This Quarterly Report on Form 10-Q may contain certain forward-looking statements, including without limitation, statements concerning Catalyst Health Solutions, Inc.'s operations, economic performance and financial condition. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. The words "believe," "expect," "anticipate," "will," "could," "would," "should," "may," "plan," "estimate," "intend," "predict," "potential," "continue," and the negatives of these words and other similar expressions generally identify forward-looking statements. These forward-looking statements may include statements addressing our operations and our financial performance. Readers are cautioned not to place undue reliance on these forward-looking statements, which, among other things, speak only as of their dates. These forward-looking statements are based largely on Catalyst Health Solutions, Inc.'s current expectations and are subject to a number of risks and uncertainties. Factors we have identified that may materially affect our results are discussed in our Annual Report on Form 10-K for the year ended December 31, 2008, particularly under Item 1A, "Risk Factors", and in our other filings with the Securities and Exchange Commission. In addition, other important factors to consider in evaluating such forward-looking statements include changes in external market factors, changes in Catalyst Health Solutions, Inc.'s business or growth strategy or an inability to execute its strategy, including due to changes in its industry or the economy generally. In light of these risks and uncertainties, there can be no assurances that the results referred to in the forward-looking statements will, in fact, occur. We undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances that may arise after the date of this report. Readers are urged to carefully review and consider the various disclosures made in this report, in our Annual Report on Form 10-K and in our other filings with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect our business.

The Company

Catalyst Health Solutions, Inc. is a full-service pharmacy benefit management, or PBM, company. We operate primarily under the brand name Catalyst Rx. Our clients include self-insured employers, including state and local governments; managed care organizations; unions; third-party administrators, referred to as TPAs; hospices; and individuals who contract with us to administer the prescription drug component of their overall health benefit programs.

We provide our clients access to a contracted, non-exclusive national network of approximately 61,000 pharmacies. We provide our clients' members with timely and accurate benefit adjudication, while controlling pharmacy spending trends through customized plan designs, clinical programs, physician orientation programs, and member education. We use an electronic point-of-sale system of eligibility verification and plan design information and offer access to rebate arrangements for certain branded pharmaceuticals. When a member of one of our clients presents a prescription or health plan identification card to a retail pharmacist in our network, the system provides the pharmacist with access to online information regarding eligibility, patient history, health plan formulary listings, and contractual reimbursement rates. The member generally pays a co-payment to the retail pharmacy and the pharmacist fills the prescription. We electronically aggregate pharmacy benefit claims, which include prescription costs plus our claims processing fees for consolidated billing and payment. We receive payments from clients, make payments of amounts owed to the retail pharmacies pursuant to our negotiated rates, and retain the difference (except where we have entered into pass-through pricing arrangements with clients) including claims processing fees.

Pharmacy benefit claims payments from our clients are recorded as revenue, and prescription costs to be paid to pharmacies are recorded as direct expenses. Under our network contracts, we generally have an independent obligation to pay pharmacies for the drugs dispensed and, accordingly, have assumed that risk independent of our clients. When we administer pharmacy reimbursement contracts and do not assume a credit risk, we record only our administrative or processing fees as revenue. Rebates earned under arrangements with manufacturers are recorded as a reduction of direct expenses. The portion of manufacturer rebates due to clients is recorded as a reduction of revenue.

For the three months ended June 30, 2009, our revenue increased by approximately 17% to $717.6 million from $614.3 million for the same period in 2008, and for the six months ended June 30, 2009, our revenue increased by approximately 18% to approximately $1.4 billion from $1.2 billion for the same period in 2008. Our increase in revenue in 2009 is primarily due to our initiation of services with several new PBM clients as well as the impact of our 2008 acquisitions of IPS and HospiScript. Total claims processed increased to 13.9 million for the three months ended June 30, 2009, from 12.4 million during the same period in 2008, and to 27.7 million for the six months ended June 30, 2009, from 25.3 million during the same period in 2008. For the three months and six months ended June 30, 2009, our revenue per claims processed increased by approximately 5% and 8%, respectively, when compared to the same periods in 2008. The increase in revenue per claims processed in 2009 was primarily impacted by manufacturer driven price inflation and increased use of specialty medications offset by an increase in generic utilization.

