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

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

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

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

· 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 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 maintain growth rates, or to control operating or capital costs, including the impact of declines in prescription drug utilization

· 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

· 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

· in connection with our specialty pharmacy business, the possible loss, or adverse modification of the terms of our contracts with a limited number of biopharmaceutical companies from whom we acquire specialty pharmaceuticals

· the use and protection of the intellectual property, data, and tangible assets that we use in our business, or infringement or alleged infringement by us of intellectual property claimed by others

· our leverage and debt service obligations, including the effect of certain covenants in our borrowing agreements, access to capital and increases in interest rates

· general developments in the health care industry, including the impact of increases in health care costs, government programs to control 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

· 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.

OVERVIEW

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 98.6% of revenues for both the three and nine months ended September 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 nine 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 nine months of 2008 we benefited from a higher generic fill rate (65.7% compared to 61.1% 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 nine 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 continue to 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. During the third quarter of 2008, we changed our accounting policy for member co-payments to retail pharmacies. Refer to Note 2 for further discussion.

RESULTS OF OPERATIONS

PBM OPERATING INCOME


                                  Three Months Ended            Nine Months Ended
                                     September 30,                September 30,
  (in millions)                  2008(2)        2007         2008(2)          2007

  Product revenues
  Network revenues(3)          $ 3,181.6     $ 3,184.4     $  9,759.3     $  9,722.9
  Home delivery revenues         1,264.2       1,251.2        3,742.8        3,737.6
  Service revenues                  47.0          41.2          140.0          124.1
  Total PBM revenues             4,492.8       4,476.8       13,642.1       13,584.6
  Cost of PBM revenues(3)        4,024.6       4,079.2       12,314.4       12,433.7
  PBM gross profit                 468.2         397.6        1,327.7        1,150.9
  PBM SG&A expenses                152.6         127.7          425.0          394.2
  PBM operating income         $   315.6     $   269.9     $    902.7     $    756.7

  Total adjusted PBM Claims(1)     122.4         122.7          377.7          374.3

(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.

(2) Includes the July 22, 2008 acquisition of MSC.

(3) Includes retail pharmacy co-payments of $733.7 million and $864.4 million for the three months ended September 30, 2008 and 2007, respectively, and $2,445.5 million and $2,694.0 million for the nine months ended September 30, 2008 and 2007, respectively. See Note 2 for change in accounting policy during the third quarter of 2008.

Product Revenues for the three months ended September 30, 2008: Network pharmacy revenues decreased $2.8 million, or 0.1%, in the three months ended September 30, 2008 over the same period of 2007. The decrease is due to the expected loss of discount card programs and other low margin clients, creating a reduction in claims volume.

Additionally, our generic penetration rate affects our average revenue per network claim. Our generic fill rate increased to 67.3% of total network claims in the third quarter of 2008 as compared to 63.6% in the same period of 2007, which reduces revenue (but not margin) as generic drugs are generally less expensive than the corresponding brand drug.

Home delivery revenues increased by $13.0 million, or 1.0%, in the three months ended September 30, 2008 from the same period in 2007. The increase in home delivery revenues is primarily due to two factors: changes in volume and changes in price. Approximately, $16.4 million of the increase is due to higher claim volumes, as described above. This increase is offset by a $3.4 million decrease in price. The decrease in price is due to the impact of the higher generic fill rate on average revenue per home delivery claim. Our generic fill rate increased to 57.2% of total home delivery claims in the three months ended September 30, 2008 as compared to 51.1% in the same period of 2007.

Product Revenues for the nine months ended September 30, 2008: Network pharmacy revenues increased $36.4 million, or 0.4%, in the nine months ended September 30, 2008 from the same period in 2007. Approximately $92.5 million of the increase in network pharmacy revenues is attributable to changes in volume. This was offset by a decrease of approximately $56.1 million in network pharmacy revenues attributable to changes in price.

