secondary offering in the accorded time frame. The SEC blocked the secondary offering by withholding approval of the registration statement as it scrutinized Rite Aid's accounting. As Rite Aid's financial condition worsened, credit-rating agencies such as Moody's and Standard & Poor's lowered the Company's ratings. If Rite Aid could not refinance its short-term commercial paper, it faced a liquidity crisis. It was clear that defendants' accounting manipulations and partial disclosures after March 12, 1999 were aimed at forestalling the liquidity crisis. It was only, finally, on October 18, 1999, just before the expiration of the $1.3 billion line of credit, in return for defendant Grass's resignation, that the banks extended the line of credit for one year.

187. While the full details of the Announced Second Restatement are not yet known, defendants deceived credit agencies and its own lenders during the Class Period as to its true financial condition. Analyst Mark Husson of Merrill Lynch commented precisely in this regard in the New York Times on October 19, 1999, that the significant restatements "make you wonder what the underlying earnings power of this company is." By misstating the Company's earnings and balance sheet during the Class Period, defendants avoided defaulting on the PCS Debt and violating provisions in the line of credit facility which required the Company to maintain certain asset and earnings ratio levels.

188. Although the PCS Debt was never refinanced by the secondary offering during the Class Period, it is clear that defendants' plan to use the stock as currency to pay for the PCS Debt was initially delayed, then ultimately defeated, by the SEC's scrutiny of Rite Aid's fraudulent accounting practices.

NO STATUTORY SAFE HARBOR

189. The statutory safe harbor provides for forward-looking statements under certain circumstances, but does not apply to any of the allegedly false forward-looking statements pleaded herein. The safe harbor does not apply to false financial statements. Also, none of the forward-looking statements pleaded herein were identified as "forward-looking statements" when made. Nor was it stated that actual results "could differ materially from those projected." Nor did meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statements accompany those forward-looking statements. Each of the forward-looking statements alleged herein was made by or authorized by an executive officer of Rite Aid, and was actually known by each of the Individual Defendants to be false when made.

COUNT I

VIOLATION OF SECTION 10(b) OF THE EXCHANGE ACT AND RULE 10b-5 THEREUNDER AGAINST THE RITE AID DEFENDANTS

190. Plaintiffs repeat and reallege each and every allegation above as if set forth in full herein.

191. Throughout the Class Period, defendants, singly and in concert, directly or indirectly, engaged in a common plan, scheme and course of conduct described herein, pursuant to which they knowingly or recklessly engaged in acts, transactions, practices and a course of business which operated as a fraud upon plaintiffs and the other members of the Class; made various false statements of material facts and omitted to state material facts to make the statements made not misleading to plaintiffs and the other members of the Class; and employed manipulative or deceptive devices and contrivances in connection with the purchase and sale of Rite Aid securities.

192. The purpose and effect of defendants' plan, scheme and course of conduct was to artificially inflate the price of Rite Aid securities and to artificially maintain the market price of these Rite Aid securities.

193. Defendants, who include the top officers of the Company, with the positions set forth herein above, had actual knowledge of the material omissions and/or the falsity of the material statements set forth above, and intended to deceive plaintiffs and the other members of the Class, or, in the alternative, acted with reckless disregard for the truth when they failed to ascertain and disclose the true facts in the statements made by them or other Rite Aid personnel to the SEC, securities analysts and members of the investing public, including plaintiffs and the Class.

194. As a result of the foregoing, the market price of Rite Aid securities was artificially inflated during the Class Period. In ignorance of the falsity of the reports and statements and, in particular the material misstatement of Rite Aid's earnings during the Class Period, and the deceptive and manipulative devices and contrivances employed by the defendants, plaintiffs and the other members of the Class relied, to their damage, on the reports and statements described above and/or the integrity of the market price of Rite Aid securities during the Class Period in purchasing Rite Aid securities which were artificially inflated as a result of defendants' false and misleading statements.

195. Had plaintiffs and the other members of the Class known of the material adverse information which defendants did not disclose, they would not have purchased Rite Aid securities at the artificially inflated prices that they did.

196. Defendants' concealment of this material information served only to harm plaintiffs and the other members of the Class who purchased Rite Aid securities in ignorance of the financial risk to them as a result of such nondisclosures.