Member co-payments to pharmacies are not recorded as revenue or direct expenses. We incur no obligations for co-payments to pharmacies and have never made such payments. Under our pharmacy agreements, the pharmacy is solely obligated to collect the co-payments from the members. If we had included co-payments in reported revenue and direct expenses, it would have resulted in an increase in our reported revenue and direct expenses of $189.9 million and $174.0 million for the three months ended June 30, 2009 and 2008, respectively, and an increase in our reported revenue and direct expenses of $392.3 million and $364.6 million for the six months ended June 30, 2009 and 2008, respectively. Our operating and net income, consolidated balance sheets and statements of cash flows would not have been affected.

The following tables illustrate the effects on our reported revenue and direct expenses if we had included the actual member co-payments as indicated by our claims processing system (in millions):

                                         Three months           Six months
                                             ended                 ended
                                           June 30,              June 30,
                                        2009      2008       2009        2008
            Reported revenue           $ 717.6   $ 614.3   $ 1,420.9   $ 1,202.9
            Member co-payments           189.9     174.0       392.3       364.6

            Total                      $ 907.5   $ 788.3   $ 1,813.2   $ 1,567.5


            Reported direct expenses   $ 672.5   $ 580.2   $ 1,334.6   $ 1,137.6
            Member co-payments           189.9     174.0       392.3       364.6

            Total                      $ 862.4   $ 754.2   $ 1,726.9   $ 1,502.2

In December 2008, we formed an entity named First Rx Specialty and Mail Services, LLC and extended existing contracts with Walgreen Co. to provide certain mail and specialty pharmacy services. This initiative was designed to provide enhanced capabilities in the distribution of specialty drugs, invest in various member-focused programs to deliver care-effective and cost-effective drugs to our customers, and access the Walgreens' network of mail service pharmacies for over-flow mail volume, back-up, and redundancy. As a part of this arrangement, we received $7.0 million in cash in December 2008 and $1.0 million of cash in the first quarter of 2009. We have considered the accounting for the arrangement and the contract extension and have recorded a liability in our consolidated balance sheet, pursuant to Financial Accounting Standard No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. We are also recognizing expense, of which $0.1 million and $0.2 million was recognized during the three months and six months ended June 30, 2009, respectively, associated with the accretion of the liability to its ultimate redemption value of $9.0 million. We have a contractual obligation to redeem the total amount in cash in the year 2013.

Acquisition of Immediate Pharmaceutical Services, Inc.

On August 5, 2008, we acquired Immediate Pharmaceutical Services, Inc. ("IPS") from Discount Drug Mart, Inc. IPS operates a fully-integrated prescription mail service fulfillment center located outside of Cleveland, Ohio. The IPS acquisition provides us with a foundation for building our mail service capability and to enable us to

provide our clients with an in-house mail service option. Total consideration for the acquisition of IPS consisted of cash payments of $40.0 million and approximately $1.2 million in transaction costs.

The purchase price of IPS was largely determined on the basis of management's expectations of future earnings and cash flows, resulting in the recognition of goodwill. Management's final allocation of the purchase price to the net assets acquired resulted in goodwill of $24.8 million, mail order customer relationship intangibles of $5.0 million with an estimated useful life of 18 years, and PBM customer relationship intangibles of $0.6 million with an estimated useful life of 5.5 years. Goodwill related to this acquisition is non-deductible for tax purposes.

Acquisition of HospiScript

On May 16, 2008, we acquired HospiScript Services, LLC and Concept Pharmaceuticals, LLC, a related party to HospiScript Services through common ownership (collectively, "HospiScript"). HospiScript provides pharmacy medication therapy management services to the hospice industry. Total consideration for the acquisition of HospiScript consisted of cash payments of $102.7 million and $0.5 million in transaction related costs. Additionally, the acquisition provides for possible contingent consideration payments through 2010 of up to $8.1 million, subject to specified operating performance targets, of which approximately $0.9 million was earned in 2008 and paid in 2009. Contingent consideration earned is accounted for as additional goodwill.

The purchase price of HospiScript was largely determined on the basis of management's expectations of future earnings and cash flows, resulting in the recognition of goodwill. Management's final allocation of the purchase price to the net assets acquired resulted in goodwill of $79.4 million and intangibles assets, consisting of customer relationships of $18.6 million with an estimated 18 year life, trade names of $1.4 million with an estimated 3.5 year life, and developed technology of $0.6 million with an estimated 5 year life. Goodwill related to this acquisition is deductible for tax purposes.

Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008

Revenue. Revenue from operations for the three months ended June 30, 2009 and 2008 were $717.6 million and $614.3 million, respectively. Revenue increased over the comparable period in 2008 by $103.3 million. Total claims processed increased to 13.9 million for the three months ended June 30, 2009 from 12.4 million for the same period in 2008. Our 2008 acquisitions of IPS and HospiScript and our initiation of services with several new PBM clients contributed to our increase in revenue and prescription volume. For the three months ended June 30, 2009, our revenue per claims processed increased by approximately 5% when compared to the same period in 2008. The increase in revenue per claims processed for 2009 was primarily impacted by manufacturer driven price inflation and increased use of specialty medications offset by an increase in generic utilization.

Direct Expenses. Direct expenses for the three months ended June 30, 2009 and 2008 were $672.5 million and $580.2 million, respectively. Direct expenses increased by $92.3 million over the comparable period in 2008 primarily related to the $103.3 million increase in overall revenue. Direct expenses for the three months ended June 30, 2009 and 2008 represented 97.2% and 97.3% of total operating expenses for the respective periods.

Gross margin is calculated as revenue less direct expenses. Factors that can result in changes in gross margins include generic substitution rates, changes in the utilization of preferred drugs with higher discounts and changes in the volume of prescription dispensing at lower cost network pharmacies. Our gross margin increased to $45.1 million for the three months ended June 30, 2009 from $34.1 million for the comparable period in 2008.

Gross margin as a percentage of revenue was 6.3% and 5.6% for the three months ended June 30, 2009 and 2008, respectively. In 2009, we experienced gross margin improvements resulting from the realization of the economics of our mail service pharmacy, higher generic utilization, the contribution of performance management fees, enhanced drug manufacturer rebates, improved pharmacy reimbursement rates and higher formulary compliance.

Selling, General and Administrative. For the three months ended June 30, 2009, selling, general and administrative expenses increased by approximately $3.4 million over the same period in the prior year to $19.3

million or 2.8% of operating expenses. For the three months ended June 30, 2008, selling general and administrative expenses was $15.9 million or 2.7% of operating expenses. The increase in selling, general and administrative expenses was primarily associated with our growth and the associated personnel, facility and vendor costs to serve and implement new clients as well as incremental selling, general and administrative costs assumed from our 2008 acquisitions of IPS and HospiScript.

Selling, general and administrative expenses of $19.3 million for the three months ended June 30, 2009, consisted of $9.8 million in compensation and benefits, which includes $1.0 million in non-cash compensation, $1.9 million in professional fees and technology services, $2.5 million in facility costs, $0.6 million in travel expenses, $0.9 million in insurance and other corporate expenses, $0.6 million in non-employee non-cash compensation expense, and $0.6 million in other, which includes $0.1 million in recruitment and temporary help, and $2.4 million in depreciation and amortization.

Selling, general and administrative expenses of $15.9 million for the three months ended June 30, 2008, consisted of $8.4 million in compensation and benefits, which includes $1.5 million in non-cash compensation, $1.2 million in professional fees and technology services, $2.0 million in facility costs, $0.8 million in travel expenses, $0.7 million in insurance and other corporate expenses, $0.8 million in other, which includes $0.3 million in recruitment and temporary help, and $2.0 million in depreciation and amortization.

Interest Income. Interest income decreased to $0.3 million for the three months ended June 30, 2009 from $1.2 million for the three months ended June 30, 2008. The decrease was primarily due to a reduction in average market interest rates on our short-term investments.

Interest Expense. Interest expense increased to $0.1 million for the three months ended June 30, 2009. The increase in interest expense was attributable primarily to the expense associated with the accretion of $1.0 million in other value related to our First Rx Specialty and Mail Services, LLC arrangement.

Income Tax Expense. The effective income tax rate of 37.9% during the three months ended June 30, 2009 and 38.1% during the comparable period in 2008 represent the combined federal and state income tax rates adjusted as necessary based on the particular jurisdictions where we operate. The effective tax rate in 2009 was lower than in the comparable period in 2008 primarily due to a decrease in our overall mix of state income tax rates.

