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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended July 1, 2006

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from  to

Commission File Number: 1-31312



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MEDCO HEALTH SOLUTIONS, INC.

(Exact name of registrant as specified in its charter)



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|                                               |  |                                     
|---------------------------------------------- |  | ------------------------------------
|Delaware                                       |  | 22-3461740                          
|(State or other jurisdiction of incorporation) |  | (I.R.S. Employer Identification No.)



|                                           |  |           
|------------------------------------------ |  | ----------
|100 Parsons Pond Drive, Franklin Lakes, NJ |  | 07417-2603
|(Address of principal executive offices)   |  | (Zip Code)

Registrants telephone number, including area code: 201-269-3400



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Indicate by check mark whether the
registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈

Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer as defined in Rule 12b-2 of the Exchange Act.

Large accelerated
filer  x    Accelerated filer ̈Non-Accelerated filer ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes ̈No  x

As of the close of business on August 1, 2006, the registrant had 293,933,041 shares of common stock, $0.01 par value, issued and outstanding.



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##### Table of Contents

MEDCO HEALTH SOLUTIONS, INC.

QUARTERLY REPORT ON FORM 10-Q

INDEX

PART I  FINANCIAL INFORMATION



|                            |  |                                                                                                                               |  |   
|--------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------- |  | --
|Item 1.                     |  | Financial Statements                                                                                                          |  |   
|                            |  |                                                                                                                              
|                            |  | Condensed Consolidated Balance Sheets (Unaudited)  July 1, 2006 and December 31, 2005                                        |  | 1 
|                            |  |                                                                                                                              
|                            |  | Condensed Consolidated Statements of Income (Unaudited)  Fiscal Quarters and Six Months Ended July 1, 2006 and June 25, 2005 |  | 2 
|                            |  |                                                                                                                              
|                            |  | Condensed Consolidated Statement of Stockholders Equity (Unaudited)  Fiscal Six Months Ended July 1, 2006                   |  | 3 
|                            |  |                                                                                                                              
|                            |  | Condensed Consolidated Statements of Cash Flows (Unaudited)  Fiscal Six Months Ended July 1, 2006 and June 25, 2005          |  | 4 
|                            |  |                                                                                                                              
|                            |  | Notes to Condensed Consolidated Financial Statements (Unaudited)                                                              |  | 5 
|                            |  |                                                                                                                              
|Item 2.                     |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                         |  | 20
|                            |  |                                                                                                                              
|Item 3.                     |  | Quantitative and Qualitative Disclosures About Market Risk                                                                    |  | 35
|                            |  |                                                                                                                              
|Item 4.                     |  | Controls and Procedures                                                                                                       |  | 36
|                           
|PART II  OTHER INFORMATION
|                            |  |                                                                                                                              
|Item 1.                     |  | Legal Proceedings                                                                                                             |  | 37
|                            |  |                                                                                                                              
|Item 1A.                    |  | Risk Factors                                                                                                                  |  | 37
|                            |  |                                                                                                                              
|Item 2.                     |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                   |  | 37
|                            |  |                                                                                                                              
|Item 3.                     |  | Defaults Upon Senior Securities                                                                                               |  | 38
|                            |  |                                                                                                                              
|Item 4.                     |  | Submission of Matters to a Vote of Security Holders                                                                           |  | 38
|                            |  |                                                                                                                              
|Item 5.                     |  | Other Information                                                                                                             |  | 39
|                            |  |                                                                                                                              
|Item 6.                     |  | Exhibits                                                                                                                      |  | 40
|                            | 
|SIGNATURES                  |  | 41                                                                                                                           



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##### Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

MEDCO HEALTH SOLUTIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(In millions, except for
share data)



|                                                                                                                                                       |  |              |          |   |                  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                       |  | July 1, 2006 |          |   | December 31,2005 |  
|ASSETS                                                                                                                                                 |  |              |          |   |                  |   |          |  
|Current assets:                                                                                                                                        |  |              |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                              |  | $            | 408.7    |   |                  | $ | 888.2    |  
|Short-term investments                                                                                                                                 |  |              | 58.2     |   |                  |   | 56.6     |  
|Accounts receivable, net                                                                                                                               |  |              | 2,209.9  |   |                  |   | 2,008.1  |  
|Inventories, net                                                                                                                                       |  |              | 1,531.9  |   |                  |   | 1,527.1  |  
|Prepaid expenses and other current assets                                                                                                              |  |              | 356.7    |   |                  |   | 259.9    |  
|Deferred tax assets                                                                                                                                    |  |              | 334.8    |   |                  |   | 321.0    |  
|                                                                                                                                                       |  |              |          |   |                  |   |          |  
|Total current assets                                                                                                                                   |  |              | 4,900.2  |   |                  |   | 5,060.9  |  
|Property and equipment, net                                                                                                                            |  |              | 637.6    |   |                  |   | 672.3    |  
|Goodwill                                                                                                                                               |  |              | 5,123.4  |   |                  |   | 5,152.3  |  
|Intangible assets, net                                                                                                                                 |  |              | 2,632.3  |   |                  |   | 2,741.6  |  
|Other noncurrent assets                                                                                                                                |  |              | 59.5     |   |                  |   | 75.9     |  
|                                                                                                                                                       |  |              |          |   |                  |   |          |  
|Total assets                                                                                                                                           |  | $            | 13,353.0 |   |                  | $ | 13,703.0 |  
|                                                                                                                                                       |  |              |          |   |                  |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                   |  |              |          |   |                  |   |          |  
|Current liabilities:                                                                                                                                   |  |              |          |   |                  |   |          |  
|Claims and other accounts payable                                                                                                                      |  | $            | 2,624.0  |   |                  | $ | 2,678.6  |  
|Accrued expenses and other current liabilities                                                                                                         |  |              | 713.5    |   |                  |   | 556.7    |  
|Short-term debt                                                                                                                                        |  |              | 450.0    |   |                  |   | 450.0    |  
|Current portion of long-term debt                                                                                                                      |  |              | 75.5     |   |                  |   | 75.5     |  
|                                                                                                                                                       |  |              |          |   |                  |   |          |  
|Total current liabilities                                                                                                                              |  |              | 3,863.0  |   |                  |   | 3,760.8  |  
|Long-term debt, net                                                                                                                                    |  |              | 897.4    |   |                  |   | 943.9    |  
|Deferred tax liabilities                                                                                                                               |  |              | 1,173.6  |   |                  |   | 1,213.8  |  
|Other noncurrent liabilities                                                                                                                           |  |              | 68.8     |   |                  |   | 60.3     |  
|                                                                                                                                                       |  |              |          |   |                  |   |          |  
|Total liabilities                                                                                                                                      |  |              | 6,002.8  |   |                  |   | 5,978.8  |  
|                                                                                                                                                       |  |              |          |   |                  |   |          |  
|Commitments and contingencies (See Note 11)                                                                                                            |  |              |          |   |                  |   |          |  
|                                                                                                                                                       |  |             
|Stockholders equity:                                                                                                                                  |  |              |          |   |                  |   |          |  
|Preferred stock, par value $0.01authorized: 10,000,000 shares; issued and outstanding: 0                                                              |  |              |         |   |                  |   |         |  
|Common stock, par value $0.01authorized: 1,000,000,000 shares; issued: 315,546,952 shares at July 1, 2006 and 312,000,754 shares at
December 31, 2005 |  |              | 3.2      |   |                  |   | 3.1      |  
|Accumulated other comprehensive income (loss)                                                                                                          |  |              | (0.1     | ) |                  |   |         |  
|Additional paid-in capital                                                                                                                             |  |              | 7,037.2  |   |                  |   | 6,913.3  |  
|Unearned compensation                                                                                                                                  |  |              |         |   |                  |   | (39.8    | )
|Retained earnings                                                                                                                                      |  |              | 1,470.6  |   |                  |   | 1,254.9  |  
|                                                                                                                                                       |  |              |          |   |                  |   |          |  
|                                                                                                                                                       |  |              | 8,510.9  |   |                  |   | 8,131.5  |  
|                                                                                                                                                       |  |             
|Treasury stock, at cost: 21,597,876 shares at July 1, 2006 and 7,743,113 shares at December 31, 2005                                                   |  |              | (1,160.7 | ) |                  |   | (407.3   | )
|                                                                                                                                                       |  |              |          |   |                  |   |          |  
|Total stockholders equity                                                                                                                             |  |              | 7,350.2  |   |                  |   | 7,724.2  |  
|                                                                                                                                                       |  |              |          |   |                  |   |          |  
|Total liabilities and stockholders equity                                                                                                             |  | $            | 13,353.0 |   |                  | $ | 13,703.0 |  
|                                                                                                                                                       |  |              |          |   |                  |   |          |  

The accompanying notes are an integral part of these condensed consolidated financial
statements.



