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 healthcare and 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 Pharmacy Benefit Management ("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.

OVERVIEW

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. 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 Emerging Markets ("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 and six months ended June 30, 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 the most cost-effective delivery channel, uncompromising safety standards and increasing member engagement and satisfaction.

EXECUTIVE SUMMARY AND TREND FACTORS AFFECTING THE BUSINESS

Our results in the first six months of 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 and low-cost brands, home delivery and specialty pharmacy. In the first six months of 2009 we benefited from better management of ingredient costs through renegotiation of supplier contracts, increased competition among generic manufacturers, higher generic fill rate (67.8% compared to 65.5% in the same period of 2008) 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.

Our acquisition of WellPoint and our related proposed alliance with WellPoint is a solid strategic fit for advancing healthcare. While we expect to incur expenses of $70-80 million in the second half of 2009 prior to the closing of the acquisition, we believe our aligned business model creates significant opportunities for accelerated growth. The two organizations share a commitment to improving health outcomes and driving out waste. As health care costs continue to be a concern, we remain focused on initiatives that keep health benefits affordable while enhancing the health care value we bring to clients and patients.

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.

We believe the positive trends in gross profit we see in the first six months of 2009, including lower drug purchasing costs and increased generic usage, 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.

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. We changed our reportable segments to PBM and EM during the first quarter of 2009 (see Note 10). For a full description of our accounting policies, please refer to the notes to the consolidated financial statements and filed with the SEC on Current Report Form 8-K on June 2, 2009.

PBM OPERATING INCOME


                                          Three Months Ended            Six Months Ended
                                               June 30,                     June 30,
  (in millions)                          2009(1)        2008         2009(1)          2008

  Product revenues
  Network revenues(2)                  $ 3,232.9     $ 3,299.2     $  6,483.5     $  6,577.7
  Home delivery and specialty revenues   1,867.2       1,789.9        3,648.6        3,566.5
  Other revenues                            19.7          13.0           36.1           24.1
  Service revenues                          69.6          65.5          133.7          128.0
  Total PBM revenues                     5,189.4       5,167.6       10,301.9       10,296.3
  Cost of PBM revenues(2)                4,609.3       4,682.3        9,202.4        9,362.3
  PBM gross profit                         580.1         485.3        1,099.5          934.0
  PBM SG&A expenses                        203.1         173.0          370.8          327.3
  PBM operating income                 $   377.0     $   312.3     $    728.7     $    606.7

  Network                                   94.7          96.1          188.9          194.3
  Home delivery and specialty               10.2          10.6           20.1           21.0
  Other                                      0.7           0.7            1.3            1.4
  Total PBM Claims                         105.6         107.4          210.3          216.7
  Total adjusted PBM Claims(3)             125.5         127.9          249.5          257.4

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

(2) Includes retail pharmacy co-payments of $721.1 million and $824.1 million for the three months ended June 30, 2009 and 2008, respectively, and $1,543.8 million and $1,711.8 million for the six months ended June 30, 2009 and 2008, respectively.

(3) Adjusted PBM claims represent network claims, specialty 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

Product Revenues for the three months ended June 30, 2009: Network pharmacy revenues decreased by $66.3 million, or 2.0%, in the three months ended June 30, 2009 over the same period of 2008. This is primarily due to lower claims volume and decreases in price. The decrease in our claims volume was primarily due to the loss of low margin clients partially offset by new clients. Changes in price are affected by the mix of prescription drugs processed at our network pharmacies and by inflation. As our generic fill rate increases, price decreases, which is offset by inflation. Our generic fill rate increased to 69.2% of total network claims in the second quarter of 2009 as compared to 67.0% in the same period of 2008, our revenues correspondingly decreased as generic drugs are generally less expensive than the corresponding brand drug.

Home delivery and specialty revenues increased $77.3 million, or 4.3%, in the three months ended June 30, 2009 from the same period in 2008. The increase is primarily due to increases in price of our specialty products due to inflation 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 57.2% of home delivery claims in the three months ended June 30, 2009 as compared to 56.8% in the same period of 2008.