Average revenue per network claim decreased 0.6% for the nine months ended September 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 66.9% of total network claims in the first nine months of 2008 as compared to 62.6% 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 nine months ended September 30, 2008, home delivery revenues increased $5.2 million, or 0.1%, as compared to the same period of 2007. Approximately, $28.9 million of the increase in home delivery revenues is attributable to changes in volume. This was offset by a decrease of approximately $23.7 million in home delivery revenues attributable to changes in price. Average revenue per home delivery claim decreased 0.6% which is primarily due the impact of higher generic fill rate. Our generic fill rate increased to 56.0% of total home delivery claims in the nine months ended September 30, 2008 as compared to 49.7% in the same period of 2007.

Cost of PBM revenues decreased $54.6 million, or 1.3%, and $119.3 million, or 1.0%, in the three and nine months ended September 30, 2008 from the same period of 2007. The decrease is primarily due to 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 $70.6 million, or 17.8%, and $176.8 million, or 15.4%, respectively, for the three and nine months ended September 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 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 nine months ended September 30, 2008 increased by $24.9 million, or 19.5%, and $30.8 million, or 7.8%, respectively. The increase is primarily due to the expansion of our operation and administrative functions supporting our program initiatives for impacting consumer behaviors to help drive lowest cost drug mix, maximum therapy adherence and greatest use of the most cost-effective delivery channel. In addition, we had a charge related to internally developed software.

SAAS OPERATING INCOME


                                  Three Months Ended          Nine Months Ended
                                    September 30,               September 30,
  (in millions)                    2008         2007         2008          2007

  Product revenues              $  930.3      $ 849.3     $ 2,745.0     $ 2,591.8
  Service revenues                  27.4         32.1          85.0          94.3
  Total SAAS revenues              957.7        881.4       2,830.0       2,686.1
  Cost of SAAS revenues            905.5        838.9       2,668.6       2,540.6
  SAAS gross profit                 52.2         42.5         161.4         145.5
  SAAS SG&A expenses                37.1         46.7         122.1         120.9
  SAAS operating income (loss)  $   15.1      $  (4.2 )   $    39.3     $    24.6

As previously noted (see Note 5, "Discontinued operations") 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 $76.3 million, or 8.7%, and $143.9 million, or 5.4%, respectively, in the three and nine months ended September 30, 2008 over the same periods of 2007. This is partially due to increased cross-selling of specialty services to our PBM clients.

SAAS cost of revenues increased $66.6 million, or 7.9%, and $128.0, or 5.0%, in the three and nine months ended September 30, 2008 over the same periods of 2007. The larger increase in revenue resulted in an increase in gross profit of $9.7 million, or 22.8% and $15.9 million, or 10.9%, in the three and nine months ended September 30, 2008 over the same periods of 2007.

SG&A for our SAAS segment for the three months ended September 30, 2008 decreased by $9.6 million, or 20.6%. The decrease is primarily caused by a charge of $13.5 million to bad debt expense in the third quarter 2007 in our Specialty Distribution line of business related to the insolvency of a client and integration of resources with our PBM. The decrease is partially offset by an increase in management compensation in 2008 due to better financial results. SG&A for our SAAS segment for the nine months ended September 30, 2008 is consistent with the same period of 2007.

SAAS income from continuing operations increased by $19.3 million, or 459.5%, for the three months ended September 30, 2008 and by $14.7 million, or 59.8%, in the nine months ended September 30, 2008 from the same periods of 2007 based on the factors described above.

OTHER (EXPENSE) INCOME

Net interest expense decreased $15.0 million, or 52.4%, and $25.7 million, or 36.2% in the three and nine months ended September 30, 2008, respectively, as compared to the same periods in 2007, which is primarily due to decreases in interest rates and lower outstanding debt (see "-Liquidity and Capital Resources-Bank Credit Facility").

The non-operating charge of $2.0 million during the three and nine months ended September 30, 2008 represents an unrealized loss on shares held in the Reserve Primary Fund (see "-Liquidity and Capital Resources-Investments").