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##### Table of Contents

MEDCO HEALTH SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(In millions, except for
per share data)



|                                                                                                                                                                                  |  |                |          |                  |   |             |  |              |          |  |   |         
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | -------- | ---------------- | - | ----------- |  | ------------ | -------- |  | - | --------
|                                                                                                                                                                                  |  | Quarters Ended |          | Six Months Ended
|                                                                                                                                                                                  |  | July 1, 2006   |          | June 25,2005     |   | July 1,2006 |  | June 25,2005
|Product net revenues (Includes retail co-payments of $1,807 and $1,796 in the second quarters of 2006 and 2005, and $3,760 and $3,632 in the
six months of 2006 and 2005)         |  | $              | 10,458.9 |                  | $ | 8,906.7     |  | $            | 20,902.3 |  | $ | 17,562.6
|Service revenues                                                                                                                                                                  |  |                | 129.9    |                  |   | 92.0        |  |              | 250.1    |  |   | 179.4   
|                                                                                                                                                                                  |  |                |          |                  |   |             |  |              |          |  |   |         
|Total net revenues                                                                                                                                                                |  |                | 10,588.8 |                  |   | 8,998.7     |  |              | 21,152.4 |  |   | 17,742.0
|                                                                                                                                                                                  |  |                |          |                  |   |             |  |              |          |  |   |         
|Cost of operations:                                                                                                                                                               |  |                |          |                  |   |             |  |              |          |  |   |         
|Cost of product net revenues (Includes retail co-payments of $1,807 and $1,796 in the second quarters of 2006 and 2005, and $3,760 and $3,632
in the six months of 2006 and 2005) |  |                | 9,977.6  |                  |   | 8,518.9     |  |              | 19,968.4 |  |   | 16,789.6
|Cost of service revenues                                                                                                                                                          |  |                | 27.7     |                  |   | 24.5        |  |              | 62.2     |  |   | 49.5    
|                                                                                                                                                                                  |  |                |          |                  |   |             |  |              |          |  |   |         
|Total cost of revenues                                                                                                                                                            |  |                | 10,005.3 |                  |   | 8,543.4     |  |              | 20,030.6 |  |   | 16,839.1
|Selling, general and administrative expenses                                                                                                                                      |  |                | 239.1    |                  |   | 175.4       |  |              | 635.0    |  |   | 350.2   
|Amortization of intangibles                                                                                                                                                       |  |                | 54.6     |                  |   | 45.0        |  |              | 109.3    |  |   | 90.0    
|Interest and other (income) expense, net                                                                                                                                          |  |                | 15.3     |                  |   | 6.4         |  |              | 28.8     |  |   | 16.6    
|                                                                                                                                                                                  |  |                |          |                  |   |             |  |              |          |  |   |         
|Total cost of operations                                                                                                                                                          |  |                | 10,314.3 |                  |   | 8,770.2     |  |              | 20,803.7 |  |   | 17,295.9
|                                                                                                                                                                                  |  |                |          |                  |   |             |  |              |          |  |   |         
|Income before provision for income taxes                                                                                                                                          |  |                | 274.5    |                  |   | 228.5       |  |              | 348.7    |  |   | 446.1   
|Provision for income taxes                                                                                                                                                        |  |                | 103.6    |                  |   | 91.1        |  |              | 133.0    |  |   | 177.5   
|                                                                                                                                                                                  |  |                |          |                  |   |             |  |              |          |  |   |         
|Net income                                                                                                                                                                        |  | $              | 170.9    |                  | $ | 137.4       |  | $            | 215.7    |  | $ | 268.6   
|                                                                                                                                                                                  |  |                |          |                  |   |             |  |              |          |  |   |         
|Basic earnings per share:                                                                                                                                                         |  |                |          |                  |   |             |  |              |          |  |   |         
|Weighted average shares outstanding                                                                                                                                               |  |                | 299.0    |                  |   | 278.0       |  |              | 301.6    |  |   | 276.6   
|                                                                                                                                                                                  |  |                |          |                  |   |             |  |              |          |  |   |         
|Earnings per share                                                                                                                                                                |  | $              | 0.57     |                  | $ | 0.49        |  | $            | 0.72     |  | $ | 0.97    
|                                                                                                                                                                                  |  |                |          |                  |   |             |  |              |          |  |   |         
|Diluted earnings per share:                                                                                                                                                       |  |                |          |                  |   |             |  |              |          |  |   |         
|Weighted average shares outstanding                                                                                                                                               |  |                | 302.9    |                  |   | 283.8       |  |              | 305.8    |  |   | 281.9   
|                                                                                                                                                                                  |  |                |          |                  |   |             |  |              |          |  |   |         
|Earnings per share                                                                                                                                                                |  | $              | 0.56     |                  | $ | 0.48        |  | $            | 0.71     |  | $ | 0.95    
|                                                                                                                                                                                  |  |                |          |                  |   |             |  |              |          |  |   |         

The accompanying notes are an integral part of these condensed consolidated financial
statements.



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##### Table of Contents

MEDCO HEALTH SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY

(UNAUDITED)

($ in millions,
except for per share data)

(Shares in thousands)



|                                                                      |  |                             |  |                        |  |                             |     |                                             |   |      |                           |  |   |                      |   |  |                   |       |                |  |   |         |  |   |          |   |  |   |         |  
|--------------------------------------------------------------------- |  | --------------------------- |  | ---------------------- |  | --------------------------- | --- | ------------------------------------------- | - | ---- | ------------------------- |  | - | -------------------- | - |  | ----------------- | ----- | -------------- |  | - | ------- |  | - | -------- | - |  | - | ------- | -
|                                                                      |  | Shares ofCommonStock Issued |  | Shares ofTreasuryStock |  | $0.01 Par ValueCommon Stock |     | Accumulated OtherComprehensiveIncome (Loss) |   |      | AdditionalPaid-in Capital |  |   | UnearnedCompensation |   |  | Retained Earnings |       | Treasury Stock |  |   | Total   | 
|Balances at December 31, 2005                                         |  | 312,001                     |  | 7,743                  |  | $                           | 3.1 |                                             | $ |     |                           |  | $ | 6,913.3              |   |  | $                 | (39.8 | )              |  | $ | 1,254.9 |  | $ | (407.3   | ) |  | $ | 7,724.2 |  
|                                                                      |  |                             |  |                        |  |                             |     |                                             |   |      |                           |  |   |                      |   |  |                   |       |                |  |   |         |  |   |          |   |  |   |         |  
|Net income                                                            |  |                            |  |                       |  |                             |    |                                             |   |     |                           |  |   |                     |   |  |                   |      |                |  |   | 215.7   |  |   |         |   |  |   | 215.7   |  
|Unrealized loss on investments                                        |  |                            |  |                       |  |                             |    |                                             |   | (0.1 | )                         |  |   |                     |   |  |                   |      |                |  |   |        |  |   |         |   |  |   | (0.1    | )
|                                                                      |  |                             |  |                        |  |                             |     |                                             |   |      |                           |  |   |                      |   |  |                   |       |                |  |   |         |  |   |          |   |  |   |         |  
|Total comprehensive income                                            |  |                            |  |                       |  |                             |    |                                             |   | (0.1 | )                         |  |   |                     |   |  |                   |      |                |  |   | 215.7   |  |   |         |   |  |   | 215.6   |  
|Issuance of common stock for options exercised, including tax benefit |  | 3,454                       |  |                       |  |                             | 0.1 |                                             |   |     |                           |  |   | 109.2                |   |  |                   |      |                |  |   |        |  |   |         |   |  |   | 109.3   |  
|Issuance of common stock under employee stock purchase plans          |  | 85                          |  |                       |  |                             |    |                                             |   |     |                           |  |   | 4.4                  |   |  |                   |      |                |  |   |        |  |   |         |   |  |   | 4.4     |  
|Restricted stock unit activity, including tax benefit                 |  | 7                           |  |                       |  |                             |    |                                             |   |     |                           |  |   | 15.3                 |   |  |                   |      |                |  |   |        |  |   |         |   |  |   | 15.3    |  
|Reversal of unearned compensation                                     |  |                            |  |                       |  |                             |    |                                             |   |     |                           |  |   | (39.8                | ) |  |                   | 39.8  |                |  |   |        |  |   |         |   |  |   |        |  
|Stock-based compensation related to options                           |  |                            |  |                       |  |                             |    |                                             |   |     |                           |  |   | 34.8                 |   |  |                   |      |                |  |   |        |  |   |         |   |  |   | 34.8    |  
|Treasury stock acquired                                               |  |                            |  | 13,855                 |  |                             |    |                                             |   |     |                           |  |   |                     |   |  |                   |      |                |  |   |        |  |   | (753.4   | ) |  |   | (753.4  | )
|                                                                      |  |                             |  |                        |  |                             |     |                                             |   |      |                           |  |   |                      |   |  |                   |       |                |  |   |         |  |   |          |   |  |   |         |  
|Balances at July 1, 2006                                              |  | 315,547                     |  | 21,598                 |  | $                           | 3.2 |                                             | $ | (0.1 | )                         |  | $ | 7,037.2              |   |  | $                 |      |                |  | $ | 1,470.6 |  | $ | (1,160.7 | ) |  | $ | 7,350.2 |  
|                                                                      |  |                             |  |                        |  |                             |     |                                             |   |      |                           |  |   |                      |   |  |                   |       |                |  |   |         |  |   |          |   |  |   |         |  

The accompanying notes are an integral part of this condensed consolidated financial statement.