197. In addition to the duties of full disclosure imposed on defendants as a result of their making of affirmative statements and reports, or participation in the making of affirmative statements and reports to the investing public, the Individual Defendants had a duty to promptly disseminate truthful information that would be material to investors in compliance with the integrated disclosure provisions of the SEC as embodied in SEC Regulation S-X (17 C.F.R. Sections 210.01 et seq.) and S-K (17 C.F.R. Sections 229.10 et seq.) and other SEC regulations, including accurate and truthful information with respect to the Company's operations, financial condition, and earnings so that the market price of the Company's common stock would be based on truthful, complete and accurate information.

198. As a result of the wrongful conduct alleged herein, plaintiffs and other members of the Class have suffered damages in an amount to be established at trial.

199. By reason of the foregoing, defendants have violated Section 10(b) of the Exchange Act and SEC Rule 10b-5 promulgated thereunder and are liable to the plaintiffs and the other members of the Class for the substantial damages which they suffered in connection with their purchase of Rite Aid securities during the Class Period.

COUNT II

VIOLATION OF SECTION 10(b) OF THE EXCHANGE ACT AND RULE 10b-5 THEREUNDER AGAINST KPMG

200. Plaintiffs repeat and reallege each and every allegation above as if set forth in full herein. This Count is asserted against KPMG, based on its unqualified audit and review

reports, for violations of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, on behalf of all purchasers of Rite Aid securities during the Class Period who were damaged thereby.

201. Throughout the Class Period, KPMG, individually and in concert, directly or indirectly, by the use and means of instrumentalities of interstate commerce and of the mails, engaged and participated in a common plan, scheme and course of conduct to conceal adverse material information about Rite Aid, including its true financial results, as specified herein. KPMG knowingly or recklessly: (a) engaged in acts, transactions, practices and a course of business which operated as a fraud upon plaintiffs and the other members of the Class; (b) made various false statements of material facts and omitted to state material facts to make the statements made not misleading to plaintiffs and the other members of the Class; and (c) employed manipulative or deceptive devices and contrivances in connection with the purchase and sale of Rite Aid securities. Specifically, KPMG knew or should have known that Rite Aid's reported financial results during the Class Period, as filed with the SEC by Rite Aid, and disseminated to the investing public, were materially overstated and were not presented in accordance with GAAP, that KPMG's audits were performed in accordance with GAAS, and, therefore, that KPMG's unqualified audit and review reports, as included or incorporated by reference in Rite Aid's annual or quarterly reports and other SEC filings, were materially false and misleading.

202. The 1997, 1998, and 1999 Form 10-Ks were materially false and misleading, contained untrue statements of material facts, omitted to state material facts necessary to make the statements made in those SEC filings, under the circumstances in which they were made, not misleading, and failed to adequately disclose material facts. As detailed herein, the misrepresentations contained in, or the material facts omitted from, those Form 10-Ks included, among other things, the overstatement of net income for 1997, 1998, and 1999, as well as the representations in KPMG's unqualified audit reports issued in connection with KPMG's audits of Rite Aid's financial statements for those years, in which KPMG certified that: (i) it had audited Rite Aid's financial statements in accordance with GAAS; (ii) it had planned and performed those audits "to obtain reasonable assurance about whether the financial statements are free of material misstatement"; (iii) in its opinion, Rite Aid's financial statements "present fairly, in all material respects, the financial position" of Rite Aid "in conformity with generally accepted accounting principles"; and (iv) KPMG's audits provided a "reasonable basis" for its opinions. As detailed herein, KPMG's audit reports were materially false and misleading. KPMG did not make a reasonable investigation or possess reasonable grounds for the belief that the statements described above, which were contained in the 1997, 1998, and 1999 Form 10-Ks, were true, were without omissions of any material facts, and were not misleading.

203. KPMG, with knowledge of the falsity and misleading nature of the statements contained in its unqualified audit reports, and in reckless disregard of the true nature of its audits, caused the public statements quoted herein to contain misstatements and omissions of material facts. As described herein, KPMG's audit of Rite Aid's financial

statements for 1997, 1998, and 1999 were not performed in accordance with GAAS, and, in fact, KPMG had no basis for its unqualified opinions. KPMG's unqualified audit reports dated April 24, 1997, April 14, 1998, and May 28, 1999, issued in connection with those audits, as included or incorporated by reference in the 1997, 1998, and 1999 Form 10-Ks, in which KPMG certified, among other things, that its audits were performed in accordance with GAAS, were materially false and misleading.

