Overview of Our Business

CVS Caremark is the largest provider of prescriptions in the United States. We fill or manage more than one billion prescriptions annually. As a fully integrated pharmacy services company, we drive value for our customers by effectively managing pharmaceutical costs and improving healthcare outcomes through our over 6,300 CVS/pharmacy ® stores; our pharmacy benefit management, mail order and specialty pharmacy division, Caremark Pharmacy Services®; our retail healthcare clinic subsidiary, MinuteClinic®; and our online pharmacy, CVS.com®.

Today's healthcare delivery system is rapidly changing. Healthcare is becoming more consumer-centric as the U.S. healthcare system strains to manage growing costs and employers shift more responsibility for managing costs to employees. In addition, an aging population, increasing incidence of chronic disease and increasing utilization of the Medicare drug benefit is fueling demand for prescriptions and pharmacy services. Further, cost-effective generic drugs are becoming more widely available and new drug therapies to treat unmet healthcare needs and reduce hospital stays are being introduced. Consumers require medication management programs and better information to help them get the most out of their healthcare dollars. As a fully integrated pharmacy services company, we are well positioned to provide solutions that address these trends and improve the pharmacy services experience for consumers.

We also strive to improve clinical outcomes, resulting in better control over healthcare costs for employers and health plans. In that regard, we offer a broad spectrum of disease management, health assessment and wellness services to help plan participants manage and protect against potential health risks and avoid future health costs.

Our business is comprised of two operating segments: Retail Pharmacy and Pharmacy Services.

Results of Operations

The following discussion explains the material changes in our results of operations for the thirteen and twenty-six weeks ended June 28, 2008 and June 30, 2007 and the significant developments affecting our financial condition since December 29, 2007. We strongly recommend that you read our audited consolidated financial statements and footnotes and Management's Discussion and Analysis of Financial Condition and Results of Operations included as Exhibit 13 to our annual report on Form 10-K for the fiscal year ended December 29, 2007 (the "2007 Form 10-K") along with this report.

Effective March 22, 2007, we completed our merger with Caremark Rx, Inc. ("Caremark"). Following the merger with Caremark (the "Caremark Merger"), we changed our name to "CVS Caremark Corporation." Accordingly, our results of operations for the thirteen and twenty-six weeks ended June 30, 2007 include 91 and 101 days, respectively, of post-merger Caremark operations.

Management's Discussion and Analysis of Financial Condition and Results of Operations

Second Quarter (Thirteen and Twenty-Six Weeks Ended June 28, 2008 and June 30, 2007)

Summary of the Consolidated Financial Results:



                                                13 weeks ended                        26 weeks ended
(In millions, except per share
amounts)                               June 28, 2008       June 30, 2007     June 28, 2008       June 30, 2007
Net revenues                          $      21,140.3     $      20,703.3   $      42,466.3     $      33,891.9
Gross profit                                  4,373.2             4,158.5           8,666.2             7,461.7
Operating expenses                            2,895.1             2,848.7           5,818.0             5,415.4

Operating profit                              1,478.1             1,309.8           2,848.2             2,046.3
Interest expense, net                           114.7               105.9             245.6               169.8

Earnings from continuing operations
before income tax provision                   1,363.4             1,203.9           2,602.6             1,876.5
Income tax provision                            539.9               480.3           1,030.6               744.0

Earnings from continuing operations             823.5               723.6           1,572.0             1,132.5
Loss from discontinued operations,
net of
income tax benefit                              (48.7 )                -              (48.7 )                -

Net earnings                                    774.8               723.6           1,523.3             1,132.5

Diluted earnings per common share:
Earnings from continuing operations   $          0.56     $          0.47   $          1.07     $          0.91
Loss from discontinued operations               (0.03 )                -              (0.03 )                -

Diluted net earnings per common
share                                 $          0.53     $          0.47   $          1.04     $          0.91

Net revenues increased $437.0 million and $8.6 billion during the thirteen and twenty-six weeks ended June 28, 2008, respectively. The increase during the thirteen weeks ended June 28, 2008, was primarily due to increased sales in the Retail Pharmacy segment. The increase during the twenty-six weeks ended June 28, 2008 was primarily due to the Caremark Merger, which resulted in an increase in Pharmacy Services revenue of $7.9 billion.