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##### Table of Contents

MEDCO HEALTH SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In millions)



|                                                                                  |  |                  |        |   |              |   |         |  
|--------------------------------------------------------------------------------- |  | ---------------- | ------ | - | ------------ | - | ------- | -
|                                                                                  |  | Six Months Ended |       
|                                                                                  |  | July 1,2006      |        |   | June 25,2005 |  
|Cash flows from operating activities:                                             |  |                  |        |   |              |   |         |  
|Net income                                                                        |  | $                | 215.7  |   |              | $ | 268.6   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                  |        |   |              |   |         |  
|Depreciation                                                                      |  |                  | 90.9   |   |              |   | 80.8    |  
|Amortization of intangibles                                                       |  |                  | 109.3  |   |              |   | 90.0    |  
|Deferred income taxes                                                             |  |                  | (54.1  | ) |              |   | (49.3   | )
|Stock-based compensation on employee stock plans                                  |  |                  | 51.1   |   |              |   |        |  
|Excess tax benefits from stock-based compensation arrangements                    |  |                  | (21.2  | ) |              |   |        |  
|Tax benefit on employee stock plans                                               |  |                  | 39.2   |   |              |   | 45.6    |  
|Other                                                                             |  |                  | 21.3   |   |              |   | 11.9    |  
|Net changes in assets and liabilities:                                            |  |                  |        |   |              |   |         |  
|Accounts receivable                                                               |  |                  | (222.4 | ) |              |   | (107.6  | )
|Inventories                                                                       |  |                  | (4.8   | ) |              |   | (3.4    | )
|Prepaid expenses and other current assets                                         |  |                  | (96.8  | ) |              |   | (15.9   | )
|Other noncurrent assets                                                           |  |                  | 15.1   |   |              |   | 23.0    |  
|Current liabilities and other noncurrent liabilities                              |  |                  | 101.1  |   |              |   | (66.4   | )
|                                                                                  |  |                  |        |   |              |   |         |  
|Net cash provided by operating activities                                         |  |                  | 244.4  |   |              |   | 277.3   |  
|                                                                                  |  |                  |        |   |              |   |         |  
|Cash flows from investing activities:                                             |  |                  |        |   |              |   |         |  
|Capital expenditures                                                              |  |                  | (56.3  | ) |              |   | (51.7   | )
|Purchases of securities and other investments                                     |  |                  | (58.3  | ) |              |   | (52.4   | )
|Proceeds from sale of securities and other investments                            |  |                  | 56.3   |   |              |   | 53.2    |  
|                                                                                  |  |                  |        |   |              |   |         |  
|Net cash used by investing activities                                             |  |                  | (58.3  | ) |              |   | (50.9   | )
|                                                                                  |  |                  |        |   |              |   |         |  
|Cash flows from financing activities:                                             |  |                  |        |   |              |   |         |  
|Repayments on long-term debt                                                      |  |                  | (37.7  | ) |              |   | (220.0  | )
|Purchase of treasury stock                                                        |  |                  | (753.4 | ) |              |   |        |  
|Debt issuance costs                                                               |  |                  |       |   |              |   | (0.3    | )
|Excess tax benefits from stock-based compensation arrangements                    |  |                  | 21.2   |   |              |   |        |  
|Proceeds from employee stock plans                                                |  |                  | 104.3  |   |              |   | 143.9   |  
|                                                                                  |  |                  |        |   |              |   |         |  
|Net cash used by financing activities                                             |  |                  | (665.6 | ) |              |   | (76.4   | )
|                                                                                  |  |                  |        |   |              |   |         |  
|Net (decrease) increase in cash and cash equivalents                              |  |                  | (479.5 | ) |              |   | 150.0   |  
|Cash and cash equivalents at beginning of period                                  |  |                  | 888.2  |   |              |   | 1,145.5 |  
|                                                                                  |  |                  |        |   |              |   |         |  
|Cash and cash equivalents at end of period                                        |  | $                | 408.7  |   |              | $ | 1,295.5 |  
|                                                                                  |  |                  |        |   |              |   |         |  

The accompanying notes are an integral part of these condensed consolidated financial
statements.



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##### Table of Contents

MEDCO HEALTH SOLUTIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. BASIS OF PRESENTATION

The accompanying unaudited interim condensed consolidated financial statements of Medco Health Solutions, Inc. and subsidiaries
(Medco or the Company) have been prepared pursuant to the Securities and Exchange Commissions (SEC) rules and regulations for reporting on Form 10-Q. Accordingly, certain information and disclosures required
by accounting principles generally accepted in the United States for complete consolidated financial statements are not included herein. In the opinion of the Companys management, all adjustments, which include adjustments of a normal
recurring nature necessary for a fair statement of the financial position, results of operations and cash flows at the dates and for the periods presented, have been included. The results of operations for any interim period are not necessarily
indicative of the results of operations for the full year. The unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto as of December 31, 2005
included in the Companys Annual Report on Form 10-K. The Companys fiscal quarters for 2006 and 2005 each consisted of 13 weeks and ended on July 1, 2006 and June 25, 2005, respectively.

Certain reclassifications have been made to prior period amounts to conform to current period presentation.

2. RECENTLY ADOPTED FINANCIAL ACCOUNTING STANDARD

On
January 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment, (SFAS 123R) which requires the measurement and recognition of
compensation expense for all stock-based compensation awards made to employees and directors including employee stock options and employee stock purchase plans. SFAS 123R supersedes the Companys previous accounting under APB Opinion
No. 25, Accounting for Stock Issued to Employees (APB 25), for periods subsequent to December 31, 2005. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB 107) which provides
interpretative guidance in applying the provisions of SFAS 123R. The Company has applied the provisions of SAB 107 in its adoption of SFAS 123R.

The Company adopted SFAS 123R using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of the Companys 2006 fiscal year. The Companys
unaudited interim condensed consolidated financial statements as of and for the fiscal quarter and six months ended July 1, 2006 reflect the impact of SFAS 123R. In accordance with the modified prospective transition method, the Companys
consolidated financial statements for periods prior to January 1, 2006 have not been restated to reflect, and do not include, the impact of SFAS 123R as the Company did not record stock-based compensation expense related to employee stock
options and employee stock purchase plans. Stock-based compensation expense related to employee stock options and employee stock purchase plans recognized under SFAS 123R for the fiscal quarter and six months ended July 1, 2006 amounted to
$14.8 million pre-tax and $35.7 million pre-tax, respectively. See Note 5, Stock-Based Compensation, for additional information.

SFAS 123R requires companies to estimate the fair value of stock-based awards on the date of grant using an option-pricing model. The portion of the value that is ultimately expected to vest is recognized as expense over the requisite
service period. Prior to the adoption of the SFAS 123R, the Company accounted for stock-based awards using the intrinsic value method in accordance with APB 25 as allowed under SFAS No. 123, Accounting for Stock-Based Compensation
(SFAS 123). Under the intrinsic value method, no stock-based compensation expense had been recognized related to options because the exercise price of the Companys stock options granted equaled the fair market value of the
underlying stock at the date of the grant.

SFAS 123R also requires the benefits of realized tax deductions in excess of tax benefits on
compensation expense to be reported as a component of cash flows from financing activities rather than as an operating cash flow, as previously required. The reported excess amounts to $21.2 million for the six months ended July 1, 2006. In
accordance with SAB 107, the Company classifies stock-based compensation within cost of product net revenues and selling, general and administrative expenses to correspond with the line items in which cash compensation paid to employees and
directors is recorded.



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Stock-based compensation expense recognized in the Companys unaudited interim condensed
consolidated statements of income for the fiscal quarter and six months ended July 1, 2006 includes compensation expense for stock-based compensation awards granted prior to, but not yet vested as of December 31, 2005, based on the
grant-date fair value estimated in accordance with the pro forma provisions of SFAS 123. Additionally, the Companys unaudited interim condensed consolidated statements of income for the fiscal quarter and six months ended July 1, 2006
includes compensation expense for the stock-based compensation awards granted subsequent to December 31, 2005 based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. In conjunction with the adoption of SFAS
123R, the Company changed its method of attributing the value of stock-based compensation to expense from the accelerated multiple-option approach under Financial Accounting Standards Board Interpretation No. 28, Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award Plans (FIN 28) to the straight-line single option method.

As stock-based compensation expense recognized in the Companys unaudited interim condensed consolidated statements of income is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123R
requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company estimates forfeitures in the same manner under SFAS 123R as it did prior to its
adoption.

3. LEGAL SETTLEMENTS CHARGE

On May 5, 2006, the Company announced that it recorded in its fiscal first quarter of 2006 a $163 million one-time pre-tax charge associated with a financial agreement in principle to resolve three pending federal legal issues with the
U.S. Attorneys Office for the Eastern District of Pennsylvania. The Company recorded the pre-tax settlements charge in selling, general and administrative expenses to reflect the net financial impact. Based on the current facts and
circumstances, the Company believes it is probable the settlement amount will be tax deductible.

Final disposition of each of these
matters is conditioned upon execution of a Corporate Integrity Agreement and the respective settlement agreements. These non-financial elements have not been agreed to by the participating parties and there can be no assurance that mutually
satisfactory agreements will be reached on all, or any, of these settlements. These previously disclosed matters include the following:

In
September 2003, the U.S. Attorneys Office for the Eastern District of Pennsylvania filed a complaint-in-intervention in the U.S. District Court for the Eastern District of Pennsylvania, alleging violations of the federal False Claims Act and
asserting other legal claims. The complaint-in-intervention was filed with respect to two pending qui tam, or whistleblower, complaints originally filed in February 2000 under the federal False Claims Act and similar state laws. Additional
legal claims were added in an Amended Complaint in December 2003, including a count alleging a violation of the Public Contracts Anti-Kickback Act. The Company and the government have been engaged in court-ordered mediation with regard to these
pending qui tam actions. This process has resulted in suspension of the court deadlines.

