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:

· uncertainties associated with our acquisitions, which include uncertainties as to the satisfaction or waiver of conditions to closing, integration risks and costs, uncertainties associated with client retention and repricing of client contracts, and uncertainties associated with the operations of acquired businesses

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

· 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

· 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

· our ability to maintain growth rates, or to control operating or capital costs, including the impact of declines in prescription drug utilization resulting from the current economic environment

· 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

· 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

· 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 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

· 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, 2008, filed with the SEC on February 25, 2009.

As one of the largest full-service pharmacy benefit management 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. During the first quarter of 2009, we changed our reportable segments to Pharmacy Benefit Management (" PBM") and Emerging Markets ("EM"). Segment disclosures for 2008 have been reclassified to reflect the new structure. Under the new structure, our integrated PBM services include network claims processing, home delivery services, patient care and direct specialty home delivery to patients, benefit design consultation, drug utilization review, formulary management, drug data analysis services, distribution of injectable drugs to patient homes and physicians offices, bio-pharma services, and fulfillment of prescriptions to low-income patients through manufacturer-sponsored patient assistance programs and company-sponsored generic patient assistance programs.

Through our EM segment, we provide services including: distribution of pharmaceuticals and medical supplies to providers and clinics; distribution of sample units to physicians and verification of practitioner licensure; fertility services to providers and patients; and healthcare account administration and implementation of consumer-directed healthcare solutions.

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 EM segments represented 98.6% of revenues for both the three months ended March 31, 2009 and for the same period of 2008.

During 2008, we established the Center for Cost-Effective Consumerism (the "Center") which assists 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.

PROPOSED ACQUISITION TRANSACTION

On April 9, 2009, we entered into a Stock and Interest Purchase Agreement (the "Acquisition Agreement") with WellPoint, Inc., an Indiana corporation ("WellPoint"). The Acquisition Agreement provides that, upon the terms and subject to the conditions set forth in the Acquisition Agreement, we will purchase all of the shares and equity interests of three WellPoint subsidiaries, NextRx, Inc., NextRx Services, Inc., and NextRx, LLC (collectively, "NextRx"), that provide pharmacy benefit management services (the "PBM Business"), in exchange for total consideration of $4.675 billion composed of $3.275 billion in cash and $1.4 billion in shares of our common stock (valued based on average closing price over the 60 days preceding the closing of the acquisition). We may, in our discretion, replace all or any portion of the common stock consideration with cash. Additionally, the parties have agreed to make an election under Section 338(h)(10) of the Internal Revenue Code with respect to the transaction. We estimate the value of such election to us to be between $800 million and $1.2 billion dependent upon the discount factor and tax rate assumed. At the closing of the acquisition, we will enter into a 10-year contract with WellPoint under which we will provide pharmacy benefits management services to WellPoint and its designated affiliates (the "PBM Agreement"). At the closing, we will also enter into a registration rights agreement with WellPoint with respect to the shares of our common stock that may be issued as part of the consideration for the acquisition and certain other ancillary agreements.

We have entered into a commitment letter with a syndicate of commercial banks for an unsecured $2.5 billion credit facility in order to finance the acquisition. We may reduce all or any portion of the facility commitment with the proceeds of a public offering of common stock, debt securities or other securities convertible or exchangeable for common stock.

Consummation of the acquisition is subject to certain conditions, including, among others, absence of certain legal impediments, the expiration or termination of the applicable waiting period under U.S. antitrust laws, the accuracy of the representations and warranties made by us and WellPoint, compliance by both parties with their respective obligations under the Acquisition Agreement and both parties having executed the PBM Agreement, the registration rights agreement and the ancillary agreements at or prior to the closing. The Acquisition Agreement contains customary representations and warranties by us and WellPoint.

Each party has agreed to use its reasonable best efforts to obtain the necessary governmental approvals for consummation of the acquisition and WellPoint has committed to take all actions necessary to obtain certain state insurance law approvals. We have agreed, if the relevant antitrust authorities request or impose on us, to divest, hold separate or take similar actions limiting our freedom to operate the assets of NextRx if such action is conditioned upon the closing. However, we are not required to agree to (i) any divesture of any assets other than NextRx, (ii) any divesture which would materially and adversely affect NextRx or materially impair the benefits to us of the acquisition or (iii) any action in connection with the receipt of any state insurance law approval which could adversely affect us.

