Information we have included or incorporated by reference in this Quarterly Report on Form 10-Q, and information which may be contained in our other filings with the Securities and Exchange Commission (the "SEC") and our press releases or other public statements, contain or may contain forward-looking statements. These forward-looking statements include, among others, statements of our plans, objectives, expectations (financial or otherwise) or intentions.

Our forward-looking statements involve risks and uncertainties. Our actual results may differ significantly from those projected or suggested in any forward-looking statements. We do not undertake any obligation to release publicly any revisions to such forward-looking statements to reflect events or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. Factors which might cause such a difference to occur include, but are not limited to:

· results in regulatory matters, the adoption of new legislation or regulations (including increased costs associated with compliance with new laws and regulations), more aggressive enforcement of existing legislation or regulations, or a change in the interpretation of existing legislation or regulations

· costs and uncertainties of adverse results in litigation, including a number of pending class action cases that challenge certain of our business practices

· continued pressure on margins resulting from client demands for lower prices or different pricing approaches, enhanced service offerings and/or higher service levels

· uncertainties associated with our acquisitions, which include integration risks and costs, uncertainties associated with client retention and repricing of client contracts, and uncertainties associated with the operations of acquired businesses

· the possible loss, or adverse modification of the terms, of contracts with pharmacies in our retail pharmacy network

· the possible termination of, or unfavorable modification to, contracts with key clients or providers, some of which could have a material impact on our financial results

· changes in industry pricing benchmarks such as average wholesale price ("AWP") and average manufacturer price ("AMP"), which could have the effect of reducing prices and margins

· competition in the PBM and specialty pharmacy industries, and our ability to consummate contract negotiations with prospective clients, as well as competition from new competitors offering services that may in whole or in part replace services that we now provide to our customers

· our ability to continue to develop new products, services and delivery channels

· increased compliance risk relating to our contracts with the Department of Defense ("DoD") TRICARE Management Activity and various state governments and agencies

· uncertainties and risks regarding the Medicare Part D prescription drug benefit, including the financial impact to us to the extent that we participate in the program on a risk-bearing basis, uncertainties of client or member losses to other providers under Medicare Part D, implementation of regulations that adversely affect our profitability or cash flow, and increased regulatory risk

· our ability to maintain growth rates, or to control operating or capital costs

· the possible loss, or adverse modification of the terms, of relationships with pharmaceutical manufacturers, or changes in pricing, discount or other practices of pharmaceutical manufacturers or interruption of the supply of any pharmaceutical products

· uncertainties associated with U.S. Centers for Medicare & Medicaid's ("CMS") implementation of the Medicare Part B Competitive Acquisition Program ("CAP"), including the potential loss of clients/revenues to providers choosing to participate in the CAP

· the use and protection of the intellectual property we use in our business or infringement of intellectual property claimed by others

· our leverage and debt service obligations, including the effect of certain covenants in our borrowing agreements

· general developments in the health care industry, including the impact of increases in health care costs, changes in drug utilization and cost patterns and introductions of new drugs

· increase in credit risk relative to our clients due to adverse economic trends or other factors

· our ability to attract and retain qualified employees

· other risks described from time to time in our filings with the SEC

See the more comprehensive description of risk factors under the captions "Forward Looking Statements and Associated Risks" contained in Item 1 - "Business"and Item IA - "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2007, filed with the SEC on February 21, 2008.

As one of the largest full-service pharmacy benefit management ("PBM") companies, we provide health care management and administration services on behalf of our clients, which include health maintenance organizations, health insurers, third-party administrators, employers, union-sponsored benefit plans, workers compensation plans, and government health programs. Our integrated PBM services include network claims processing, home delivery services, benefit design consultation, drug utilization review, formulary management, and drug data analysis services.