In September 2004, the Company
received notification from the U.S. Attorneys Office for the Eastern District of Pennsylvania that the U.S. District Court for the Eastern District of Pennsylvania had granted a motion filed at the Companys request allowing the Company
to publicly disclose the existence of a separate qui tam action in which the Company is named as one of various defendants (the Complaint). The U.S. Attorneys Office has informed the Company that the Complaint alleges
violations of the federal False Claims Act, that the Company and other defendants inflated manufacturers best price to Medicare and Medicaid, and that the Company and other defendants offered and paid kickbacks to third parties to
induce the placement on formularies and promotion of certain drugs. In January 2005, the Company received a subpoena from the Department of Health and Human Services Office of Inspector General (OIG) requesting documents that relate to
this Complaint. The government agreed to suspend enforcement of the OIG subpoena until October 1, 2005. The Company has produced the documents requested by the government, and has requested that the enforcement action be dismissed.



6



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In January 2005, the Company received a letter from the U.S. Attorneys Office for the Eastern
District of Pennsylvania requesting information and representations regarding the Companys Medicare coordination of benefits recovery program.

There can be no assurance that the Company will ultimately enter into all or any of the potential settlements or that the amount of any settlement will be at or below the reserved amounts.

The Company has learned of the existence of two new sealed qui tam matters. The first action is filed in the Eastern District of Pennsylvania. It
appears to allege that the Company billed government payors using invalid or out-of-date national drug codes (NDCs). The second action is filed in the District of New Jersey and appears to allege that the Company charged government
payors a different rate than it reimbursed pharmacies; engaged in duplicate billing; refilled prescriptions too soon; and billed government payors for prescriptions written by unlicensed physicians and physicians with invalid Drug Enforcement Agency
authorizations. The Department of Justice has not yet made any decision as to whether it will intervene in either of these matters. The matters are under seal and U.S. District Court orders prohibit the Company from answering inquiries about the
complaints. The Company was notified of the existence of the two new qui tam matters during its current settlement negotiations with the Department of Justice. The Company does not know the identities of the relators or the other
defendants in either of these matters. The two new qui tam matters are not currently being considered in the Companys ongoing settlement negotiations with the Department of Justice.

In light of the litigation risks intrinsic to businesses that operate in the healthcare industry and that perform services for federal and state
governmental agencies, there can be no assurance that the Company will not be named as a defendant in future qui tam actions, or that there are no other pending qui tam actions against the Company that remain under seal pursuant to
court order.

See Note 11, Commitments and Contingencies, for additional information on various lawsuits, claims proceedings
and investigations that are pending against the Company and certain of its subsidiaries.

4. ACQUISITION OF ACCREDO

The results of operations of Accredo Health, Incorporated (Accredo) are included in the accompanying unaudited interim condensed consolidated
financial statements beginning on August 18, 2005. The pro forma results of operations of the Company and Accredo for the quarter and six months ended June 25, 2005, as if the Accredo acquisition had occurred at the beginning of fiscal
2005, were as follows ($ in millions, except for per share amounts):



|                                                      |  |                            |         |                               |   |         
|----------------------------------------------------- |  | -------------------------- | ------- | ----------------------------- | - | --------
|                                                      |  | Quarter EndedJune 25, 2005 |         | Six Months EndedJune 25, 2005
|Pro forma total net revenues                          |  | $                          | 9,396.0 |                               | $ | 18,583.3
|Pro forma net income                                  |  | $                          | 120.8   |                               | $ | 265.2   
|Pro forma basic weighted average shares outstanding   |  |                            | 302.4   |                               |   | 300.8   
|Pro forma basic earnings per common share             |  | $                          | 0.40    |                               | $ | 0.88    
|Pro forma diluted weighted average shares outstanding |  |                            | 308.9   |                               |   | 306.8   
|Pro forma diluted earnings per common share           |  | $                          | 0.39    |                               | $ | 0.86    

The pro forma financial information above is not necessarily indicative of what the Companys
consolidated results of operations actually would have been if the Accredo acquisition had been completed at the beginning of fiscal 2005. In addition, the pro forma information above does not attempt to project the Companys future results of
operations.

5. STOCK-BASED COMPENSATION

The Compensation Committee of the Companys Board of Directors regularly reviews the Companys compensation structure and practices, including the timing of its stock-based awards. The Audit Committee of the Companys Board
of Directors also reviews the Companys option-granting practices from time to time. The Company grants options to employees and directors to purchase shares of Medco common stock at the fair market value on the date of grant. The options
generally vest over three years and expire within 10 years from the date of the grant. Under the terms of the Medco Health Solutions, Inc. 2002 Stock Incentive Plan, as of July 1, 2006, 19.7 million shares of the Companys



7



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##### Table of Contents

common stock are available for awards. As of July 1, 2006, under the terms of the Accredo Health, Incorporated 2002
Long-Term Incentive Plan as amended and restated on August 18, 2005, there are 0.5 million shares of the Companys common stock available for awards.

On January 1, 2006, the Company adopted SFAS 123R, which requires the measurement and recognition of compensation expense for all stock-based compensation awards made to the Companys employees and
directors, including stock options and employee stock purchases related to employee stock purchase plans, based on estimated fair values. Prior to the adoption of SFAS 123R, the Company accounted for employee options to purchase stock, and for
employee participation in employee stock purchase plans, under the intrinsic value method of expense recognition in APB 25, as permitted by SFAS 123. See Note 2, Recently Adopted Financial Accounting Standard, for a discussion of SFAS
123R, which revised SFAS No. 123 and supersedes APB 25 and its related implementation guidance.

If the fair value method of
accounting had been applied for stock options and the employee stock purchase plans in 2005, net income in 2005 would have been reduced. The fair value method requires recognition of compensation expense ratably over the requisite service period.
The employee stock purchase plans value under the fair value method represents a 15% discount provided to eligible employees.

The
fair value of options granted is estimated on the date of grant using the Black-Scholes option-pricing model. The Medco volatility assumption is based on the volatility of the largest public companies within the pharmacy benefit management
(PBM) industry combined with the Companys stock price volatility for the period the Company has been publicly traded. The Company uses historical data to estimate the expected option life. The expected option life represents the
period of time that options granted are expected to be outstanding. Groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The risk-free rate is based on the U.S. Treasury yield curve in
effect at the time of grant. The weighted average fair value of options granted for the six months ended July 1, 2006 and June 25, 2005 was $20.84 and $18.22, respectively. The weighted average assumptions utilized for options granted
during the fiscal quarters presented are as follows:



|                                                                  |  |                |   |  |                  |   |  |              |   |  |               |  
|----------------------------------------------------------------- |  | -------------- | - |  | ---------------- | - |  | ------------ | - |  | ------------- | -
|                                                                  |  | Quarters Ended |   |  | Six Months Ended |  
|                                                                  |  | July 1, 2006   |   |  | June 25, 2005    |   |  | July 1, 2006 |   |  | June 25, 2005 |  
|Medco stock options Black-Scholes assumptions (weighted average): |  |                |   |  |                  |   |  |              |   |  |               |  
|Expected dividend yield                                           |  | 0              | % |  | 0                | % |  | 0            | % |  | 0             | %
|Risk-free interest rate                                           |  | 5.0            | % |  | 3.9              | % |  | 4.6          | % |  | 4.0           | %
|Expected volatility                                               |  | 32.0           | % |  | 35.0             | % |  | 32.0         | % |  | 35.0          | %
|Expected life (years)                                             |  | 5.3            |   |  | 6.4              |   |  | 5.2          |   |  | 6.0           |  

Stock-based compensation expense related to stock option expense and employee stock purchase plans
recognized for the quarter and six months ended July 1, 2006 as a result of the adoption of SFAS 123R was comprised as follows ($ in millions, except for per share data):



|                                                  |  |                           |      |   |                              |   |       |  
|------------------------------------------------- |  | ------------------------- | ---- | - | ---------------------------- | - | ----- | -
|                                                  |  | Quarter EndedJuly 1, 2006 |      |   | Six Months EndedJuly 1, 2006 |  
|Cost of product net revenues                      |  | $                         | 2.4  |   |                              | $ | 5.9   |  
|Selling, general and administrative expenses      |  |                           | 12.4 |   |                              |   | 29.8  |  
|                                                  |  |                           |      |   |                              |   |       |  
|Stock-based compensation expense, before taxes    |  |                           | 14.8 |   |                              |   | 35.7  |  
|Related income tax benefits                       |  |                           | (5.8 | ) |                              |   | (14.0 | )
|                                                  |  |                           |      |   |                              |   |       |  
|Stock-based compensation expense, net of taxes(1) |  | $                         | 9.0  |   |                              | $ | 21.7  |  
|                                                  |  |                           |      |   |                              |   |       |  
|Earnings per share effect:                        |  |                           |      |   |                              |   |       |  
|Basic                                             |  | $                         | 0.03 |   |                              | $ | 0.07  |  
|Diluted                                           |  | $                         | 0.03 |   |                              | $ | 0.07  |  

---

|(1) | Stock-based compensation expense for the quarter and six months ended July 1, 2006 includes stock option expense of $8.7 million ($14.4 million pre-tax) and $21.2 million
($34.8 million pre-tax), respectively, and employee stock purchase plan expense of $0.3 million ($0.4 million pre-tax) and $0.5 million ($0.9 million pre-tax), respectively.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