204. The Form 10-Qs filed during fiscal 1997 and 1998 were also materially false and misleading, contained untrue statements of material facts, omitted to state material facts necessary to make the statements made in those SEC filings, under the circumstances in which they were made, not misleading, and failed to adequately disclose material facts. As detailed herein, the misrepresentations contained in, or the material facts omitted from, those Form 10-Qs included, but were not limited to, the overstatement of net income and net earnings, as well as the representations in KPMG's unqualified review reports issued in connection with KPMG's reviews of Rite Aid's financial statements for those quarters in which KPMG warranted that it reviewed Rite Aid's financial results for each quarterly period "in accordance with standards established by the [AICPA]," and that, based on its reviews, KPMG was "not aware of any material modifications that should be made to the condensed consolidated financial statements . . . for them to be in conformity with generally accepted accounting principles." As detailed herein, KPMG's review reports were materially false and misleading. KPMG did not make a reasonable investigation or possess reasonable grounds for the belief that the statements described above in the Form 10-Qs during 1997 and 1998 fiscal years were true, were without omissions of any material facts, and were not misleading.

205. KPMG, with knowledge of the falsity and misleading nature of the statements contained in its unqualified review reports, and in reckless disregard of the true nature of its reviews, caused the public statements quoted herein to contain misstatements and omissions of material facts. As described herein, KPMG's reviews of Rite Aid's interim financial statements during fiscal 1997, 1998, and 1999 violated the guidelines established by the AICPA. KPMG's unqualified review reports, issued in connection with those reviews, in which KPMG stated, among other things, that its reviews were performed in accordance with guidelines established by the AICPA, were materially false and misleading.

206. KPMG acted with scienter throughout the Class Period because it either had actual knowledge of the misrepresentations and omissions of material facts set forth herein, or acted with reckless disregard for the truth in that it failed to ascertain and to disclose the true facts, even though such facts were available to it. KPMG was Rite Aid's auditor, and, therefore, was directly responsible for the false and misleading statements and omissions disseminated to the public through its unqualified audit and review reports.

207. KPMG's misrepresentations and omissions were intentional or reckless. KMPG, as Rite Aid's auditor, had unfettered access to Rite Aid's books and records throughout the Class Period. KPMG, as a world-renowned "Big 5" public accounting firm, had

knowledge of the requirements of GAAS. The following facts support a strong inference that KPMG acted with scienter:

a. KPMG knew or recklessly disregarded that it had not performed its audits of Rite Aid's 1997, 1998, and 1999 financial statements in accordance with GAAS, and, therefore, that its unqualified audit reports on Rite Aid's financial statements for 1997, 1998, and 1999 were materially false and misleading. Under GAAS, "[t]he auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud." AICPA Professional Standards, AU § 110.02 (1998); AU § 316.05 (1997). As described herein, KPMG did not fulfill that responsibility. In fact, KPMG's audits of Rite Aid's financial statements for 1997, 1998, and 1999 were so woefully inadequate that KPMG repeatedly violated GAAS. KPMG repeatedly and materially violated GAAS in each of those audits, failed to plan or perform its audits to obtain reasonable assurance that Rite Aid's financial statements were free of material misstatement, and, therefore, had no basis on which to state that Rite Aid's financial statements were presented in conformity with GAAP. For example, KPMG failed to properly consider Rite Aid's lack of internal controls. GAAS provide that "[i]n all audits, the auditor should obtain an understanding of internal control sufficient to plan the audit." AU § 319.02. "The auditor should obtain sufficient knowledge of the information system relevant to financial reporting to understand," among other things, the classes of significant transactions, "the accounting records, supporting information and specific accounts in the financial statements involved in the processing and reporting of transactions," the accounting processing involved in recording, processing, accumulating and reporting transactions, and the financial reporting process used to prepare financial statements. AU § 319.36. KPMG violated GAAS because it failed to learn or consider that Rite Aid had grossly deficient internal controls and procedures.

b. KPMG knew or recklessly disregarded that it had not performed its reviews of Rite Aid's quarterly financial statements during fiscal 1997, 1998, and 1999 in accordance with standards established by the AICPA, particularly in light of Rite Aid's weak internal control structure, and, therefore, that its unqualified review reports included in the Form 10-Qs filed with the SEC were materially false and misleading. A review of interim financial statements may bring to the auditor's attention significant matters affecting the financial statements. AU § 770.09. An auditor performing a review of interim financial information must "have sufficient knowledge of a client's internal control as it relates to the preparation of both annual and interim financial information." AU § 722.10. KPMG's reviews of Rite Aid's interim financial statements for the fiscal quarters during 1997, 1998, and 1999 violated AICPA standards because, as described in paragraphs 170, 171, and 173 above, KPMG did not obtain sufficient knowledge of Rite Aid's internal controls. The procedures applied by KPMG in connection with its reviews of Rite Aid's interim financial statements for the fiscal quarters during 1997, 1998, and 1999 also repeatedly violated the AICPA's Professional Standards (AU § 722) because KPMG completely failed in its reviews to perform the most fundamental of procedures to provide a basis for its unqualified reports.