Through our Specialty and Ancillary Services ("SAAS") segment, we provide specialty services, including: patient care and direct specialty home delivery to patients; distribution of injectable drugs to patient homes and physician offices; distribution of pharmaceuticals and medical supplies to providers and clinics; fertility services to providers and patients; and bio-pharmaceutical services including marketing, reimbursement and customized logistics solutions. SAAS does not include the fulfillment of specialty prescriptions at retail pharmacies participating in our networks; these prescriptions are reflected in PBM network revenues. We also provide services that include distribution of specialty pharmaceuticals requiring special handling or packaging where we have been selected by the pharmaceutical manufacturer as part of a limited distribution network, distribution of pharmaceuticals to low-income patients through manufacturer-sponsored patient assistance programs and company-sponsored generic patient assistance programs, and distribution of sample units to physicians and verification of practitioner licensure.

We report two segments: PBM and SAAS (see "-Results of Operations"). Revenue generated by our segments can be classified as either tangible product revenue or service revenue. We earn tangible product revenue from the sale of prescription drugs by retail pharmacies in our retail pharmacy networks and from dispensing prescription drugs from our home delivery and specialty pharmacies. Service revenue includes administrative fees associated with the administration of retail pharmacy networks contracted by certain clients, market research programs, medication counseling services, certain specialty distribution services, and sample fulfillment and accountability services. Tangible product revenue generated by our PBM and SAAS segments represented 98.4% of revenues for both the six months ended June 30, 2008 and for the same period of 2007.

During 2008, we established the Center for Cost-Effective Consumerism (the "Center") which will assist us in the advancement of our understanding of consumers and the way they use health care. The Center combines our industry-leading research capabilities with insights from a multidisciplinary advisory board of national experts in science of human behavior and decision making. Using work done by the Center, we plan to better equip plan sponsors to achieve: lowest cost drug mix (e.g., generics), maximum therapy adherence (in key classes), greatest use of most cost-effective delivery channel, uncompromising safety standards and increasing member engagement and satisfaction.

EXECUTIVE SUMMARY AND TREND FACTORS AFFECTING THE BUSINESS

Our results in the first six months of 2008 reflect the successful execution of our business model, which emphasizes the alignment of our financial interests with those of our clients through greater use of generics, home delivery and specialty pharmacy. In the first six months of 2008 we benefited from a higher generic fill rate (65.5% compared to 60.6% in the same period of 2007) and better management of ingredient costs through renegotiation of supplier contracts, increased competition among generic manufacturers and other actions which helped to reduce ingredient costs. In addition, through the research performed by the Center, as described above, we intend to provide our clients with additional tools designed to generate higher generic fill rates, and further increase the use of our home delivery and specialty pharmacy services.

We believe the positive trends we see in the first six months of 2008, including increased generic usage and lower drug purchasing costs, should continue to offset the negative impact of various marketplace forces effecting pricing and plan structure, among other factors, and thus generate improvements in our results of operations in the future.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions which affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our estimates and assumptions are based upon a combination of historical information and various other assumptions believed to be reasonable under the particular circumstances. Actual results may differ from our estimates. For a full description of our accounting policies, please refer to the notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2007, filed with the SEC on February 21, 2008.

RESULTS OF OPERATIONS

PBM OPERATING INCOME


                                    Three Months Ended June 30,             Six Months Ended June 30,
   (in millions)                      2008               2007                  2008             2007

   Product revenues
   Network revenues              $    2,475.1        $    2,376.8         $    4,865.9       $ 4,708.9
   Home delivery revenues             1,243.1             1,250.5              2,478.5         2,486.4
   Service revenues                      48.4                42.0                 93.0            82.9
   Total PBM revenues                 3,766.6             3,669.3              7,437.4         7,278.2
   Cost of PBM revenues               3,317.0             3,281.4              6,573.7         6,522.0
   PBM gross profit                     449.6               387.9                863.7           756.2
   PBM SG&A expenses                    146.6               138.1                276.8           269.4
   PBM operating income          $      303.0        $      249.8         $      586.9       $   486.8

   Total adjusted PBM Claims(1)         126.9               124.8                255.4           251.6

(1) Adjusted PBM claims represent network claims plus home delivery claims, which are multiplied by 3, as home delivery claims are typically 90 day claims and network claims are generally 30 day claims.