The pro forma net income and earnings per share for the quarter and six months ended June 25, 2005,
which reflect results as if the Company had applied the fair value method for recognizing employee stock-based compensation to the stock options and the employee stock purchase plan, are as follows ($ in millions, except for per share data):



|                                                                                                         |  |                            |       |   |                               |   |       |  
|-------------------------------------------------------------------------------------------------------- |  | -------------------------- | ----- | - | ----------------------------- | - | ----- | -
|                                                                                                         |  | Quarter EndedJune 25, 2005 |       |   | Six Months EndedJune 25, 2005 |  
|Net income, as reported                                                                                  |  | $                          | 137.4 |   |                               | $ | 268.6 |  
|Stock-based compensation expense related to options and the employee stock purchase plan, net of tax (1) |  |                            | (16.2 | ) |                               |   | (32.3 | )
|                                                                                                         |  |                            |       |   |                               |   |       |  
|Pro forma net income, including stock-based compensation expense                                         |  | $                          | 121.2 |   |                               | $ | 236.3 |  
|                                                                                                         |  |                            |       |   |                               |   |       |  
|Basic earnings per share:                                                                                |  |                            |       |   |                               |   |       |  
|As reported                                                                                              |  | $                          | 0.49  |   |                               | $ | 0.97  |  
|Pro forma                                                                                                |  | $                          | 0.44  |   |                               | $ | 0.85  |  
|Diluted earnings per share:                                                                              |  |                            |       |   |                               |   |       |  
|As reported                                                                                              |  | $                          | 0.48  |   |                               | $ | 0.95  |  
|Pro forma                                                                                                |  | $                          | 0.43  |   |                               | $ | 0.84  |  

---

|(1) | Pro forma stock-based compensation expense for the
quarter and six months ended June 25, 2005 includes stock option expense of $16.0 million ($26.6 million pre-tax) and $31.9 million ($53.0 million pre-tax), respectively, and employee stock purchase plan expense of $0.2 million ($0.3 million
pre-tax) and $0.4 million ($0.6 million pre-tax), respectively.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Stock Option Plans.Summarized
information related to stock options held by the Companys employees and directors is as follows:



|                               |  |                               |   |  |                               |       |                                         |      |                                      |   |      
|------------------------------ |  | ----------------------------- | - |  | ----------------------------- | ----- | --------------------------------------- | ---- | ------------------------------------ | - | -----
|Medco Stock Options            |  | Number ofShares(in thousands) |   |  | WeightedAverageExercise Price |       | WeightedAverageRemainingContractualTerm |      | AggregateIntrinsicValue(in millions)
|Outstanding at January 1, 2006 |  | 18,392.3                      |   |  | $                             | 33.13 |                                         |      |                                      |   |      
|Granted                        |  | 2,798.5                       |   |  |                               | 56.44 |                                         |      |                                      |   |      
|Exercised                      |  | (3,485.9                      | ) |  |                               | 29.07 |                                         |      |                                      |   |      
|Forfeited                      |  | (363.6                        | ) |  |                               | 40.80 |                                         |      |                                      |   |      
|                               |  |                               |   |  |                               |       |                                         |      |                                      |   |      
|Outstanding at July 1, 2006    |  | 17,341.3                      |   |  | $                             | 37.55 |                                         | 7.41 |                                      | $ | 352.6
|                               |  |                               |   |  |                               |       |                                         |      |                                      |   |      
|Exercisable at July 1, 2006    |  | 9,074.7                       |   |  | $                             | 30.49 |                                         | 6.75 |                                      | $ | 244.9
|                               |  |                               |   |  |                               |       |                                         |      |                                      |   |      

The total intrinsic value of options exercised during the six months ended July 1, 2006 was
$99.9 million. The total intrinsic value of options exercised during the six months ended June 25, 2005 was $114.6 million.



|                             |  |                               |   |  |                                     |      
|---------------------------- |  | ----------------------------- | - |  | ----------------------------------- | -----
|Nonvested Options            |  | Number ofShares(in thousands) |   |  | WeightedAverageGrant-DateFair Value
|Nonvested at January 1, 2006 |  | 10,002.4                      |   |  | $                                   | 15.55
|Granted                      |  | 2,798.5                       |   |  |                                     | 20.84
|Vested                       |  | (4,289.4                      | ) |  |                                     | 14.35
|Forfeited                    |  | (244.9                        | ) |  |                                     | 16.47
|                             |  |                               |   |  |                                     |      
|Nonvested at July 1, 2006    |  | 8,266.6                       |   |  | $                                   | 17.95
|                             |  |                               |   |  |                                     |      

As of July 1, 2006, there was $89.8 million of total unrecognized compensation cost related
to stock options granted. That cost is expected to be recognized over a weighted-average period of 2.2 years. The total fair value of shares vested during the six months ended July 1, 2006 was $61.5 million. The total fair value of shares
vested during the six months ended June 25, 2005 was $48.9 million. The Company expects the majority of outstanding nonvested options to vest.



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Restricted Stock Units and Restricted Stock Plans. The Company grants restricted stock
units and restricted shares to employees and directors, which generally vest over two or three years. The fair value of the restricted stock units and restricted shares is determined by the product of the number of shares granted and the grant-date
market price of the Companys common stock. The fair value of the restricted stock units and restricted shares is expensed on a straight-line basis over the requisite service period. Net income, as reported, includes stock-based compensation
expense related to restricted stock and restricted stock units for the quarter and six months ended July 1, 2006 of $5.4 million ($8.8 million pre-tax) and $9.4 million ($15.4 million pre-tax). Net income, as reported, includes stock-based
compensation expense related to restricted stock and restricted stock units for the quarter and six months ended June 25, 2005 of $2.9 million ($4.9 million pre-tax) and $4.3 million ($7.2 million pre-tax).

Upon vesting, certain employees and directors may defer conversion of the restricted stock units to common stock. Summarized information related to
restricted stock units and restricted stock held by the Companys employees and directors is as follows:



|                                    |  |                               |   |  |                                      |      
|----------------------------------- |  | ----------------------------- | - |  | ------------------------------------ | -----
|Restricted Stock Units              |  | Number ofShares(in thousands) |   |  | AggregateIntrinsicValue(in millions)
|Outstanding at January 1, 2006      |  | 1,329.1                       |   |  |                                      |      
|Granted                             |  | 886.3                         |   |  |                                      |      
|Converted                           |  | (10.7                         | ) |  |                                      |      
|Forfeited                           |  | (35.8                         | ) |  |                                      |      
|                                    |  |                               |   |  |                                      |      
|Outstanding at July 1, 2006         |  | 2,168.9                       |   |  | $                                    | 124.7
|                                    |  |                               |   |  |                                      |      
|Vested and deferred at July 1, 2006 |  | 139.3                         |   |  | $                                    | 8.0  
|                                    |  |                               |   |  |                                      |      



|                               |  |                               |  |                                      |    
|------------------------------ |  | ----------------------------- |  | ------------------------------------ | ---
|Restricted Stock               |  | Number ofShares(in thousands) |  | AggregateIntrinsicValue(in millions)
|Outstanding at January 1, 2006 |  | 113.0                         |  |                                      |    
|Granted                        |  |                              |  |                                      |    
|Converted                      |  |                              |  |                                      |    
|Forfeited                      |  |                              |  |                                      |    
|                               |  |                               |  |                                      |    
|Outstanding at July 1, 2006    |  | 113.0                         |  | $                                    | 6.5
|                               |  |                               |  |                                      |    

The weighted average grant-date fair value of restricted stock units granted during the six months
ended July 1, 2006 and June 25, 2005 was $56.67 and $44.33, respectively. The total intrinsic value of restricted stock units converted during the six months ended July 1, 2006 and June 25, 2005 was $0.6 million and $0.4 million,
respectively.



|                                 |  |                               |   |  |                                     |      
|-------------------------------- |  | ----------------------------- | - |  | ----------------------------------- | -----
|Nonvested Restricted Stock Units |  | Number ofShares(in thousands) |   |  | WeightedAverageGrant-DateFair Value
|Nonvested at January 1, 2006     |  | 1,201.1                       |   |  | $                                   | 42.63
|Granted                          |  | 886.3                         |   |  |                                     | 56.76
|Vested                           |  | (22.0                         | ) |  |                                     | 48.93
|Forfeited                        |  | (35.8                         | ) |  |                                     | 48.26
|                                 |  |                               |   |  |                                     |      
|Nonvested at July 1, 2006        |  | 2,029.6                       |   |  | $                                   | 48.59
|                                 |  |                               |   |  |                                     |      



|                             |  |                               |  |                                     |      
|---------------------------- |  | ----------------------------- |  | ----------------------------------- | -----
|Nonvested Restricted Stock   |  | Number ofShares(in thousands) |  | WeightedAverageGrant-DateFair Value
|                             |  |                               |  |                                     |      
|Nonvested at January 1, 2006 |  | 113.0                         |  | $                                   | 49.68
|Granted                      |  |                              |  |                                     |     
|Vested                       |  |                              |  |                                     |     
|Forfeited                    |  |                              |  |                                     |     
|                             |  |                               |  |                                     |      
|Nonvested at July 1, 2006    |  | 113.0                         |  | $                                   | 49.68
|                             |  |                               |  |                                     |      



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As of July 1, 2006, there was $72.7 million of total unrecognized compensation cost related to
nonvested restricted stock units and restricted stock grants. That cost is expected to be recognized over a weighted average period of 2.3 years. The total fair value of restricted stock units vested during the six months ended July 1, 2006 and
June 25, 2005 was $1.2 million and $0.5 million, respectively. The Company expects the majority of nonvested restricted stock units and restricted stock shares to vest.