208. During the Class Period, KPMG issued unqualified audit and review opinions, certifying that Rite Aid's financial statements were prepared in accordance with GAAP and that KPMG's audits of such financial statements had been performed in accordance with GAAS. These statements were false. As described in detail below, KPMG knew or deliberately turned a blind eye to red flags indicating that Rite Aid's publicly reported earnings during the Class Period were materially overstated.

209. As a result of KPMG's deceptive practices and false and misleading statements and omissions, the market price of Rite Aid securities was artificially inflated throughout the Class Period. In ignorance of the false and misleading nature of the representations and omissions described above, in particular the material misstatement of Rite Aid's net income during the Class Period, and the deceptive and manipulative devices and contrivances employed by KPMG, plaintiffs and the other members of the Class, in reliance on either the integrity of the market or directly on the statements and reports of KPMG, purchased Rite Aid publicly traded securities at artificially inflated prices and were damaged thereby.

210. If plaintiffs and the other members of the Class had known of the material adverse information not disclosed by KPMG, or had been aware of the truth behind KPMG's material misstatements, they would not have purchased Rite Aid securities at artificially inflated prices.

211. As a result of the wrongful conduct alleged herein, plaintiffs and other members of the Class have suffered damages in an amount to be established at trial.

212. By reason of the foregoing, KPMG has violated Section 10(b) of the Exchange Act and SEC Rule 10b-5 promulgated thereunder and is liable to the plaintiffs and the other members of the Class for the substantial damages which they suffered in connection with their purchase of Rite Aid securities during the Class Period.

COUNT III

VIOLATION OF SECTION 20(a) OF THE EXCHANGE ACT

AGAINST THE INDIVIDUAL DEFENDANTS

213. Plaintiffs repeat and reallege each and every allegation above as if set forth in full herein.

214. During the Class Period, each of the Individual Defendants, by virtue of his office and directorship at Rite Aid and his specific acts, as well as significant holdings of Rite Aid securities, was a controlling person of Rite Aid and its employees within the meaning of Section 20(a) of the Exchange Act.

215. Each of the Individual Defendants' positions made him privy to, and provided him with actual knowledge of, the material facts which Rite Aid concealed from plaintiffs and the other members of the Class during the Class Period.

216. Each of the Individual Defendants at Rite Aid had the power and influence, and exercised the same, to cause Rite Aid to engage in the unlawful conduct and practices complained of herein by causing Rite Aid to disseminate the false and misleading information referred to above.

217. By virtue of the foregoing, the Individual Defendants have violated Section 20(a) of the Exchange Act.

218. Each of the Individual Defendants and Rite Aid had the power and influence, and exercised the same, to control Rite Aid employees (controlled persons) who engaged in the violations alleged herein. As a result of their control over the controlled persons, the Individual Defendants violated Section 20(a) of the Exchange Act.

219. By virtue of the conduct alleged above, Individual Defendants are liable to the plaintiffs and the other members of the Class for the substantial damages which they suffered in connection with their purchases of Rite Aid securities during the Class Period.

WHEREFORE, plaintiffs, on their own behalf and on behalf of the other members of the Class, demand judgment against the defendants as follows:

A. Determining that this action is properly maintainable as a class action pursuant to Rule 23 of the Federal Rules of Civil Procedure;

B. Declaring and determining that defendants violated the federal securities laws by reason of their conduct as alleged herein;

C. Awarding monetary damages against all defendants, jointly and severally, in favor of plaintiffs and the other members of the Class for all losses and damages suffered as a result of the acts and transactions complained of herein, together with prejudgment interest from the date of the wrongs to the date of the judgment herein;

D. Awarding plaintiffs the costs, expenses, and disbursements incurred in this action, including reasonable attorneys' and experts' fees; and

E. Awarding plaintiffs and the other members of the Class such other and further relief as the Court may deem just and proper in light of all the circumstances of this case.

JURY TRIAL DEMAND

Plaintiffs hereby demand a trial by jury.

