Overview of Our Business

CVS Caremark Corporation ("we", "our", the "Company") 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 believe we can drive value for our customers by effectively managing pharmaceutical costs and improving health care outcomes through our pharmacy benefit management, mail order and specialty pharmacy division, Caremark Pharmacy Services ®; our more than 6,900 CVS/pharmacy® and Longs Drug® retail stores; our retail-based health clinic subsidiary, MinuteClinic®; and our online pharmacy, CVS.com®.

We strive to improve clinical outcomes to help employers and health plans control their health care costs. In that regard, we offer disease management, health assessment and wellness services to help plan participants manage and protect against potential health risks and avoid future health costs.

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

Our business includes two operating segments: Pharmacy Services and Retail Pharmacy.

Fiscal Year Change

On December 23, 2008, the Board of Directors of the Company approved a change in the Company's fiscal year end from the Saturday nearest December 31 of each year to December 31 of each year to better reflect the Company's position in the health care, rather than the retail, industry. The fiscal year change was effective beginning with the fourth quarter of fiscal 2008. As you review our operating performance, please consider that the fiscal quarters ended March 31, 2009 and March 29, 2008 include 90 days and 91 days, respectively.

Results of Operations

The following discussion explains the material changes in our results of operations for the fiscal quarters ended March 31, 2009 and March 29, 2008 and the significant developments affecting our financial condition since December 31, 2008. 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 31, 2008 (the "2008 Form 10-K") along with this report.

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

First Quarter Ended March 31, 2009 versus March 29, 2008

Summary of the Consolidated Financial Results:

                                                                  Fiscal Quarter Ended
                                                               March 31,       March 29,
In millions, except per common share amounts                      2009            2008
Net revenues                                                   $ 23,393.9      $ 21,326.0
Gross profit                                                      4,748.0         4,293.0
Total operating expenses                                          3,370.8         2,922.9

Operating profit                                                  1,377.2         1,370.1
Interest expense, net                                               142.1           130.9

Earnings from continuing operations before income tax
provision                                                         1,235.1         1,239.2
Income tax provision                                                491.6           490.7

Earnings from continuing operations                                 743.5           748.5
Loss from discontinued operations, net of income tax
benefit of $3.2                                                      (5.1 )            -

Net earnings                                                   $    738.4      $    748.5

Diluted earnings per common share:
Earnings from continuing operations                            $     0.51      $     0.51
Loss from discontinued operations                                  (0.003 )            -

Net earnings                                                   $     0.50      $     0.51

Net revenues increased $2.1 billion compared to the first quarter of 2008. As you review our performance in this area, we believe you should consider the following important information:

• Effective October 20, 2008, we acquired Longs Drug Stores Corporation, which included 529 retail drug stores (the "Longs Drug Stores"), RxAmerica, LLC ("RxAmerica"), which provides pharmacy benefit management services and Medicare Part D benefits, and other related assets (the "Longs Acquisition"). During the first quarter of 2009, the Longs Acquisition increased net revenues by approximately $1.4 billion, compared to the first quarter of 2008.

• During the first quarter of 2009, one less day in the reporting period decreased net revenues by approximately $343 million, compared to the first quarter of 2008.

Please see the Segment Analysis later in this document for additional information about our net revenues.

Gross profit increased $455.0 million compared to the first quarter of 2008. As you review our performance in this area, we believe you should consider the following important information:

• In addition, our gross profit continued to benefit from the increased utilization of generic drugs (which normally yield a higher gross profit rate than equivalent brand name drugs) in both the Pharmacy Services and Retail Pharmacy Segments.

• During the first quarter of 2009, our gross profit increased as a result of the Longs Acquisition.

• During the first quarter of 2009, one less day in the reporting period decreased gross profit by approximately $90 million, compared to the first quarter of 2008.

Please see the Segment Analysis later in this document for additional information about our gross profit.

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

Operating expenses increased $447.9 million compared to the first quarter of 2008. As you review our performance in this area, we believe you should consider the following important information:

• During the first quarter of 2009, operating expenses increased as a result of the Longs Acquisition.

• During the first quarter of 2009, one less day in the reporting period decreased operating expenses by approximately $58 million, compared to the first quarter of 2008.

Please see the Segment Analysis later in this document for additional information about our operating expenses.