Gross profit increased $214.7 million and $1.2 billion during the thirteen and twenty-six weeks ended June 28, 2008, respectively. The increase during the thirteen and twenty six weeks ended June 28, 2008, was primarily due to increased utilization of generic drugs (which normally yield a higher gross profit rate than equivalent brand name drugs) in both the Retail Pharmacy and Pharmacy Services segments. In addition, the twenty-six weeks ended June 28, 2008 was significantly impacted by the Caremark merger, including benefits from purchasing synergies.

Operating expenses increased $46.4 million and $402.6 million during the thirteen and twenty-six weeks ended June 28, 2008, respectively. The increase primarily relates to the Caremark Merger, which resulted in incremental amortization related to the intangible assets acquired and merger-related integration costs.

   Management's Discussion and Analysis of Financial Condition and Results of
                                   Operations

Interest expense, net consisted of the following:



                                                13 weeks ended                              26 weeks ended
(In millions)                         June 28, 2008         June 30, 2007         June 28, 2008         June 30, 2007
Interest expense                     $         118.5       $         113.8       $         255.7       $         185.4
Interest income                                 (3.8 )                (7.9 )               (10.1 )               (15.6 )

Interest expense, net                $         114.7       $         105.9       $         245.6       $         169.8

The increase in interest expense during the thirteen and twenty-six weeks ended June 28, 2008 is due to an increase in our average debt balance, which resulted primarily from the borrowings used to fund a special cash dividend paid to Caremark shareholders upon closing of the Caremark Merger and the accelerated share repurchase program that commenced subsequent to the Caremark Merger.

Income tax provision ~ Our effective income tax rate was 39.6% for the thirteen and twenty-six weeks ended June 28, 2008, respectively, compared to 39.9% and 39.7% for the comparable 2007 periods. The decrease in our effective income tax rate was primarily due to a reduction in nondeductible items and state taxes.

Earnings from continuing operations for thirteen weeks ended June 28, 2008 increased $99.9 million, or 13.8%, to $823.5 million (or $0.56 per diluted share), compared to $723.6 million (or $0.47 per diluted share), in the comparable 2007 period. Earnings from continuing operations for twenty-six weeks ended June 28, 2008 increased $439.5 million, or 38.8%, to $1,572.0 million (or $1.07 per diluted share), compared to $1,132.5 million (or $0.91 per diluted share) in the comparable 2007 period.

Loss from discontinued operations ~In connection with certain business dispositions completed between 1991 and 1997, we continue to guarantee approximately 220 store lease obligations for a number of former subsidiaries, including Linen 'n Things. On May 2, 2008, Linens Holding Co., which operates Linens 'n Things, filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. The loss from discontinued operations includes $78.8 million of lease-related costs ($48.7 million net of a $30.1 million income tax benefit), which the Company believes it may be required to satisfy pursuant to the lease guarantees. These amounts, which will change as more information becomes available, were calculated in accordance with Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities."

   Management's Discussion and Analysis of Financial Condition and Results of
                                   Operations

Segment Analysis:

We evaluate segment performance based on net revenues, gross profit and
operating profit before the effect of discontinued operations and certain
intersegment activities and charges. Following is a reconciliation of the
Company's business segments to the consolidated financial statements:



                                   Retail Pharmacy       Pharmacy Services         Intersegment           Consolidated
(In millions)                          Segment              Segment (1)          Eliminations (2)            Totals
13 weeks ended:
June 28, 2008:
Net revenues                      $        11,770.8     $          10,656.8     $         (1,287.3 )     $     21,140.3
Gross profit                                3,523.3                   849.9                     -               4,373.2
Operating profit                              864.0                   614.1                     -               1,478.1
June 30, 2007:
Net revenues                      $        11,249.7     $          10,554.1     $         (1,100.5 )     $     20,703.3
Gross profit                                3,295.7                   862.8                     -               4,158.5
Operating profit                              727.8                   582.0                     -               1,309.8

26 weeks ended:
June 28, 2008:
Net revenues                      $        23,616.4     $          21,421.5     $         (2,571.6 )     $     42,466.3
Gross profit                                7,028.3                 1,637.9                     -               8,666.2
Operating profit                            1,704.1                 1,144.1                     -               2,848.2
June 30, 2007:
Net revenues                      $        22,488.9     $          12,664.4     $         (1,261.4 )     $     33,891.9
Gross profit                                6,401.4                 1,060.3                     -               7,461.7
Operating profit                            1,353.7                   692.6                     -               2,046.3

(1) Net revenues of the Pharmacy Services Segment include approximately $1,540.2 million and $1,412.1 million of Retail Co-payments for the thirteen weeks ended June 28, 2008 and June 30, 2007, respectively. Net revenues of the Pharmacy Services Segment include approximately $3,205.1 million and $1,568.1 million of Retail Co-payments for the twenty-six weeks ended June 28, 2008 and June 30, 2007, respectively.