DATED: March 10, 2000

BERGER & MONTAGUE, P.C.

__________________________

Sherrie R. Savett, Esq.

Robin Switzenbaum, Esq.

Stuart J. Guber, Esq.

1622 Locust Street

Philadelphia, PA 19103

(215) 875-3000

MILBERG WEISS BERSHAD HYNES

& LERACH LLP

__________________________

William C. Fredericks, Esq.

Brian C. Kerr, Esq.

Susan M. Greenwood, Esq.

One Pennsylvania Plaza

New York, NY 10119

(212) 594-5300

Co-Lead Counsel for Plaintiffs

Attorneys for Plaintiffs

Mel Lifschitz, Esq.

Robert J. Berg, Esq.

Bernstein Liebhard & Lifschitz

10 East 40th Street, 22nd Floor

New York, NY 10016

(212) 779-1414

Jeffrey H. Squire, Esq.

Ira M. Press, Esq.

Kirby McInerney & Squire, LLP

830 Third Avenue

New York, NY 10022

(212) 371-6600

Andrew L. Barroway, Esq.

Schiffrin & Barroway, LLP

Three Bala Plaza East, Suite 400

Bala Cynwyd, PA 19004

(610) 667-7706

Deborah R. Gross, Esq.

Christopher T. Reyna, Esq.

Law Offices Bernard M. Gross, P.C.

1500 Walnut Street, Sixth Floor

Philadelphia, PA 19102

(215) 561-3600

Marc Henzel, Esq.

Law Offices Marc S. Henzel

210 W. Washington Square

Third Floor

Philadelphia, PA 19106

(215) 625-9999

Joshua N. Rubin, Esq.

Abbey, Gardy & Squitieri

212 East 39th Street

New York, NY 10016

(212) 889-3700

Stuart H. Savett, Esq.

Robert P. Frutkin, Esq.

Savett Frutkin Podell & Ryan, P.C.

325 Chestnut Street, Suite 700

Philadelphia, PA 19106

(215) 923-5400

Kevin J. Yourman, Esq.

Mathew Zevin, Esq.

Elizabeth P. Lin, Esq.

Weiss & Yourman

10940 Wilshire Blvd., 24th Floor

Los Angeles, CA 90024

(310) 208-2800

Joseph H. Weiss, Esq.

Weiss & Yourman

551 Fifth Avenue, Suite 1600

New York, NY 10176

(212) 682-3025

Roberta Liebenberg, Esq.

Liebenberg & White

The Pavilion

261 Old York Road, Suite 810

Jenkintown, PA 19046

(215) 481-0272

Vincent Cappucci, Esq.

Robert N. Cappucci, Esq.

Entwistle & Cappucci LLP

400 Park Avenue

New York, NY 10022

(212) 894-7200

David R. Scott, Esq.

Neil Rothstein, Esq.

Scott & Scott

108 Norwich Avenue

Colchester, CT 06415

(860) 537-5537

Marc Edelson, Esq.

Hoffman & Edelson

45 W. Court Street

Doylestown, PA 18901

(215) 230-8043

Robert M. Roseman, Esq.

Spector & Roseman

1818 Market Street, Suite 2500

Philadelphia, PA 19103

(215) 496-0300

Jonathan Shub, Esq.

Sheller, Ludwig & Badey

1528 Walnut Street, 3rd Floor

Philadelphia, PA 19102

(215) 790-7300

Scott R. Shepherd, Esq.

Shepherd & Geller, LLC

117 Gayley Street, Suite 200

Media, PA 19063

(610) 891-9880

Paul J. Geller, Esq.

Shepherd & Geller, LLC

7200 West Camino Real, Suite 203

Boca Raton, FL 33433

(561) 750-3000

Jeffrey R. Krinsk, Esq

Arthur L. Shingler, Esq.

Finkelstein & Krinsk

The Koll Center

501 West Broadway, Suite 1250

San Diego, CA 92101-3579

(619) 238-1333

Michael D. Donovan, Esq.

Donovan Miller, LLC

1608 Walnut Street, Suite 1400

Philadelphia, PA 19103

(215) 732-6020

Prongay & Borderud

12121 Wilshire Boulevard, Suite 400

Los Angeles, CA 90025

Dennis J. Johnson, Esq.

Law Offices of Dennis J. Johnson

1890 Williston Road

South Burlington, VT 05403

(802) 862-0330

Marvin L. Frank, Esq.

Rabin & Peckel LLP

275 Madison Avenue

New York, NY 10016

(212) 682-1818

Glen DeValerio, Esq.