Interest expense, net consisted of the following:

                                            Fiscal Quarter Ended
                                         March 31,         March 29,
                In millions                2009              2008
                Interest expense        $     144.0       $     137.2
                Interest income                (1.9 )            (6.3 )

                Interest expense, net   $     142.1       $     130.9

During the first quarter of 2009, net interest expense increased $11.2 million, compared to the first quarter of 2008. This was primarily the result of an increase in our average debt balance due to increased borrowings to fund the Longs Acquisition.

Income tax provision ~ Our effective income tax rate was 39.8% for the first quarter of 2009, compared to 39.6% for the first quarter of 2008.

Earnings from continuing operations decreased $5.0 million to $743.5 million (or $0.51 per diluted share) compared to the first quarter of 2008.

Loss from discontinued operations ~ In connection with certain business dispositions completed between 1991 and 1997, the Company continues to guarantee store lease obligations for a number of former subsidiaries, including Linens 'n Things. The Company's loss from discontinued operations for the first quarter of 2009 includes $5.1 million ($8.3 million, net of a $3.2 million income tax benefit) of lease-related costs (i.e., interest accretion and legal fees). Please see Note 9 previously in this document for additional information about our lease guarantees.

Net earnings decreased $10.1 million or 1.3% to $738.4 million (or $0.50 per diluted share) for the first quarter of 2009, compared to $748.5 million (or $0.51 per diluted share) for the first quarter of 2008. The decrease in net earnings was primarily due to the factors discussed above.

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 certain intersegment activities and
charges. Following is a reconciliation of the Company's business segments to the
consolidated financial statements:



                                Pharmacy Services       Retail Pharmacy        Intersegment           Consolidated
In millions                        Segment(1)               Segment           Eliminations(2)            Totals
Fiscal Quarter Ended
March 31, 2009:
Net revenue                    $          11,534.8     $        13,496.9     $        (1,637.8 )     $     23,393.9
Gross profit                                 791.8               3,956.2                    -               4,748.0
Operating profit                             485.8                 891.4                    -               1,377.2
March 29, 2008:
Net revenue                    $          10,764.7     $        11,845.6     $        (1,284.3 )     $     21,326.0
Gross profit                                 788.0               3,505.0                    -               4,293.0
Operating profit                             530.0                 840.1                    -               1,370.1

(1) Net revenues of the Pharmacy Services Segment include approximately $1,667.9 million and $1,664.9 million of Retail Co-payments for the first quarter of 2009 and 2008, respectively.

(2) Intersegment eliminations relate to intersegment revenues that occur when a Pharmacy Services Segment customer uses a Retail Pharmacy Segment store to purchase covered products. When this occurs, both segments record the revenue on a standalone basis.

Pharmacy Services Segment

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



                                                   Fiscal Quarter Ended
                                                 March 31,      March 29,
           In millions                              2009           2008
           As reported:
           Net revenues                          $ 11,534.8     $ 10,764.7
           Gross profit                               791.8          788.0
           Gross profit % of net revenues               6.9 %          7.3 %
           Operating expenses                         306.0          258.0
           Operating expense % of net revenues          2.7 %          2.4 %
           Operating profit                           485.8          530.0
           Operating profit % of net revenues           4.2 %          4.9 %
           Net revenues:
           Mail service                          $  3,955.0     $  3,647.1
           Retail network                           7,498.2        7,023.8
           Other                                       81.6           93.8
           Pharmacy claims processed:
           Total                                      163.4          156.8
           Mail service                                15.7           15.3
           Retail network                             147.7          141.5
           Generic dispensing rate:
           Total                                       67.7 %         64.1 %
           Mail service                                55.5 %         52.8 %
           Retail network                              68.8 %         65.2 %
           Mail order penetration rate                 23.0 %         23.1 %

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

Net revenues ~ Net revenues increased $770.1 million, or 7.2%, to $11.5 billion in the first quarter of 2009 compared to $10.8 billion in the first quarter of 2008. As you review our Pharmacy Services Segment's revenue performance, we believe you should consider the following important information:

• The Pharmacy Services Segment recognizes revenues for its national retail pharmacy network transactions based on individual contract terms. In accordance with Emerging Issues Task Force Issue ("EITF") No. 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent," Caremark's contracts are predominantly accounted for using the gross method. RxAmerica's contracts are accounted for using the net method. We expect to convert a number of RxAmerica's contracts to the Caremark contract structure beginning in the second quarter of 2009, which will result in such contracts being accounted for under the gross method.