Network claims increased by 2.0 million and 3.4 million, or 2.1% and 1.8%, in the three and six months ended June 30, 2008 from the same periods of 2007. Total unadjusted home delivery claims remained relatively constant for the three and six months ended June 30, 2008 when compared to the same periods of 2007. On an adjusted basis, total PBM claims increased 1.7% and 1.5% in the first three and six months ended June 30, 2008, respectively.

Home delivery revenues decreased by $7.4 million, or 0.6%, in the three months ended June 30, 2008 from the same period in 2007. This reduction in home delivery revenues is primarily due to the impact of the higher generic fill rate on average revenue per home delivery claim. Our generic fill rate increased to 56.8% of total home delivery claims in the three months ended June 30, 2008 as compared to 49.9% in the same period of 2007.

Product Revenues for the six months ended June 30, 2008: Network pharmacy revenues increased $157.0 million, or 3.3%, in the six months ended June 30, 2008 from the same period in 2007. Approximately $84.3 million of the increase in network pharmacy revenues is attributable to changes in volume. In addition, approximately $72.7 million of the increase in network pharmacy revenues is attributable to changes in price.

Average revenue per network claim remained constant for the six months ended June 30, 2008 from the same period of 2007. Our generic fill rate affects our average revenue per network claim, as noted above. As our generic fill rate has increased to 66.7% of total network claims in the first six months of 2008 as compared to 62.1% in the same period in 2007, it offsets the upward trend in price caused by inflation as generic drugs are less expensive than brand drugs.

For the six months ended June 30, 2008, home delivery revenues decreased $7.9 million, or 0.3%, as compared to the same period of 2007 primarily due to the impact of higher generic fill rate on average revenue per home delivery claim.
Our generic fill rate increased to 55.4% of total home delivery claims in the six months ended June 30, 2008 as compared to 49.0% in the same period of 2007. The decrease in revenue per home delivery claim of 0.8% was partially offset by ingredient cost inflation.

Cost of PBM revenues increased $35.6 million, or 1.1%, and $51.7 million, or 0.8%, in the three and six months ended June 30, 2008, respectively, from the same period of 2007. This increase was primarily due to the 1.7% and 1.5% increase in adjusted claims volume and ingredient cost inflation for the three and six months ended June 30, 2008, respectively, as discussed above. Offsetting the increase in ingredient cost inflation were improvements in the aggregate generic fill rate, and better management of ingredient costs resulting from renegotiation of certain supplier contracts.

Our PBM gross profit increased $61.7 million, or 15.9%, and $107.5 million, or 14.2%, respectively, for the three and six months ended June 30, 2008 as compared to the same periods of 2007. Client cost savings from the increase in the aggregate generic fill rate and better management of ingredient costs were only partially offset by margin pressures arising from ingredient cost inflation and the current competitive environment.

Selling, general and administrative expense ("SG&A") for our PBM segment for the three months and six months ended June 30, 2008 increased by $8.5 million, or 6.2%, and $7.4 million, or 2.7%, respectively, primarily due to increases in management incentive compensation which is based on corporate financial results.

PBM operating income increased $53.2 million, or 21.3%, and $100.1 million, or 20.6%, respectively, for the three months and six months ended June 30, 2008 as compared to the same period of 2007, based on the various factors described above.

SAAS OPERATING INCOME



                           Three Months Ended June 30,         Six Months Ended June 30,
  (in millions)              2008               2007              2008             2007

  Product revenues       $     911.9        $     872.8      $    1,814.9       $ 1,742.4
  Service revenues              28.2               32.7              57.5            62.2
  Total SAAS revenues          940.1              905.5           1,872.4         1,804.6
  Cost of SAAS revenues        885.3              854.3           1,763.1         1,701.6
  SAAS gross profit             54.8               51.2             109.3           103.0
  SAAS SG&A expenses            41.1               37.9              85.0            74.2
  SAAS operating income  $      13.7        $      13.3      $       24.3       $    28.8

As previously noted, our SAAS results for 2008 and 2007 have been adjusted for the discontinued operations, which were formerly part of our SAAS segment.