6. EARNINGS PER SHARE (EPS)

The following is a reconciliation of the number of weighted
average shares used in the basic and diluted EPS calculation (amounts in millions):



|                                                      |  |                |  |                  |  |              |  |              
|----------------------------------------------------- |  | -------------- |  | ---------------- |  | ------------ |  | -------------
|                                                      |  | Quarters Ended |  | Six Months Ended
|                                                      |  | July 1, 2006   |  | June 25, 2005    |  | July 1, 2006 |  | June 25, 2005
|Weighted average shares outstanding                   |  | 299.0          |  | 278.0            |  | 301.6        |  | 276.6        
|Dilutive common stock equivalents:                    |  |                |  |                  |  |              |  |              
|Outstanding stock options and restricted stock units  |  | 3.9            |  | 5.8              |  | 4.2          |  | 5.3          
|                                                      |  |                |  |                  |  |              |  |              
|Weighted average shares outstanding assuming dilution |  | 302.9          |  | 283.8            |  | 305.8        |  | 281.9        
|                                                      |  |                |  |                  |  |              |  |              

SFAS No. 128, Earnings per Share, (SFAS 128) requires that stock
options and restricted stock units granted by the Company be treated as potential common shares outstanding in computing diluted earnings per share. Under the treasury stock method, the amount the employee or director must pay for exercising the
award, the amount of compensation cost for future service that the Company has not yet recognized, and the amount of tax benefits that would be recorded in additional paid-in capital when the award becomes deductible are assumed to be used to
repurchase shares. For both the quarter and six months ended July 1, 2006, there were outstanding options to purchase 3.7 million shares of Medco stock, which were not dilutive to the EPS calculation. These outstanding options may be
dilutive to future EPS calculations. For the quarter ended June 25, 2005, there were no outstanding options to purchase Medco stock where the exercise price of the options exceeded the average stock price. For the six months ended June 25,
2005, there were outstanding options to purchase 0.1 million shares of Medco stock, which were not dilutive to the EPS calculation. The increase in the weighted average shares outstanding and diluted weighted average shares outstanding reflect
approximately 24 million shares issued in August 2005 in connection with the Accredo acquisition, as well as the issuance of stock under employee stock plans and the dilutive effect of outstanding stock options, partially offset by share
repurchases. In accordance with SFAS 128, treasury shares, on a weighted average basis, are not considered part of the basic or diluted shares outstanding for the quarter and six months ended July 1, 2006.

7. ACCOUNTS RECEIVABLE, NET

As of July 1, 2006
and December 31, 2005, total unbilled client, other payor and manufacturer receivables amounted to $2,343.9 million and $2,182.6 million, respectively. As of July 1, 2006 and December 31, 2005, identified specialty pharmacy accounts
receivable from payors and patients amounted to $428.9 million and $399.6 million, respectively. Accounts receivable are presented net of allowance for doubtful accounts of $72.1 million at July 1, 2006 and $67.3 million at December 31,
2005, including $65.6 million and $62.0 million, respectively, for specialty pharmacy. The relatively higher allowance for specialty pharmacy reflects a different credit risk profile than the PBM business, characterized by reimbursement through
medical coverage, including government agencies, and higher patient co-payments. See Note 10, Segment Reporting, for more information on the Specialty Pharmacy segment.



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8. INTANGIBLE ASSETS, NET

The following is a summary of the Companys intangible assets ($ in millions):



|                            |  |                    |         |                         |   |         |  |                    |         |                         |   |         |  |   |         |  |   |        
|--------------------------- |  | ------------------ | ------- | ----------------------- | - | ------- |  | ------------------ | ------- | ----------------------- | - | ------- |  | - | ------- |  | - | -------
|                            |  | July 1, 2006       |         | December 31, 2005      
|                            |  | GrossCarryingValue |         | AccumulatedAmortization |   | Net     |  | GrossCarryingValue |         | AccumulatedAmortization |   | Net    
|PBM client relationships(1) |  | $                  | 3,172.2 |                         | $ | 1,301.5 |  | $                  | 1,870.7 |                         | $ | 3,172.2 |  | $ | 1,211.5 |  | $ | 1,960.7
|Accredo(2)                  |  |                    | 793.5   |                         |   | 31.9    |  |                    | 761.6   |                         |   | 793.5   |  |   | 12.6    |  |   | 780.9  
|                            |  |                    |         |                         |   |         |  |                    |         |                         |   |         |  |   |         |  |   |        
|Total                       |  | $                  | 3,965.7 |                         | $ | 1,333.4 |  | $                  | 2,632.3 |                         | $ | 3,965.7 |  | $ | 1,224.1 |  | $ | 2,741.6
|                            |  |                    |         |                         |   |         |  |                    |         |                         |   |         |  |   |         |  |   |        

---

|(1) | Principally comprised of the recorded value of
Medcos client relationships at the time of the acquisition of the Company by Merck & Co., Inc. in 1993 and, to a significantly lesser extent, the Companys acquisition of ProVantage Health Services, Inc. in 2000.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Represents the Specialty Pharmacy segment primarily
reflecting the portion of the excess of the Accredo purchase price over tangible net assets acquired, which was allocated to intangible assets and, to a significantly lesser extent, the acquisition of selected assets of Pediatric Services of
America, Inc.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Aggregate intangible asset amortization expense in each of the five succeeding fiscal years is
estimated to be $218.5 million. The weighted average useful life of intangible assets subject to amortization is 23 years in total and by major intangible asset class are approximately 23 years for the PBM client relationships and approximately 22
years for the Accredo acquired intangible assets.

9. PENSION AND OTHER POSTRETIREMENT BENEFITS

Net Pension and Postretirement Benefit Cost. The Company has various plans covering the majority of its employees. The Company uses its
fiscal year-end date as the measurement date for most of its plans. The majority of the net cost for the Companys pension plans consisted of the following components ($ in millions):



|                                     |  |                |      |   |                  |   |      |              |  |   |               |   |  |   |      |  
|------------------------------------ |  | -------------- | ---- | - | ---------------- | - | ---- | ------------ |  | - | ------------- | - |  | - | ---- | -
|                                     |  | Quarters Ended |      |   | Six Months Ended |  
|                                     |  | July 1, 2006   |      |   | June 25, 2005    |   |      | July 1, 2006 |  |   | June 25, 2005 |  
|Service cost                         |  | $              | 4.3  |   |                  | $ | 4.0  |              |  | $ | 8.5           |   |  | $ | 8.1  |  
|Interest cost                        |  |                | 1.6  |   |                  |   | 1.5  |              |  |   | 3.2           |   |  |   | 3.0  |  
|Expected return on plan assets       |  |                | (2.3 | ) |                  |   | (2.0 | )            |  |   | (4.6          | ) |  |   | (4.0 | )
|Net amortization of actuarial losses |  |                | 0.1  |   |                  |   | 0.1  |              |  |   | 0.2           |   |  |   | 0.1  |  
|                                     |  |                |      |   |                  |   |      |              |  |   |               |   |  |   |      |  
|Net pension cost                     |  | $              | 3.7  |   |                  | $ | 3.6  |              |  | $ | 7.3           |   |  | $ | 7.2  |  
|                                     |  |                |      |   |                  |   |      |              |  |   |               |   |  |   |      |  

The Company maintains an unfunded postretirement healthcare benefit plan covering the majority of
its employees. The net cost of these postretirement benefits consisted of the following components ($ in millions):



|                                     |  |                |      |   |                  |   |      |              |  |   |               |   |  |   |      |  
|------------------------------------ |  | -------------- | ---- | - | ---------------- | - | ---- | ------------ |  | - | ------------- | - |  | - | ---- | -
|                                     |  | Quarters Ended |      |   | Six Months Ended |  
|                                     |  | July 1, 2006   |      |   | June 25, 2005    |   |      | July 1, 2006 |  |   | June 25, 2005 |  
|Service cost                         |  | $              | 0.4  |   |                  | $ | 0.3  |              |  | $ | 0.9           |   |  | $ | 0.9  |  
|Interest cost                        |  |                | 0.5  |   |                  |   | 0.3  |              |  |   | 0.9           |   |  |   | 0.8  |  
|Amortization of prior service costs  |  |                | (1.0 | ) |                  |   | (1.0 | )            |  |   | (2.1          | ) |  |   | (2.1 | )
|Net amortization of actuarial losses |  |                | 0.4  |   |                  |   | 0.3  |              |  |   | 0.8           |   |  |   | 0.9  |  
|                                     |  |                |      |   |                  |   |      |              |  |   |               |   |  |   |      |  
|Net postretirement benefit cost      |  | $              | 0.3  |   |                  | $ | (0.1 | )            |  | $ | 0.5           |   |  | $ | 0.5  |  
|                                     |  |                |      |   |                  |   |      |              |  |   |               |   |  |   |      |  

The Company amended the postretirement healthcare benefit plan in 2003, which reduced benefit
obligations, the effect of which is reflected in the amortization of the prior service costs component of the net postretirement benefit cost.



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10. SEGMENT REPORTING

Reportable Segments

As a result of the Companys acquisition of Accredo on August 18,
2005, the Company has two reportable segments, PBM and Specialty Pharmacy. The PBM segment involves sales of traditional prescription drugs to the Companys clients and their members, either through the Companys network of contractually
affiliated retail pharmacies or the Companys mail-order pharmacies. The Specialty Pharmacy segment, which was formed upon the Accredo acquisition, includes the sale of higher margin specialty pharmacy products and services for the treatment of
chronic and potentially life-threatening diseases. The results of Accredo are included in the Specialty Pharmacy segment results and the consolidated statements of income effective with the August 18, 2005 acquisition. The Specialty Pharmacy
segment also includes the specialty pharmacy activity previously included within Medcos PBM business.