• During the first quarter of 2009, the inclusion of RxAmerica's results increased net revenues by approximately $240 million (and retail network revenues by approximately $215 million), compared to the first quarter of 2008.

• During the first quarter of 2009, one less day in the reporting period decreased net revenues by approximately $138 million, compared to the first quarter of 2008.

• Our mail service claims processed increased 3.0% to 15.7 million claims in the first quarter of 2009, compared to 15.3 million claims in the first quarter of 2008. This increase was primarily due to net new client starts offset by claims which were filled at a retail pharmacy under the Maintenance Choice™ program and are reported as retail claims. Maintenance Choice is a flexible fulfillment option that affords eligible plan participants the convenient choice of picking up their 90-day supply of maintenance medications at any CVS/pharmacy store or obtaining them through mail order in either case at the cost of mail (i.e., using the pricing discounts applied at mail) for both the payer and the plan participant.

• During the first quarter of 2009, our average revenue per mail service claim increased by 5.3% compared to the first quarter of 2008. Specialty mail service claims, which have significantly higher average net revenues per claim, increased our average revenue per mail claim by 6.2%. This increase was offset, in part, by an increase in the percentage of generic drugs dispensed and changes in client pricing.

• Our mail service generic dispensing rate increased to 55.5% in the first quarter of 2009, compared to 52.8% in the first quarter of 2008. This increase was primarily due to new generic drug introductions and our continued efforts to encourage plan participants to use generic drugs when they are available.

• Our retail network claims processed increased 4.4% to 147.7 million in the first quarter of 2009, compared to 141.5 million in the first quarter of 2008. This increase was primarily due to the addition of RxAmerica claims and claims which were filled at retail pharmacies under the Maintenance Choice program, offset by a reduction in claims due to the termination of two large health plan clients effective January 1, 2009 and having one less day in the first quarter of 2009 compared to the first quarter of 2008.

• During the first quarter of 2009, our average revenue per retail network claim processed increased 2.3% compared to the first quarter of 2008. Our average revenue per retail network claim processed is affected by
(i) higher drug costs, which normally result in higher claim revenues,
(ii) customer pricing, (iii) changes in the percentage of generic drugs dispensed and (iv) claims mix. In addition, our average revenue per retail network claim was impacted in the first quarter of 2009 by (i) the inclusion of RxAmerica results, which are accounted for using the net revenue recognition method as discussed above, and (ii) a change in the revenue recognition method from net to gross for a large health plan on

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

March 1, 2009 as a result of a revised contract, which resulted in an additional $244.1 million in retail network revenues in the first quarter of 2009 compared to the first quarter of 2008.

• Our retail network generic dispensing rates increased to 68.8% in the first quarter of 2009, compared to 65.2% in the first quarter of 2008. This increase was primarily due to the impact of new generic drug introductions, our continued efforts to encourage plan participants to use generic drugs when they are available and the impact of RxAmerica claims. RxAmerica retail network claims increased our generic dispensing rate by approximately 125 basis points during the first quarter of 2009 compared to the first quarter of 2008.

Gross profit includes net revenues less cost of revenues. Cost of revenues includes (i) the cost of pharmaceuticals dispensed, either directly through our mail service and specialty retail pharmacies or indirectly through our national retail pharmacy network, (ii) shipping and handling costs and (iii) the operating costs of our mail service pharmacies, customer service operations and related information technology support. Gross profit as a percentage of revenues was 6.9% and 7.3% in the first quarter of 2009 and 2008, respectively.

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

• Our total generic dispensing rate increased to 67.7% in the first quarter of 2009, compared to 64.1% in the first quarter of 2008. RxAmerica claims increased our total generic dispensing rate by approximately 125 basis points during the first quarter of 2009 compared to the first quarter of 2008.

• Our gross profit dollars and gross profit rates continued to be impacted by our efforts to (i) retain existing customers, (ii) obtain new business,
(iii) migrate customers and participants to our Maintenance Choice™ program and (iv) maintain or improve the purchase discounts we received from manufacturers, wholesalers and retail pharmacies. During the 2008 selling season, the Company renewed a number of existing clients and obtained new clients at lower rates, which resulted in gross profit compression in the first quarter of 2009.