The Acquisition Agreement contains specified termination rights for the parties and may be terminated at any time prior to closing by either party if (i) any law or final order prohibits the transaction; (ii) the closing fails to occur by January 9, 2010 subject to a regulatory extension until April 9, 2010; or (iii) the other party has breached any representation, warranty or covenant, such that the conditions relating to the accuracy of the other party's representations and warranties or performance of covenants would fail to be satisfied and such breach is incapable of being cured or is not cured.

The Acquisition Agreement further provides that in the event of termination by either party on January 9, 2010 due to the failure to receive required approval under U.S. antitrust laws or at any time due to the issuance of a law or final order prohibiting the acquisition pursuant to U.S. antitrust laws, and all other conditions are satisfied at the time of such termination, then we will pay WellPoint a termination fee of $50 million as WellPoint's sole and exclusive remedy (absent our willful and material breach) in connection with the failure of the acquisition.

EXECUTIVE SUMMARY AND TREND FACTORS AFFECTING THE BUSINESS

Our results in the first three months of 2009 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 three months of 2009 we benefited from a higher generic fill rate (67.7% compared to 65.1% in the same period of 2008) 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.

While we believe we are well positioned from a business and financial perspective, we are subject to the current adverse economic environment. These conditions could affect our business in a number of direct and indirect ways. In 2009, claims volumes have decreased compared to prior year which we believe is attributable to the expected loss of low margin clients and decreased utilization due to the current economic environment.

We believe the positive trends in gross profit we see the first three months of 2009, including increased generic usage and lower drug purchasing costs, should continue to offset the negative impact of various economic and marketplace forces effecting pricing, plan structure and claim volumes, among other factors, and thus continue to generate improvements in our results of operations in the future.

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. We changed our reportable segments to PBM and EM during the first quarter of 2009 (see Note 8). 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, 2008, filed with the SEC on February 25, 2009.

PBM OPERATING INCOME



                                            Three Months Ended March 31,
  (in millions)                              2009(1)               2008

  Product revenues
  Network revenues(2)                    $     3,250.6        $     3,278.5
  Home delivery and speciality revenues        1,781.4              1,776.6
  Other revenues                                  16.4                 11.1
  Service revenues                                64.1                 62.5
  Total PBM revenues                           5,112.5              5,128.7
  Cost of PBM revenues(2)                      4,593.1              4,680.0
  PBM gross profit                               519.4                448.7
  PBM SG&A expenses                              167.7                154.3
  PBM operating income                   $       351.7        $       294.4

  Network                                         94.2                 98.2
  Home delivery and specialty                      9.9                 10.4
  Other                                            0.6                  0.7
  Total PBM claims                               104.7                109.3
  Total adjusted PBM claims(3)                   124.0                129.5

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

(2) Includes retail pharmacy co-payments of $822.7 million and $887.7 million for the three months ended March 31, 2009 and 2008, respectively.

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

Home delivery revenues increased $4.8 million, or 0.3%, in the three months ended March 31, 2009 from the same period in 2008. The increase is due to increases in price of specialty products offset by lower home delivery claims volume from the loss of low margin clients and the impact of the higher generic fill rate. Our generic fill rate increased to 56.9% of home delivery claims in the three months ended March 31, 2009 as compared to 53.9% in the same period of 2008.

Cost of PBM revenues decreased $86.9 million, or 1.9%, in the three months ended March 31, 2009 from the same period of 2008. The decrease is primarily due to improvements in the aggregate generic fill rate and better management of ingredient costs, partially offset by inflation.

Our PBM gross profit increased $70.7 million, or 15.8%, for the three months ended March 31, 2009 as compared to the same periods of 2008. 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 ended March 31, 2009 increased by $13.4 million, or 8.7%. The increase is due to investments for productivity improvement and growth.

PBM operating income increased $57.3 million, or 19.5%, for the three months ended March 31, 2009 as compared to the same period of 2008, based on the various factors described above.