Product Revenues for the six months ended June 30, 2009: Network pharmacy revenues decreased by $94.2 million, or 1.4%, in the six months ended June 30, 2009 over the same period of 2008. This is primarily due to lower claims volume which was partially offset by increases in price. The decrease in our claims volume was primarily due to the loss of low margin clients partially offset by new clients. Changes in price are affected by the mix of prescriptions processed at network pharmacies and by inflation. As our generic fill rate increases, price decreases, which is offset by inflation. Our generic fill rate increased to 69.1% of total network claims in the first six months as compared to 66.7% in the same period of 2008.

Home delivery and specialty revenues increased $82.1 million, or 2.3%, in the six months ended June 30, 2009 from the same period in 2008. The increase is primarily due to increases in price of our 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 57.1% of home delivery claims in the six months ended June 30, 2009 as compared to 55.4% in the same period of 2008.

Cost of PBM revenues decreased $73.0 million, or 1.6%, and $159.9 million, or 1.7%, in the three months and six months ended June 30, 2009, respectively, from the same period of 2008. The decrease is primarily due to better management of ingredient costs and improvements in aggregate generic fill rate, partially offset by inflation.

Our PBM gross profit increased $94.8 million, or 19.5%, and $165.5 million, or 17.7%, for the three months and six months ended June 30, 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 June 30, 2009 increased by $30.1 million, or 17.4%, as compared to the same period of 2008 primarily as a result of the following factors:

· Investments of $23.6 million to improve technological infrastructure which enhances product and service capabilities; along with other strategic initiatives,

· Cost of $11.7 million related to the NextRx transaction,

· Increases in employee compensation of $9.3 million due to growth, productivity improvements and incentives tied to corporate financial results, in addition to the effect of inflation,

· These increases were offset by a $15.0 million benefit related to an insurance recovery for previously incurred litigation costs.

Selling, general and administrative expense ("SG&A") for our PBM segment for the six months ended June 30, 2009 increased by $43.5 million, or 13.3%, as compared to the same period of 2008 primarily as a result of the following factors:

· Investments of $34.4 million to improve technological infrastructure which enhances product and services capabilities; along with other strategic initiatives,

· Increases in employee compensation of $14.7 million due to growth, productivity improvements, and incentives tied to corporate financial results, in addition to the effect of inflation,

· Costs of $11.7 million related to the NextRx transaction,

· These increases were offset by a $15.0 million benefit related to an insurance recovery for previously incurred litigation costs.

PBM operating income increased $64.7 million, or 20.7%, and $122.0 million, or 20.1%, for the three and six months ended June 30, 2009 as compared to the same period of 2008, based on the various factors described above.

EM OPERATING INCOME


                         Three Months Ended         Six Months Ended
                              June 30,                  June 30,
  (in millions)           2009         2008         2009        2008

  Product revenues     $  304.4      $ 352.2      $ 604.4     $ 702.9
  Service revenues          9.5         11.0         19.8        22.4
  Total EM revenues       313.9        363.2        624.2       725.3
  Cost of EM revenues     300.0        345.9        595.6       690.6
  EM gross profit          13.9         17.3         28.6        34.7
  EM SG&A expenses         10.9         12.9         21.8        30.2
  EM operating income  $    3.0      $   4.4      $   6.8     $   4.5

EM Continuing Operations. EM revenues decreased $49.3 million, or 13.6%, and $101.1 million, or 13.9%, respectively, in the three months and six months ended June 30, 2009 over the same periods of 2008. This is primarily due to decreased revenue in our Specialty Distribution line of business due to a reduction in sales volume of a few specific drugs.

EM cost of revenues decreased $45.9 million, or 13.3%, and $95.0 million, or 13.8%, respectively, in the three months and six months ended June 30, 2009 over the same periods of 2008. This resulted in a decrease in gross profit of $3.4 million, or 19.7%, and $6.1 million, or 17.6%, in the three months and six months ended June 30, 2009 over the same periods of 2008 primarily due to a reduction in sales as discussed above.