Total operating expenses, which include selling, general and administrative expenses (including integration and other merger-related expenses), depreciation and amortization related to selling, general and administrative activities and retail specialty pharmacy store and administrative payroll, employee benefits and occupancy costs increased $48.0 million to $306.0 million, or 2.7% of net revenues, in the first quarter of 2009, compared to $258.0 million, or 2.4% of net revenues, in the first quarter of 2008.

• The increase in total operating expenses in the first quarter of 2009 is primarily related to (i) litigation reserves; (ii) the dissolution of our joint venture with Universal American Corporation at the end of fiscal 2008, the income from which was historically an offset to operating expenses and (iii) the inclusion of RxAmerica's total operating expenses in the first quarter of 2009.

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:



                                                    Fiscal Quarter Ended
                                                  March 31,      March 29,
           In millions                               2009           2008
           Net revenues                           $ 13,496.9     $ 11,845.6
           Gross profit                              3,956.2        3,505.0
           Gross profit % of net revenues               29.3 %         29.6 %
           Operating expenses                        3,064.8        2,664.9
           Operating expenses % of net revenues         22.7 %         22.5 %
           Operating profit                            891.4          840.1
           Operating profit % of net revenues            6.6 %          7.1 %

           Net revenue increase:
           Total                                        13.9 %          5.4 %
           Pharmacy                                     13.2 %          4.8 %
           Front Store                                  15.6 %          6.6 %
           Same store sales increase:(1)(2)
           Total                                         3.3 %          3.9 %
           Pharmacy                                      4.6 %          3.7 %
           Front Store                                   0.7 %          4.3 %
           Generic dispensing rate                      69.2 %         66.6 %
           Pharmacy % of net revenues                   67.7 %         68.2 %
           Third party % of pharmacy revenue            95.4 %         95.4 %
           Retail prescriptions filled                 152.4          139.5

(1) Same store sales increase excludes the Longs Drug Stores, which were acquired effective October 20, 2008. These stores will be included in same store sales beginning in November 2009.

(2) Same store sales increase is based on sales from stores open more than one year based on a comparable 90-day reporting period.

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 sales were negatively impacted by a later Easter (April 12th this year versus March 23rd last year), which shifted less holiday sales into the second quarter of 2009. We estimate the Easter shift negatively impacted total same store sales by approximately 40 basis points and front store same store sales by approximately 115 basis points during the first quarter of 2009.

• During the first quarter of 2009, the inclusion of the Longs Drug Stores' results increased net revenues by approximately $1.2 billion, compared to the first quarter of 2008.

• As of March 31, 2009, we operated 6,912 retail stores compared to 6,267 retail stores on March 29, 2008. Total net revenues from new stores accounted for approximately 160 and 130 basis points of our total net revenue percentage increase for the first quarter of 2009 and 2008, respectively.

• 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 March 31,

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

2009, approximately 63% of our existing stores were freestanding, compared to approximately 65% at March 29, 2008. The decrease in the percentage of freestanding stores is attributable to the inclusion of the Longs Drug Stores acquired in 2008.

• 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 utilization trend as a result of a weakening economy, growth of the mail order channel, a decline in the number of significant new brand named drug introductions, higher consumer co-payments and co-insurance arrangements and by an increase in the number of over-the-counter remedies that were historically only available by prescription.

Gross profit, which includes net revenues less the cost of merchandise sold during the reporting period and the related purchasing costs, warehousing costs, delivery costs and actual and estimated inventory losses, as a percentage of net revenues, was 29.3% for the first quarter of 2009, compared to 29.6% for the first quarter of 2008.

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

• During the first quarter of 2009, our pharmacy gross profit rate continued to benefit from an increase in generic drug revenues, which normally yield a higher gross profit rate than equivalent brand name drug revenues. However, the increased use of generic drugs has augmented the efforts of third party payors to reduce reimbursement payments to retail pharmacies for prescriptions. This trend, which we expect to continue, reduces the benefit we realize from brand to generic product conversions.

• During the first quarter of 2009, our gross profit increased as a result of the Longs Drug Stores, compared to the first quarter of 2008.

• The Federal Government's Medicare Part D benefit is increasing prescription utilization. However, it is also decreasing our pharmacy gross profit rates as our higher gross profit business (e.g., cash customers) continues to migrate to Part D.

• On February 8, 2006, the Deficit Reduction Act of 2005 (the "DRA") was signed into law. The DRA seeks to reduce federal spending by altering the . . .