Net Income. Net income for the three months ended June 30, 2009 increased by approximately $4.2 million over the same period in 2008 to $16.2 million. The increase in net income was primarily a result of increased gross margin dollars, reduced by an increase in selling, general and administrative expenses.

Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008

Revenue. Revenue from operations for the six months ended June 30, 2009 and 2008 were approximately $1.4 billion and $1.2 billion, respectively. Revenue increased over the comparable period in 2009 by $218.0 million. Total claims processed increased to approximately 27.7 million for the six months ended June 30, 2009 from 25.3 million for the same period in 2008. Our 2008 acquisitions of IPS and HospiScript and our initiation of services with several new PBM clients contributed to our increase in revenue and prescription volume. For the six months ended June 30, 2009, our revenue per claims processed increased by approximately 8% when compared to the same period in 2008. The increase in revenue per claims processed for 2009 was primarily impacted by manufacturer driven price inflation and increased use of specialty medications offset by an increase in generic utilization.

Direct Expenses. Direct expenses for the six months ended June 30, 2009 and 2008 were approximately $1.3 billion and $1.1 billion, respectively. Direct expenses increased by $197.0 million over the comparable period in 2008 primarily related to the $218.0 million increase in overall revenue. Direct expenses for the six months ended June 30, 2009 and 2008 represented 97.2% and 97.4% of total operating expenses for the respective periods.

Gross margin is calculated as revenue less direct expense. Factors that can result in changes in gross margins include generic substitution rates, changes in the utilization of preferred drugs with higher discounts and changes in the volume of prescription dispensing at lower cost network pharmacies. Gross margins increased to $86.3 million for the six months ended June 30, 2009 from $65.3 million for the comparable period in 2008.

Gross margin as a percentage of revenue was 6.1% and 5.4% for the six months ended June 30, 2009 and 2008, respectively. In 2009, we experienced gross margin improvements resulting from the realization of the economics of our mail service pharmacy, higher generic utilization, the contribution of performance management fees, enhanced drug manufacturer rebates, improved pharmacy reimbursement rates and higher formulary compliance.

Selling, General and Administrative. For the six months ended June 30, 2009, selling, general and administrative expenses increased by approximately $8.3 million over the same period in the prior year to $38.6 million or 2.8% of operating expenses. For the six months ended June 30, 2008, selling general and administrative expenses was $30.3 million or 2.6% of operating expenses. The increase in selling general and administrative expenses was primarily associated with our growth and the associated personnel, facility and vendor costs to serve and implement new clients as well as incremental selling, general and administrative costs assumed from our 2008 acquisitions of IPS and HospiScript.

Selling, general and administrative expenses of $38.6 million for the six months ended June 30, 2009, consisted of $20.0 million in compensation and benefits, which includes $2.1 million in non-cash compensation, $3.2 million in professional fees and technology services, $4.9 million in facility costs, $1.2 million in travel expenses, $1.8 million in insurance and other corporate expenses, $1.1 million in non-employee non-cash compensation expense, and $1.6 million in other, which includes $0.4 million in recruitment and temporary help, and $4.8 million in depreciation and amortization.

Selling, general and administrative expenses of $30.3 million for the six months ended June 30, 2008, consisted of $15.8 million in compensation and benefits, which includes $2.7 million in non-cash compensation, $2.4 million in professional fees and technology service costs, $3.7 million in facility costs, $1.6 million in travel expenses, $1.3 million in insurance and other corporate expenses and $1.8 in other, which includes $0.7 million in recruitment and temporary help, and $3.7 million in depreciation and amortization.

Interest Income. Interest income decreased to $0.6 million for the six months ended June 30, 2009 from $3.1 million for the six months ended June 30, 2008. The decrease was primarily due to a decrease in average funds available for investment resulting from our 2008 business acquisitions and a reduction in average market interest rates on these short-term investments.

Interest Expense. Interest expense increased to $0.3 million for the six months ended June 30, 2009 from $0.1 million from the comparable period in the prior year. The increase in interest expense was attributable primarily to the expense associated with the accretion of $1.0 million in other value related to our First Rx Specialty and Mail Services, LLC arrangement.