The Company defines the
Specialty Pharmacy segment based on a product set and associated services, broadly characterized to include drugs that are high-cost, usually developed by biotechnology companies and often injectable, and which require elevated levels of patient
support. When dispensed, these products frequently require a significant amount of ancillary administration equipment, special packaging, and a much higher degree of patient-oriented customer service than is required in the traditional PBM business
model. In addition, specialty pharmacy products and services are often covered through medical benefit programs with the primary payors being insurance companies and government programs, along with patients, with a smaller but growing percentage of
PBM clients as payors.

Factors Used to Identify Reportable Segments

The Specialty Pharmacy segment was formed as a result of the Accredo acquisition on August 18, 2005 in response to a management desire to manage the
acquired business together with Medcos pre-existing specialty pharmacy activity as a separate business from Medcos PBM operations. This acquisition complemented the pre-existing Medco specialty pharmacy operation, which was evolving in
2005. Prior to the acquisition, results for the specialty pharmacy business were neither prepared nor provided to the chief operating decision maker as he managed Medco on a consolidated entity level.

During 2005, Medco established procedures and controls and implemented system solutions in order to identify discrete financial information on a
prospective basis for the specialty pharmacy activities in anticipation of the combination of those activities with Accredo into a separate segment, effective with the closing of the Accredo acquisition. Until these procedures, controls and systems
were implemented during 2005, the complexity of the Companys manufacturer and client contracts, determining the appropriate cost of inventory and retail reimbursement, as well as the shared costs between the PBM and specialty pharmacy
activities prevented Medco from preparing detailed separate profitability financial results for specialty pharmacy for periods prior to the formation of the segment in August of 2005. For the second quarters and six months of 2006 and 2005, Medco
has identified the revenues associated with Medcos pre-existing specialty pharmacy business based on a data extract of sales for the specialty product set. Additionally, Medco has calculated the estimated operating income for the second
quarter and six months of 2005 based on the best information available for the pre-acquisition period and the detailed post-acquisition segment results.

Selected Segment Income and Asset Information

Total net revenues and operating income are the
measures used by the chief operating decision maker to assess the performance of each of the Companys operating segments. As described above, the Companys acquisition of Accredo resulted in the establishment of the Specialty Pharmacy
segment, hence the Specialty Pharmacy segment activity commenced with the Accredo acquisition date. The following table presents selected financial information about the Companys reportable segments, including a reconciliation of operating
income to income before provision for income taxes ($ in millions):



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|                                                              |  |     |         |                    |   |         |  |   |         
|------------------------------------------------------------- |  | --- | ------- | ------------------ | - | ------- |  | - | --------
|Quarter Ended July 1, 2006                                    |  | PBM |         | Specialty Pharmacy |   | Total  
|Product net revenues                                          |  | $   | 9,140.3 |                    | $ | 1,318.6 |  | $ | 10,458.9
|Total service revenues                                        |  |     | 115.2   |                    |   | 14.7    |  |   | 129.9   
|                                                              |  |     |         |                    |   |         |  |   |         
|Total net revenues                                            |  |     | 9,255.5 |                    |   | 1,333.3 |  |   | 10,588.8
|Total cost of revenues                                        |  |     | 8,782.7 |                    |   | 1,222.6 |  |   | 10,005.3
|Selling, general and administrative expenses                  |  |     | 187.9   |                    |   | 51.2    |  |   | 239.1   
|Amortization of intangibles                                   |  |     | 45.0    |                    |   | 9.6     |  |   | 54.6    
|                                                              |  |     |         |                    |   |         |  |   |         
|Operating income                                              |  | $   | 239.9   |                    | $ | 49.9    |  | $ | 289.8   
|Reconciling item to income before provision for income taxes: |  |     |         |                    |   |         |  |   |         
|Interest and other (income) expense, net                      |  |     |         |                    |   |         |  |   | 15.3    
|                                                              |  |     |         |                    |   |         |  |   |         
|Income before provision for income taxes                      |  |     |         |                    |   |         |  | $ | 274.5   
|                                                              |  |     |         |                    |   |         |  |   |         
|Capital expenditures                                          |  | $   | 22.2    |                    | $ | 6.4     |  | $ | 28.6    



|                                                              |  |     |          |                    |   |         |  |   |         
|------------------------------------------------------------- |  | --- | -------- | ------------------ | - | ------- |  | - | --------
|Six Months Ended July 1, 2006                                 |  | PBM |          | Specialty Pharmacy |   | Total  
|Product net revenues                                          |  | $   | 18,267.8 |                    | $ | 2,634.5 |  | $ | 20,902.3
|Total service revenues                                        |  |     | 222.1    |                    |   | 28.0    |  |   | 250.1   
|                                                              |  |     |          |                    |   |         |  |   |         
|Total net revenues                                            |  |     | 18,489.9 |                    |   | 2,662.5 |  |   | 21,152.4
|Total cost of revenues                                        |  |     | 17,579.0 |                    |   | 2,451.6 |  |   | 20,030.6
|Selling, general and administrative expenses                  |  |     | 536.9    |                    |   | 98.1    |  |   | 635.0   
|Amortization of intangibles                                   |  |     | 90.0     |                    |   | 19.3    |  |   | 109.3   
|                                                              |  |     |          |                    |   |         |  |   |         
|Operating income                                              |  | $   | 284.0    |                    | $ | 93.5    |  | $ | 377.5   
|Reconciling item to income before provision for income taxes: |  |     |          |                    |   |         |  |   |         
|Interest and other (income) expense, net                      |  |     |          |                    |   |         |  |   | 28.8    
|                                                              |  |     |          |                    |   |         |  |   |         
|Income before provision for income taxes                      |  |     |          |                    |   |         |  | $ | 348.7   
|                                                              |  |     |          |                    |   |         |  |   |         
|Capital expenditures                                          |  | $   | 43.4     |                    | $ | 12.9    |  | $ | 56.3    



|                          |  |     |          |                    |   |         |  |   |         
|------------------------- |  | --- | -------- | ------------------ | - | ------- |  | - | --------
|As of July 1, 2006        |  | PBM |          | Specialty Pharmacy |   | Total  
|Total identifiable assets |  | $   | 11,147.5 |                    | $ | 2,205.5 |  | $ | 13,353.0



|                          |  |     |          |                    |   |         |  |   |         
|------------------------- |  | --- | -------- | ------------------ | - | ------- |  | - | --------
|As of December 31, 2005   |  | PBM |          | Specialty Pharmacy |   | Total  
|Total identifiable assets |  | $   | 11,526.0 |                    | $ | 2,177.0 |  | $ | 13,703.0

The Specialty Pharmacy segment includes product net revenue for the seasonal drug, Synagis, of
$6.3 million and $74.1 million for the second quarter and six months of 2006, respectively. Medcos operating results for the second quarter and six months of 2006, excluding the estimated effect of the Accredo acquisition, would have reflected
$10,156.8 million and $20,245.1 million in net revenues, respectively, and $261.2 million and $323.7 million in operating income, respectively. For the second quarter and six months of 2005, the Company estimates that net revenues for the
pre-existing Medco specialty pharmacy operations were approximately $0.7 billion and $1.4 billion, respectively, with operating income estimated at $14 million and $25 million, respectively.

11. COMMITMENTS AND CONTINGENCIES

Various lawsuits,
claims, proceedings and investigations are pending against the Company and certain of its subsidiaries. The most significant of these matters are described below. There can be no assurance that there will not be an increase in the scope of these
matters or that any future lawsuits, claims, proceedings or investigations will not be material. In accordance with SFAS No. 5,Accounting for Contingencies, the Company records accruals for such contingencies when it is
probable that a liability will be incurred and the amount of loss can be reasonably estimated.



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Government Proceedings and Requests for Information. On December 22, 2003, the Board
of the State Teachers Retirement System of Ohio (STRS), a former client, filed a complaint against Merck and the Company in the Ohio Court of Common Pleas, alleging, among other things, violations of the contract between STRS and Medco
and other state law claims. This case was tried before a jury in November and December 2005. The jury did not reach a verdict on whether Medco violated its contract with STRS. It rendered a verdict in favor of STRS on two counts for a total of $7.8
million. It rendered a verdict in favor of Merck on a claim of tortious interference with the contract. Medco has accrued for the amount of the jury verdict and plans to appeal the unfavorable components of the verdict.

On April 13, 2005, the Company received a request for information from the Attorney General of the State of Texas in connection with the Attorney
Generals investigation of whether PBMs are enforcing or relying on certain plan limitations to reject, deny or reduce payment on requests for Medicaid reimbursement made to PBMs by or on behalf of a state Medicaid agency.

The Company continues to believe that its business practices comply in all material respects with applicable laws and regulations and it will continue to
vigorously defend itself in these actions. See Note 3, Legal Settlements Charge, for further information on government proceedings.