(2) Intersegment eliminations relate to intersegment revenues and accounts receivables that occur when a Pharmacy Services Segment customer uses a Retail Pharmacy Segment store to purchase covered merchandise. When this occurs, both segments record the revenue on a stand-alone basis.

   Management's Discussion and Analysis of Financial Condition and Results of
                                   Operations

Retail Pharmacy Segment

The following table summarizes our Retail Pharmacy Segment's performance for the
respective periods:



                                           13 Weeks Ended                26 Weeks Ended
                                       June 28,       June 30,       June 28,       June 30,
(In millions)                            2008           2007           2008           2007
Net revenues                          $ 11,770.8     $ 11,249.7     $ 23,616.4     $ 22,488.9
Gross profit                             3,523.3        3,295.7        7,028.3        6,401.4
Gross profit % of net revenues              29.9 %         29.3 %         29.8 %         28.5 %
Operating expenses                       2,659.3        2,567.9        5,324.2        5,047.7
Operating expense % of net revenues         22.6 %         22.8 %         22.5 %         22.5 %
Operating profit                           864.0          727.8        1,704.1        1,353.7
Operating profit % of net revenues           7.3 %          6.5 %          7.2 %          6.0 %

Net revenue increase:
Total                                        4.6 %         15.5 %          5.0 %         19.2 %
Pharmacy                                     4.9 %         14.1 %          4.9 %         17.6 %
Front Store                                  4.1 %         18.6 %          5.3 %         22.6 %
Same store sales increase:(1)
Total                                        3.1 %          5.7 %          3.5 %          6.5 %
Pharmacy                                     3.7 %          5.7 %          3.7 %          6.7 %
Front Store                                  1.8 %          5.9 %          3.1 %          6.2 %
Generic dispensing rate                     67.0 %         62.4 %         66.8 %         62.1 %
Pharmacy % of total revenues                67.8 %         67.6 %         68.0 %         68.1 %
Third party % of pharmacy revenue           95.8 %         95.0 %         95.8 %         95.1 %
Retail prescriptions filled                134.6          130.7          274.1          264.7

(1) On June 2, 2006, we acquired certain assets and assumed certain liabilities from Albertson's, Inc. for $4.0 billion. The assets acquired and the liabilities assumed included approximately 700 standalone drugstores and a distribution center located in La Habra, California (collectively, the "Standalone Drug Business"). During the thirteen and twenty-six weeks ended June 30, 2007, total net revenues were significantly affected by the acquisition of the Standalone Drug Business, which increased total net revenues by approximately 8.1% and 11.0% respectively. The sales results of the Standalone Drug Business were not included in same store sales revenue until July 1, 2007.

Net revenues ~ As you review our Retail Pharmacy Segment's performance in this area, we believe you should consider the following important information:

• Front store revenues for the thirteen weeks ended June 28, 2008, were negatively impacted by an earlier Easter (March 23rd this year versus April 8thlast year), which shifted more holiday sales into the first quarter. We estimate the Easter shift decreased total same store revenues by approximately 40 basis points and front store same store revenues by approximately 110 basis points during the thirteen weeks ended June 28, 2008. The Easter shift had no impact on the twenty-six weeks ended June 28, 2008.

• As of June 28, 2008, we operated 6,308 retail stores, compared to 6,177 retail stores on June 30, 2007. Total net revenues from new stores accounted for approximately 140 basis points of our total net revenues percentage increase for the thirteen and twenty-six weeks ended June 28, 2008 and June 30, 2007.

• Total net revenues continued to benefit from our active relocation program, which moves existing in-line shopping center stores to larger, more convenient, freestanding locations. Historically, we have achieved significant improvements in customer count and net revenue when we do this. As such, our relocation strategy remains an important component of our overall growth strategy. As of June 28, 2008, approximately 65% of our existing stores were freestanding, compared to approximately 63% at June 30, 2007.