EM OPERATING INCOME


                         Three Months Ended March 31,
  (in millions)             2009               2008

  Product revenues     $      300.0        $      350.7
  Service revenues             10.3                11.4
  Total EM revenues           310.3               362.1
  Cost of EM revenues         295.6               344.7
  EM gross profit              14.7                17.4
  EM SG&A expenses             10.9                17.2
  EM operating income  $        3.8        $        0.2

EM cost of revenues decreased $49.1 million, or 14.2%, in the three months ended March 31, 2009 over the same periods of 2008. This resulted in a decrease in gross profit of $2.7 million, or 15.5%, in the three months ended March 31, 2009 over the same periods of 2008 partially due to a reduction in sales as discussed above.

SG&A for our EM segment for the three months ended March 31, 2009 decreased by $6.3 million, or 36.6%. The decrease is primarily due to bad debt expense, severance charges, and site closure costs incurred by the Specialty Distribution line of business during the first quarter of 2008.

EM income from continuing operations increased by $3.6 million for the three months ended March 31, 2009 from the same periods of 2008 based on the factors described above.

OTHER (EXPENSE) INCOME

Net interest expense decreased $1.8 million, or 10.0%, in the three months ended March 31, 2009, as compared to the same periods in 2008, which is primarily due to decreases in interest rates and lower outstanding debt (see "-Liquidity and Capital Resources-Bank Credit Facility").

PROVISION FOR INCOME TAXES

Our effective tax rate from continuing operations increased to 36.7% for the three months ended March 31, 2009 from 35.5% for the same period of 2008. The three months ended March 31, 2009 reflects an increase in certain state income tax rates due to enacted law changes. The three months ended March 31, 2009 included a nonrecurring tax benefit of $2.6 million resulting from 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 $0.8 million for the three months ended March 31, 2009 compared to the same period of 2008 (see Note 3).

NET INCOME AND EARNINGS PER SHARE

Net income for the three months ended March 31, 2009 increased $37.2 million, or 21.0%, over the same period of 2008 due to factors discussed above. Additionally, basic and diluted earnings per share increased 24.3% and 24.6%, respectively, for the three months ended March 31, 2009 over the same period of 2008. This increase is primarily due to improved operating results.

LIQUIDITY AND CAPITAL RESOURCES

OPERATING CASH FLOW AND CAPITAL EXPENDITURES

For the three months ended March 31, 2009, net cash provided by continuing operations increased $38.1 million to $286.4 million. The increase was primarily impacted by the $36.4 million increase in net income from continuing operations as compared to the same period of 2008. Additionally, there were net cash inflows of $23.4 million related to a decrease in inventory due to large purchases of inventory at discounted prices at the end of 2008 and net cash inflows of $36.1 million due to an increase in accrued expenses due to timing of income tax payments. Offsetting these net cash inflows are net cash outflows of $43.3 million from claims and rebates payables due the timing of invoices and payments and other net cash outflows, none of which were material.

Our capital expenditures for the three months ended March 31, 2009 increased $1.9 million compared to the same period of 2008. 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. 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.

As of March 31, 2009 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 $5.1 million as of March 31, 2009. 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 third quarter of 2008 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, which is classified within Level 3 of the fair value hierarchy.

We received cash distributions from the Primary Fund of $38.9 million during 2008, $3.3 million in the three months ended March 31, 2009 and $2.2 million subsequent to March 31, 2009. We expect to receive future distributions as the Primary Funds's assets mature or are sold. If the markets for short term securities remain illiquid, there may be further declines in the value of our remaining 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 of $5.1 million at March 31, 2009.

On April 9, 2009, we entered into the Acquisition Agreement with WellPoint pursuant to the terms of which we will purchase all of the shares and equity interests of three WellPoint subsidiaries, NextRx, Inc., NextRx Services, Inc., and NextRx, LLC, that provide pharmacy benefit management services, in exchange for total consideration of $4.675 billion composed of $3.275 billion in cash and $1.4 billion in shares of our common stock (valued based on average closing price over the 60 days preceding the closing of the acquisition). We may, in our discretion, replace all or any portion of the common stock consideration with cash. Additionally, the parties have agreed to make an election under Section 338(h)(10) of the Internal Revenue Code with respect to the transaction. We estimate the value of such election to us to be between $800 million and $1.2 billion dependent upon the discount factor and tax rate assumed. At the closing of the acquisition, we will enter into a 10-year contract with WellPoint under which we will provide pharmacy benefits management services to WellPoint and its designated affiliates. WellPoint's NextRx subsidiaries provide PBM services to approximately 25 million Americans and manage more than 265 million adjusted . . .