Income Tax Expense. The effective income tax rate of 37.6% during the six months ended June 30, 2009 and 37.9% during the comparable period in 2008 represent the combined federal and state income tax rates adjusted as necessary based on the particular jurisdictions where we operate. The effective tax rate in 2009 was lower than in the comparable period in 2008 primarily due to a decrease in our overall mix of state income tax rates.

Net Income. Net income for six months ended June 30, 2009 increased by approximately $6.4 million over the same period in 2008 to $30.0 million. The increase in net income was primarily a result of increased gross margin dollars, reduced by an increase in selling, general and administrative expenses.

Our sources of funds are primarily from cash flows from operating activities. We have in the past also raised funds by borrowing on bank debt and selling equity in the capital markets to fund specific acquisition opportunities. During the last several years, we have generated positive cash flow from operations and anticipate similar results in 2009. At June 30, 2009, we had available a $50.0 million revolving credit facility and our cash and cash equivalents were $118.7 million. The increase of $63.7 million in our cash and cash equivalents since the end of fiscal 2008 resulted primarily from cash generated from operations. Our existing revolving credit facility expires in September 2009, and we intend to secure a new long-term revolving credit facility in the near future.

We have $12.7 million at par value in investments related to auction rate securities (ARS), all of which are classified as non-current on our balance sheet. Our ARS are floating rate securities with longer-term maturities with auction reset dates from 7 to 35 day intervals. Beginning in February 2008, auctions for these securities began to fail. Currently, we are unlikely to be able to access the principal amounts of these securities until future auctions for these ARS are successful, or until we sell the securities in a fully active secondary market, of which there are none. There have been instances of redemptions at par to date by issuers of auction rate securities, including by issuers of securities we currently own. Our ARS investments currently lack short-term liquidity and are therefore classified as non-current on our balance sheet.

In April 2009, the FASB issued FSP 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (FSP 115-2), which amended the other-than-temporary impairment model for debt securities, such as ARS. Under FSP 115-2, an other-than-temporary impairment must be recognized through earnings if an investor has the intent to sell the debt or if it is more likely than not that the investor will be required to sell the debt security before recovery of its amortized cost basis. However, even if an investor does not expect to sell a debt security, it must evaluate expected cash flows to be received and determine if a credit loss has occurred. In the event of a credit loss, only the amount of the impairment associated with the credit loss is recognized in income. The amount of impairment relating to other factors is recorded in accumulated other comprehensive income. We adopted the provision of FSP 115-2 on April 1, 2009.

For each of our ARS, we evaluate the risks related to the structure, collateral and liquidity and estimate the fair value of the securities using a discounted cash flow model based on (a) the underlying structure of each security; (b) the present value of future principal and interest payments discounted at rates considered to reflect current market conditions; and (c) considerations of the probabilities of redemption or auction success for each period. Based on the results of these assessments, we recorded temporary impairment charges in accumulated other comprehensive income of $1.1 million in the fourth quarter of 2008 and approximately $57 thousand in the first quarter of 2009 to reduce the value of our ARS classified as available-for-sale securities. As of June 30, 2009, based on our evaluation of cash flows expected to be recovered from these securities, we determined there was no credit loss related to our ARS and, accordingly, no impairment losses have been recognized through earnings for the three months and six months ended June 30, 2009.

Based on our cash and cash equivalents balance of $118.7 million, our available $50.0 million revolving credit facility, and our positive operating cash flows, we do not anticipate a lack of liquidity associated with our ARS to have a material impact on our liquidity, financial condition, results of operations or cash flows. Although liquidity is not currently required, where appropriate, we are exploring and pursuing alternatives for obtaining relief from the unanticipated temporary illiquidity of the ARS holdings, including seeking relief from entities involved in investing our funds in ARS. As a part of these efforts, on February 23, 2009, we brought an arbitration claim before the Financial Industry Regulatory Authority ("FINRA") against Credit Suisse Securities (USA), LLC ("Credit Suisse") seeking rescission, restitution and damages for Credit Suisse's conduct in connection with our investment account with Credit Suisse.

Net Cash Provided by Operating Activities. Our operating activities generated $66.2 million of cash from operations in the six-month period ended June 30, 2009, a $26.3 million increase from the $39.9 million generated in the comparable prior year period. This $66.2 million in cash provided by operating . . .