Management's Discussion and Analysis of Financial Condition and Results of Operations

• During the thirteen and twenty-six weeks ended June 30, 2007, total net revenues were significantly affected by the acquisition of the Standalone Drug Business on June 2, 2006.

• Pharmacy revenue growth continued to benefit from new market expansions, increased penetration in existing markets, the introduction of a prescription drug benefit under Medicare Part D in 2006, our ability to attract and retain managed care customers and favorable industry trends. These trends include an aging American population; many "baby boomers" are now in their fifties and sixties and are consuming a greater number of prescription drugs. In addition, the increased use of pharmaceuticals as the first line of defense for individual healthcare also contributed to the growing demand for pharmacy services. We believe these favorable industry trends will continue.

• Pharmacy revenue dollars continue to be negatively impacted in both periods by the conversion of brand named drugs to equivalent generic drugs, which typically have a lower selling price. In addition, our pharmacy growth has also been adversely affected by a decline in the number of significant new brand named drug introductions, higher consumer co-payments and co-insurance arrangements, by an increase in the number of over-the-counter remedies that were historically only available by prescription and by the growth of the mail order channel. We may choose not to participate in certain prescription benefit programs that fall below our minimum profitability standards. In the event we elect to, for any reason, withdraw from current programs and/or decide not to participate in future programs, we may not be able to sustain our current rate of sales growth.

Gross profit includes net revenues less the cost of merchandise sold during the reporting period and related purchasing costs, warehousing costs, delivery costs and actual and estimated inventory losses. Retail Pharmacy gross profit as a percentage of net revenues was 29.9% for the thirteen weeks ended June 28, 2008, compared to 29.3% of net revenues for the comparable 2007 period. Retail Pharmacy gross profit for the twenty-six weeks ended June 28, 2008 was 29.8% of net revenues, compared to 28.5% of net revenues in the comparable 2007 period.

As you review our Retail Pharmacy Segment's performance in this area, we believe you should consider the following important information:

• Our pharmacy gross profit rate continued to benefit from an increase in the sale of generic drugs, which normally yield a higher gross profit rate than equivalent brand name drug revenues. However, the increased use of generic drugs increased the pressure from third party payors to reduce reimbursement payments to retail pharmacies for generic drugs, which reduced the benefit we realized from brand to generic product conversions. We expect this trend to continue.

• Our pharmacy gross profit rate benefited from a portion of the significant purchasing synergies resulting from the Caremark Merger. We expect the benefit from purchasing synergies to positively impact our pharmacy gross profit rate through fiscal 2008, as we realize a full year benefit from the Caremark Merger.

• Sales to customers covered by third party insurance programs have continued to increase and, thus, have become a larger component of our retail pharmacy business. On average, our gross profit on third party pharmacy revenues is lower than our gross profit on cash pharmacy revenues. Third party revenues were 95.8% of total pharmacy revenues during the thirteen and twenty-six weeks ended June 28, 2008, compared to 95.0% and 95.1% of total pharmacy revenues, respectively, during the comparable 2007 periods. We expect this trend to continue.

Management's Discussion and Analysis of Financial Condition and Results of Operations

• In February 2006, the President signed into law the Deficit Reduction Act of 2005 (the "DRA"), which sought to reduce federal spending by altering the Medicaid reimbursement formula for multi-source (i.e., generic) drugs. These changes were scheduled to begin to take effect during the first quarter of 2007 and were expected to result in reduced Medicaid reimbursement rates for retail pharmacies. According to the Congressional Budget Office, retail pharmacies were expected to negotiate with individual states for higher dispensing fees to mitigate the adverse effect of these changes. During 2007, the Centers for Medicare and Medicaid Services ("CMS") issued a final rule purporting to implement the new reimbursement formula. In December 2007, the U.S. District Court for the District of Columbia preliminarily enjoined CMS from implementing the new rule to the extent such action affects Medicaid reimbursement rates for retail pharmacies. In addition, in July 2008, the Medicare Improvements for Patients and Providers Act of 2008 (the "MIPP") became law. Among other things, the MIPP delayed implementation of the new Medicaid reimbursement formula until September 30, 2009 at the earliest. Accordingly, the timing and extent of any reductions and the impact on the Company cannot be determined at this time.