Jeffrey C. Block, Esq.

Berman, DeValerio & Pease LLP

One Liberty Squire

Boston, MA 02109

(617) 542-8300

Myron Harris, Esq.

South 106 - Park Towne Place

22nd & Benjamin Franklin Parkway

Philadelphia, PA 19130

(215) 567-5333

Charles J. Piven, Esq.

Law Offices of Charles J. Piven

The World Trade Center - Baltimore

Suite 2525

401 East Pratt Street

Baltimore, MD 21202

(410) 332-0030

Curtis V. Trinko, Esq.

Law Offices of Curtis V. Trinko, LLP

16 West 46th Street, 7th Floor

New York, NY 10036

(212) 490-9550

Kenneth A. Elan, Esq.

Law Offices of Kenneth A. Elan

217 Broadway

New York, NY 10007

(212) 619-0261

Francis J. Farina, Esq.

Law Offices of Francis J. Farina

577 Gregory Lane

Devon, PA 19333

(610) 695-9007

Steven E. Cauley, Esq.

Law Offices of Steven E. Cauley

Suite 218, Cypress Plaza

2200 N. Rodney Parham Road

Little Rock, AR 72212

(501) 312-8500

Jack. G. Fruchter, Esq.

Fruchter & Twersky

60 East 42d Street, 47th Floor

New York, NY 10165

(212) 687-6655

Fred T. Isquith, Esq.

Wolf Haldenstein Adler Freeman

& Herz LLP

270 Madison Avenue

New York, NY 10016

(212) 545-4600

Richard D. Kranich, Esq.

Law Offices of Richard D. Kranich

120 Broadway, Suite 1016

New York, NY 10271

Marc I. Gross, Esq.

Pomerantz Haudek Block

Grossman & Gross LLP

100 Park Avenue

New York, NY 10017-5516

(212) 661-1100

Jaroslawicz & Jacobs

150 William Street

New York, NY 10038

(212) 227-2780

Michael J. Boni, Esq.

Kohn, Swift & Graf, P.C.

1101 Market Street, Suite 2400

Philadelphia, PA 19107

(215) 238-1700

James V. Bashian, Esq.

Oren S. Giskan, Esq.

Law Offices of James V. Bashian, P.C.

500 Fifth Avenue, Suite 2700

New York, NY 10110

(212) 921-4110

J. Dennis Faucher, Esq.

Michael C. Dell'Angelo, Esq.

Bryan L. Clobes, Esq.

Miller Faucher and Cafferty LLP

One Penn Square West

30 South 15th Street, Suite 2500

Philadelphia, PA 19102

(215) 864-2800

Burton H. Finkelstein, Esq.

Donald J. Enright, Esq.

Vincent D. Renzi, Esq.

Finkelstein, Thompson & Loughran

1055 Thomas Jefferson Street, N.W.

Suite 601

Washington, D.C. 20007

(202) 337-8000

Andrew M. Schatz, Esq.

Schatz & Nobel, P.C.

330 Main Street, 2nd Floor

Hartford, CT 06106-1852

(860) 493-6292

CERTIFICATE OF SERVICE

I, Stuart J. Guber, hereby certify that on this 10th day of March 2000, I caused a true and correct copy of the Third Consolidated Amended Class Action Complaint to be served on the following parties:

Via Hand Delivery:

Alan J. Davis, Esq.

William A. Slaughter, Esq.

Ballard Spahr Andrews & Ingersoll, LLP

1735 Market Street, 51st Floor

Philadelphia, PA 19103

James J. Rogers, Esq.

Dilworth Paxson, LLP

3200 Mellon Bank Center

1735 Market Street

Philadelphia, PA 19103-7595

Via Overnight Delivery:

Andrew B. Weissman, Esq.

Wilmer Cutler & Pickering

2445 M. Street, N.W.

Washington, D.C. 20037-1420

Bruce A. Hiler, Esq.

O'Melveny & Meyers, LLP

555 13th Street, N.W.

Washington, D.C. 20004-1109

Samuel Sporn, Esq.

Christopher Lometti, Esq.

Schoengold & Sporn, P.C.

233 Broadway

New York, NY 10279

KPMG LLP

Legal Department

280 Park Avenue

New York, NY 10017

____________________________________

Stuart J. Guber

1. The full extent to which earnings were overstated in this and other quarters will not be known until Rite Aid issues the details of its Announced Second Restatement.

2. See preceding footnote.