SAAS Continuing Operations. SAAS revenues increased $34.6 million, or 3.8%, and $67.8 million, or 3.8%, respectively, in the three and six months ended June 30, 2008 over the same periods of 2007. This is partially due to increased cross-selling of specialty services to our PBM clients. The increase in revenues was partially offset by a reduction in sales of higher margin drugs through our Specialty Distribution line of business.

Consistent with the increase in revenues, SAAS cost of revenues increased $31.0 million, or 3.6%, and $61.5, or 3.6%, in the three and six months ended June 30, 2008 over the same periods of 2007. The increase in revenue resulted in an increase in gross profit of $3.6 million, or 7.0% and $6.3 million, or 6.1%, in the three and six months ended June 30, 2008 over the same periods of 2007.

SG&A for our SAAS segment for the three and six months ended June 30, 2008 increased by $3.2 million, or 8.4%, and $10.8 million, or 14.6% from the same periods of 2007. The increase is primarily due to an increase in bad debt expense, severance charges and site closure costs by our Specialty Distribution line of business.

SAAS income from continuing operations increased slightly by $0.4 million, or 3.0%, for the three months ended June 30, 2008 from the same periods of 2007. SAAS income from continuing operations decreased $4.5 million, 15.6%, in the six months ended June 30, 2008 from the same periods of 2007 based on the factors described above.

OTHER (EXPENSE) INCOME

Net interest expense decreased $9.3 million, or 40.4%, and $10.8 million, or 25.5% respectively, in the three and six months ended June 30, 2008 as compared to the same periods in 2007 due to decreases in interest rates and increases in interest income from higher average cash balances (see "-Liquidity and Capital Resources-Bank Credit Facility").

On December 18, 2006, we announced a proposal to acquire all of the outstanding shares of Caremark Rx, Inc. ("Caremark") common stock. On March 16, 2007, Caremark shareholders approved a merger agreement with CVS Corporation ("CVS") and we subsequently withdrew our proposal to acquire Caremark. Legal and other professional fees (which do not include expenses incurred internally) of $27.4 million were expensed in the first six months of 2007. These expenses were partially offset by a $4.4 million special dividend CVS/Caremark Corporation ("CVS/Caremark") paid on Caremark stock we owned prior to the CVS/Caremark merger and by a non-operating gain of $4.2 million resulting from the sale of our shares of CVS/Caremark stock in the second quarter of 2007. We recognized net non-operating charges of $18.8 million in the first six months of 2007.

Our effective tax rate was 36.6% and 36.1% for the three and six months ended June 30, 2008, respectively, as compared to 36.6% for the same periods of 2007. The six months ended June 30, 2008 includes discrete tax adjustments resulting in a tax benefit of $2.5 million. These adjustments reflect changes in our unrecognized tax benefits, primarily attributable to a lapse in the applicable statute of limitations.

NET LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX

Net loss from discontinued operations, net of tax, decreased $0.3 million and increased $1.5 million for the three and six months ended June 30, 2008, respectively, compared to the same periods of 2007. The changes are primarily due to the pre-tax gain on sale of IP for $8.2 million which was more than offset by the pre-tax loss on sale of CMP for $1.3 million, current period losses and additional IP related bad debt expense.

NET INCOME AND EARNINGS PER SHARE

Net income for the three months ended June 30, 2008 increased $37.5 million, or 24.6%, over the same period of 2007. Net income increased $80.9 million, or 28.2%, for the six months ended June 30, 2008 over the same period of 2007.

On May 23, 2007, we announced a two-for-one stock split for stockholders of record on June 8, 2007, effective June 22, 2007. The split was effected in the form of a dividend by issuance of one additional share of common stock for each share of common stock outstanding. The earnings per share and the weighted average number of shares outstanding for basic and diluted earnings per share for each respective period have been adjusted for the stock split.