• Our pharmacy gross profit rates have been adversely affected by the efforts of managed care organizations, pharmacy benefit managers, governmental and other third party payors to reduce their prescription costs. In the event this trend continues, we may not be able to sustain our current rate of revenue growth and gross profit dollars could be adversely impacted.

• Our front store revenues decreased as a percentage of total revenues during the thirteen weeks ended June 28, 2008. On average our gross profit on front store revenues is higher than our gross profit on pharmacy revenues. Pharmacy revenues as a percentage of total revenues for the thirteen and twenty-six weeks ended June 28, 2008 were 67.8% and 68.0%, respectively, compared to 67.6% and 68.1% in the comparable 2007 periods, respectively.

• Front store gross profit rate benefited from improved product mix and benefits from our ExtraCare loyalty program.

Operating expenses, which include store and administrative payroll, employee benefits, store and administrative occupancy costs, selling expenses, advertising expenses, administrative expenses and depreciation and amortization expense, decreased to 22.6% of total net revenues during the thirteen weeks ended June 28, 2008, compared to 22.8% of net revenues during the comparable 2007 period. Operating expenses for the twenty-six weeks ended June 28, 2008 and the comparable 2007 period were 22.5% of total net revenues. Total operating expenses as a percentage of net revenues decreased during the thirteen weeks ended June 28, 2008 as a result of decreased payroll and benefit costs. Total operating expenses as a percentage of net revenues increased during the twenty-six weeks ended June 28, 2008, as a result of declining revenue leverage. The declining revenue leverage is due in part to continued pressure from the sale of generic drugs, which typically have a lower selling price than their brand named equivalents' selling price and from MinuteClinic operations, which operate at a higher operating expense ratio than the CVS/pharmacy stores.

   Management's Discussion and Analysis of Financial Condition and Results of
                                   Operations

Pharmacy Services Segment

The following table summarizes our Pharmacy Services Segment's performance for
the respective periods:



                                                    13 Weeks Ended                  26 Weeks Ended
                                               June 28,        June 30,        June 28,        June 30,
(In millions)                                    2008            2007            2008            2007
As reported:
Net revenues (1)                              $ 10,656.8      $ 10,554.1      $ 21,421.5      $ 12,664.4
Gross profit                                       849.9           862.8         1,637.9         1,060.3
Gross profit % of net revenues                       8.0 %           8.2 %           7.6 %           8.4 %
Operating expenses                                 235.8           280.8           493.8           367.7
Operating expense % of net revenues                  2.2 %           2.7 %           2.3 %           2.9 %
Operating profit                                   614.1           582.0         1,144.1           692.6
Operating profit % of net revenues                   5.8 %           5.5 %           5.3 %           5.5 %
Net revenues:
Mail service                                  $  3,620.8      $  4,171.7      $  7,267.9      $  5,381.4
Retail network                                   6,942.9         6,296.5        13,966.7         7,182.4
Other                                               93.1            85.9           186.9           100.6
Comparable Financial Information: (2)
Net revenues                                  $ 10,656.8      $ 10,554.1      $ 21,421.5      $ 21,075.0
Gross profit                                       849.9           862.8         1,637.9         1,620.8
Gross profit % of net revenues                       8.0 %           8.2 %           7.6 %           7.7 %
Operating expenses                                 235.8           265.2           493.8           732.3
Merger and integration costs(3)                     (5.0 )         (18.8 )         (15.4 )        (234.0 )
Total operating expenses                           230.8           246.4           478.4           498.3
Operating expense % of net revenues                  2.2 %           2.3 %           2.2 %           2.4 %
Operating profit                                   619.1           616.4         1,159.5         1,122.5
Operating profit % of net revenues                   5.8 %           5.8 %           5.4 %           5.3 %
Net revenues:
Mail service                                  $  3,620.8      $  4,171.7      $  7,267.9      $  8,336.6
Retail network                                   6,942.9         6,296.5        13,966.7        12,570.0
Other                                               93.1            85.9           186.9           168.4
Pharmacy claims processed:
Total                                              151.3           151.2           308.1           303.6
Mail service                                        15.0            18.5            30.3            37.0
Retail network                                     136.3           132.7           277.8           266.6
. . .