SG&A for our EM segment for the three months and six months ended June 30, 2009 decreased by $2.0 million, or 15.5%, and $8.4 million, or 27.8%, respectively. The decrease for the three months ended is due to efforts to control costs within our EM segment. The decrease for the six months ended is primarily due to non-recurring bad debt expense, severance charges, and site closure costs incurred by the Specialty Distribution line of business in 2008.

EM income from continuing operations decreased by $1.4 million, or 31.8%, for the three months ended June 30, 2009 from the same period of 2008. EM income from continuing operations increased by $2.3 million, or 51.1%, for the six months ended June 30, 2009 from the same period of 2008 based on the factors described above.

OTHER (EXPENSE) INCOME

Net interest expense increased $62.7 million and $61.0 million in the three months and six months ended June 30, 2009, as compared to the same periods in 2008, which is primarily due to fees of $58.4 million we incurred related to the termination of the bridge loan for the financing of the Next Rx acquisition and the additional interest expense we incurred for the debt issuance (see "Liquidity and Capital Resources").

PROVISION FOR INCOME TAXES

Our effective tax rate from continuing operations was 36.7% for the three and six months ended June 30, 2009 as compared to 36.6% and 36.1% for the same periods of 2008. The three and six months ended June 30, 2009 reflect an increase in certain state income tax rates due to enacted law changes. The six months ended June 30, 2008 includes a nonrecurring tax benefit of $2.5 million resulting primarily from a lapse in the applicable statutes of limitations.

NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAX

Net income (loss) from discontinued operations, net of tax, increased $2.0 million and decreased ($2.8) million for the three months and six months ended June 30, 2009 compared to the same period of 2008 (see Note 4).

NET INCOME AND EARNINGS PER SHARE

Net income for the three and six months ended June 30, 2009 increased $2.1 million, or 1.1%, and $39.4 million, or 10.7%, respectively, over the same period of 2008 due to factors discussed above.

Additionally, basic and diluted earnings per share decreased 1.3% for the three months ended June 30, 2009 over the same period of 2008. For the six months ended June 30, 2009, basic and diluted earnings per share increased 9.5% and 10.3%, respectively, over the same period of 2008. This increase is primarily due to improved operating results.

LIQUIDITY AND CAPITAL RESOURCES

OPERATING CASH FLOW, CAPITAL EXPENDITURES AND FINANCING

For the six months ended June 30, 2009, net cash provided by continuing operations increased $35.3 million to $518.1 million. The increase was primarily impacted by the $36.6 million increase in net income from continuing operations as compared to the same period of 2008. Additionally, there were net cash inflows of $26.0 million related to a decrease in inventory due to large purchases of inventory at discounted prices at the end of 2008. Offsetting these net cash inflows are net cash outflows of $90.6 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 six months ended June 30, 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.

Net cash provided by financing activities was $3,836.2 million for the six months ended June 30, 2009 compared to net cash used of $573.7 million in the same period of 2008. We recently issued Senior Notes resulting in net proceeds of $2,478.3 million which includes original issue discount of $8.4 million and financing costs of $13.3 million. In addition, we completed a public offering of 26.45 million shares of common stock which resulted in net proceeds of $1,569.1 million after giving effect to the underwriting discount and issuance costs of $44.4 million. Proceeds of $1,198.9 million are invested in U.S treasury bills with maturities over three months and are classified as short-term investment on the unaudited consolidated balance sheet. The remaining proceeds of $2,848.5 million are invested in AAA-rated money market mutual funds with weighted average maturities of less than 90 days. Most of these mutual funds invest solely in U.S. Government securities. We intend to use the net proceeds to finance a portion of the $4.675 billion purchase price for the acquisition of WellPoint's NextRx pharmacy benefit business. Offsetting these proceeds were financing fees of $56.3 million for the committed credit facility (see Note 6).

INVESTMENTS

As of June 30, 2009, short-term investments includes 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 $2.9 million as of June 30, 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 we 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 and $5.5 million in the six months ended June 30, 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 $2.9 million at June 30, 2009.

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. We may, in our discretion, deliver up to $1.4 billion of the purchase price in the form of common stock (valued based on average closing price over the 60 days preceding the closing of the acquisition) in lieu of cash, although we do not currently intend to do so. 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 . . .