PROVISION FOR INCOME TAXES

Our effective tax rate was 35.6% and 35.9% for the three and nine months ended September 30, 2008, respectively, as compared to 38.1% and 37.1% for the same periods of 2007. The three and nine months ended September 30, 2008 include discrete tax adjustments resulting in a net tax benefit of $2.7 million and $5.2 million, respectively, attributable to lapses in the applicable statutes of limitations, favorable audit resolutions, and changes in our unrecognized tax benefits. The three and nine months ended September 30, 2007 include a nondeductible penalty of $10.5 million relating to the settlement of a legal matter.

NET LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX

Net loss from discontinued operations, net of tax, decreased $2.7 million and $1.1 million for the three and nine months ended September 30, 2008, respectively, compared to the same period of 2007. See Note 5 "Discontinued operations" for additional discussion.

NET INCOME AND EARNINGS PER SHARE

Net income for the three months ended September 30, 2008 increased $59.0 million, or 41.3%, over the same period of 2007. Net income increased $140.0 million, or 32.6%, for the nine months ended September 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 46.4% and 44.6%, respectively, for the three months ended September 30, 2008 over the same period of 2007. For the nine months ended September 30, 2008, basic and diluted earnings per share increased 39.9% and 39.8%, respectively, over the nine months ended September 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 nine 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 nine months ended September 30, 2008, net cash provided by continuing operations increased $221.3 million to $727.1 million. Changes in operating cash flows from continuing operations for the nine months ended September 30, 2008 were impacted by the following factors:

· Net income from continuing operations increased $138.9 million in the nine months ended September 30, 2008 as compared to the same period of 2007.

· Changes in working capital resulted in a reduction of cash outflow from $48.1 million in the nine months ended September 30, 2007 to $19.7 million in the first nine months of 2008.

· Net non-cash adjustments to net income increased from $45.2 million in the first nine months of 2007 to $100.6 million in the first nine months of 2008, primarily due to 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".

Our capital expenditures for the nine months ended September 30, 2008 increased $12.4 million compared to the same period of 2007. We intend to continue to invest in infrastructure and technology that we believe will provide efficiencies in operations and facilitate growth and enhance the service we provide to our clients. We expect future anticipated capital expenditures will be funded primarily from operating cash flow or, to the extent necessary, with borrowings under our revolving credit facility, discussed below.

INVESTMENTS

As of September 30, 2008, short-term investments, included in Prepaid expenses and other current assets in the Unaudited Consolidated Balance Sheet, were carried at fair value and consisted of our investment in the Reserve Primary Fund (the "Primary Fund"), which is a money market fund. The estimated fair value of our investment in the Primary Fund was $47.3 million and our cost was $49.3 million as of September 30, 2008. The net asset value of the Primary Fund decreased below $1 per share as a result of the Primary Fund's valuing at zero its holdings of debt securities by Lehman Brothers Holdings, Inc., which filed for bankruptcy on September 15, 2008. Accordingly, we recognized an unrealized loss of $2.0 million in the three months ended September 30, 2008, which is included in Non-operating gains (charges), net in the Unaudited Consolidated Statement of Operations and reclassified the Primary Fund investment from Cash and cash equivalents to Prepaid expenses and other current assets in the Unaudited Consolidated Balance Sheet. We assessed the fair value of the underlying collateral for the Primary Fund through evaluation of the liquidation value of assets held by the Primary Fund.

We have requested the redemption of our investment in the Primary Fund. We expect cash distributions will occur as the Primary Fund's assets mature or are sold. If the markets for short term securities remain illiquid, there may be further declines in the value of these investments. To the extent we determine there is a further decline in fair value, we may recognize additional losses in future periods up to the aggregate amount of these investments. We believe cash distributions for our investment in the Primary Fund, will be received within the next twelve months; however, no commitments on the timing and ability of future redemptions have been made by the Primary Fund.

CHANGES IN BUSINESS

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