Basic and diluted earnings per share increased 31.0% and 31.6%, respectively, for the three months ended June 30, 2008 over the same period of 2007. For the six months ended June 30, 2008, basic and diluted earnings per share increased 37.3% and 36.8%, respectively, over the six months ended June 30, 2007. This increase is primarily due to improved operating results, as well as the decrease in the basic and diluted weighted average number of common shares, relating to the repurchase of 7.2 million shares in the six months of 2008 and 23.1 million shares during 2007 (see "-Stock Repurchase Program").

LIQUIDITY AND CAPITAL RESOURCES

OPERATING CASH FLOW AND CAPITAL EXPENDITURES

For the six months ended June 30, 2008, net cash provided by continuing operations increased $227.5 million to $482.8 million. Changes in operating cash flows from continuing operations for the six months ended June 30, 2008 were impacted by the following factors:
· Net income from continuing operations increased $82.4 million in the six months ended June 30, 2008 as compared to the same period of 2007.

· Changes in working capital resulted in a cash inflow of $11.6 million in the six months ended June 30, 2008 as compared to a cash outflow of $100.8 million in the same period of 2007. The change in working capital is primarily due to a $141.4 million net cash inflow in claims and rebates payable year over year due to the timing of invoices and payments.

· Net non-cash adjustments to net income increased from $16.9 million in the first six months of 2007 to $51.5 million in the first six months of 2008, reflecting changes in the deferred tax provision caused by the first quarter 2007 implementation of Financial Accounting Standards Board ("FASB") Interpretation Number 48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109". In addition, bad debt expense increased by approximately $8.3 million in the first six months of 2008, primarily driven by our Specialty Distribution line of business, as described above.

CHANGES IN BUSINESS

On July 22, 2008, we completed the acquisition of the Pharmacy Services Division of MSC-Medical Services Company ("MSC"), a privately held PBM, for a purchase price of $248 million, subject to certain purchase price adjustments. MSC is a leader in providing PBM services clients providing workers compensation benefits. The transaction will be accounted for under the provisions of FAS 141, "Business Combinations." The purchase price was funded through internally generated cash and borrowings under the revolving credit facility. This acquisition will be reported as part of our PBM segment.

On July 1, 2008, the merger of RxHub and SureScripts was announced. We are one of the founders of RxHub, an electronic exchange enabling physicians who use electronic prescribing technology to link to pharmacies, PBM companies, and health plans. The new organization will enable physicians to securely access health information when caring for their patients through a fast and efficient health exchange. We will retain one-sixth ownership in the merged company. Due to the decreased ownership percentage, the investment will be prospectively recorded using the cost method, under which dividends are the basis of recognition of earnings from an investment.

On June 30, 2008, the Company completed the sale of CuraScript Infusion Pharmacy, Inc. ("IP") for $27.5 million and recorded a pre-tax gain of approximately $8.2 million which is included in Net loss from discontinued operations, net of tax in the consolidated statement of income for the three and six months ended June 30, 2008. IP was identified as available for sale during the fourth quarter of 2007 as we considered it non-core to our future operations. In connection with the classification of IP as a discontinued operation, we recorded a charge in the fourth quarter of 2007 related to impairment losses.

On October 10, 2007, we purchased Connect Your Care, LLC ("CYC"), a leading provider of consumer directed healthcare technology solutions to the employer, health plan and financial services markets. The purchase price was funded through internally generated cash. The purchase agreement includes an earnout provision, payable after three years based on the performance of the business. This acquisition is reported as part of our PBM segment.

We regularly review potential acquisitions and affiliation opportunities. We believe available cash resources, bank financing or the issuance of additional common stock could be used to finance future acquisitions or affiliations. There can be no assurance we will make new acquisitions or establish new affiliations in 2008 or thereafter.

STOCK REPURCHASE PROGRAM

We have a stock repurchase program, originally announced on October 25, 1996. Treasury shares are carried at first in, first out cost. There is no limit on the duration of the program. During the three and six months ended June 30, . . .