ERISA and Similar Litigation. In December 1997, a lawsuit captionedGruer v. Merck-Medco Managed Care, L.L.C. was filed in the U.S. District Court for the Southern District of New York against Merck and the Company. The suit
alleges that the Company should be treated as a fiduciary under the provisions of ERISA (the Employee Retirement Income Security Act of 1974) and that the Company has breached fiduciary obligations under ERISA in a variety of ways. After
theGruer case was filed, a number of other cases were filed in the same court asserting similar claims. In December 2002, Merck and the Company agreed to settle theGruer series of lawsuits on a class action basis for $42.5 million,
and agreed to certain business practice changes, to avoid the significant cost and distraction of protracted litigation. The release of claims under the settlement applies to plans for which the Company has administered a pharmacy benefit at any
time between December 17, 1994 and the date of final approval. It does not involve the release of any potential antitrust claims. The plaintiff in one of the cases discussed above,Blumenthal v. Merck-Medco Managed Care, L.L.C., et al.,
has elected to opt out of the settlement. In May 2004, the district court granted final approval to the settlement and a Final Judgment was entered in June 2004. The settlement becomes final only after all appeals have been exhausted. Two appeals
were filed. On December 8, 2005, the U.S. Court of Appeals for the Second Circuit vacated the district courts Final Judgment and ordered the district court to consider whether the plaintiffs representing the settlement class had legal
standing to assert their claims. The Court of Appeals declined to address other issues raised in the appeals until after the district court ruled on the standing issue.

Similar ERISA-based complaints against the Company and Merck were filed in eight additional actions by ERISA plan participants, purportedly on behalf of their plans, and, in some of the actions, similarly situated
self-funded plans. The ERISA plans themselves, which were not parties to these lawsuits, had elected to participate in the settlement discussed above and, accordingly, seven of these actions had been dismissed pursuant to the Final Judgment
discussed above. The plaintiff in another action,Betty Jo Jones v. Merck-Medco Managed Care, L.L.C., et al., has filed a Second Amended Complaint, in which she seeks to represent a class of all participants and beneficiaries of ERISA plans
that required such participants to pay a percentage co-payment on prescription drugs. The effect of the release under the settlement discussed above on theJones action has not yet been litigated. In addition to these cases, a proposed class
action complaint against Merck and the Company has been filed by trustees of another benefit plan, the United Food and Commercial Workers Local Union No. 1529 and Employers Health and Welfare Plan Trust, in the U.S. District Court for the
Northern District of California. This plan has elected to opt out of the settlement. TheUnited Food action has been transferred and consolidated in the U.S. District Court for the Southern District of New York by order of the Judicial Panel
on Multidistrict Litigation.



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In April 2003, a lawsuit captionedPeabody Energy Corporation v. Medco Health Solutions, Inc., et
al. was filed in the U.S. District Court for the Eastern District of Missouri. The complaint, filed by one of the Companys former clients, relies on allegations similar to those in the ERISA cases discussed above, in addition to
allegations relating specifically to Peabody, which has elected to opt out of the settlement described above. In December 2003, Peabody filed a similar action against Merck in the U.S. District Court for the Eastern District of Missouri. Both of
these actions have been transferred to the U.S. District Court for the Southern District of New York to be consolidated with the ERISA cases pending against Merck and the Company in that court.

In March 2003, a lawsuit captionedAmerican Federation of State, County and Municipal Employees (AFSCME) v. AdvancePCS et al. based on allegations
similar to those in the ERISA cases discussed above, was filed against the Company and other major PBMs in the Superior Court of California. The theory of liability in this action is based on a California law prohibiting unfair business practices.
The plaintiff, which purports to sue on behalf of itself, California non-ERISA health plans, and all individual participants in such plans, seeks injunctive relief and disgorgement of revenues that were allegedly improperly received by the Company.
In March 2005, the court in theAFSCME case dismissed that action with prejudice. That ruling is being appealed.

In September 2002,
a lawsuit captionedMiles v. Merck-Medco Managed Care, L.L.C., based on allegations similar to those in the ERISA cases discussed above, was filed against Merck and the Company in the Superior Court of California. The theory of liability in
this action is based on a California law prohibiting unfair business practices. TheMiles case was removed to the U.S. District Court for the Southern District of California and was later transferred to the U.S. District Court for the
Southern District of New York and consolidated with the ERISA cases pending against Merck and the Company in that court.

In October 2002,
the Company filed a declaratory judgment action, captionedMedco Health Solutions, Inc. v. West Virginia Public Employees Insurance Agency, in the Circuit Court of Kanawha County, West Virginia, asserting the Companys right to retain
certain cost savings in accordance with the Companys written agreement with the West Virginia Public Employees Insurance Agency, or PEIA. In November 2002, the State of West Virginia and PEIA filed a separate lawsuit against Merck and the
Company in the same court. This action was premised on several state law theories, including violations of the West Virginia Consumer Credit and Protection Act, conspiracy, tortious interference, unjust enrichment, accounting, fraud and breach of
contract. PEIA later filed a counter claim in the declaratory judgment action and the State of West Virginia, which was joined as a party, filed a third-party complaint against the Company and Merck. This case continues with a variety of motions and
rulings by the court, including dismissal of some of PEIAs and the States claims. Fact discovery is proceeding.

In July 2003,
a lawsuit captionedGroup Hospitalization and Medical Services v. Merck-Medco Managed Care, L.L.C., et al. was filed against the Company in the Superior Court of New Jersey. In this action, the Companys former client, CareFirst Blue
Cross Blue Shield, asserts claims for violation of fiduciary duty under state law; breach of contract; negligent misrepresentation; unjust enrichment; violations of certain District of Columbia laws regarding consumer protection and restraint of
trade; and violation of a New Jersey law prohibiting racketeering. The plaintiff demands compensatory damages, punitive damages, treble damages for certain claims, and restitution.

The Company does not believe that it is a fiduciary, and believes that its business practices comply with all applicable laws and regulations. The
Company has denied all allegations of wrongdoing and is vigorously defending all of the lawsuits described above, although the Company has proposed to settle some of them as described above.

Antitrust and Related Litigation. In August, 2003, a lawsuit captionedBrady Enterprises, Inc., et al. v. Medco Health Solutions, Inc., et
al. was filed in the U.S. District Court for the Eastern District of Pennsylvania against Merck and the Company. The plaintiffs, who seek to represent a national class of retail pharmacies that have contracted with the Company, allege that the
Company has conspired with, acted as the common agent for, and used the combined bargaining power of plan sponsors to restrain competition in the market for the dispensing and sale of prescription drugs. The plaintiffs allege that, through the
alleged conspiracy, the Company has engaged in various forms of anticompetitive conduct, including, among other things, setting artificially low reimbursement rates to such pharmacies. The plaintiffs assert claims for violation of the Sherman Act
and seek treble damages and injunctive relief. The plaintiffs motion for



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class certification is currently pending. In April 2006, theBrady plaintiffs filed a petition to transfer and
consolidate various antitrust actions against PBMs, including North Jackson, Brady, andMikes Medical Center before a single federal judge. The motion is pending.

In October 2003, a lawsuit captionedNorth Jackson Pharmacy, Inc., et al. v. Medco Health Solutions, Inc., et al. was filed in the U.S. District
Court for the Northern District of Alabama against Merck and the Company. In their Second Amended Complaint, the plaintiffs allege that Merck and the Company have engaged in price fixing and other unlawful concerted actions with others, including
other PBMs, to restrain trade in the dispensing and sale of prescription drugs to customers of retail pharmacies who participate in programs or plans that pay for all or part of the drugs dispensed, and have conspired with, acted as the common agent
for, and used the combined bargaining power of plan sponsors to restrain competition in the market for the dispensing and sale of prescription drugs. The plaintiffs allege that, through such concerted action, Merck and the Company have engaged in
various forms of anticompetitive conduct, including, among other things, setting reimbursement rates to such pharmacies at unreasonably low levels. The plaintiffs assert claims for violation of the Sherman Act and seek treble damages and injunctive
relief. The plaintiffs motion for class certification has been granted.

In January 2004, a lawsuit captionedAlameda Drug
Company, Inc., et al. v. Medco Health Solutions, Inc., et al. was filed against the Company and Merck in the Superior Court of California. The plaintiffs, which seek to represent a class of all California pharmacies that have contracted with the
Company and that have indirectly purchased prescription drugs from Merck, allege, among other things, that since the expiration of a 1995 consent injunction entered by the U.S. District Court for the Northern District of California, if not earlier,
the Company has failed to maintain an Open Formulary (as defined in the consent injunction), and that the Company and Merck had failed to prevent nonpublic information received from competitors of Merck and the Company from being disclosed to each
other. The complaint also copies verbatim many of the allegations in the Amended Complaint filed by the U.S. Attorney for the Eastern District of Pennsylvania, discussed above. The plaintiffs further allege that, as a result of these alleged
practices, the Company has been able to increase its market share and artificially reduce the level of reimbursement to the retail pharmacy class members, and that the prices of prescription drugs from Merck and other pharmaceutical manufacturers
that do business with the Company have been fixed and raised above competitive levels. The plaintiffs assert claims for violation of California antitrust law and California law prohibiting unfair business practices. The plaintiffs demand, among
other things, compensatory damages, restitution, disgorgement of unlawfully obtained profits, and injunctive relief. In an Amended Complaint, the plaintiff further alleges, among other things, that the Company acts as a purchasing agent for its plan
sponsor customers, resulting in a system that serves to suppress competition.

In December 2005, a lawsuit captionedMikes Medical
Center Pharmacy, et al. v. Medco Health Solutions, Inc., et al. was filed against the Company and Merck in the U.S. District Court for the Northern District of California. The plaintiffs seek to represent a class of all pharmacies and
pharmacists that have contracted with the Company and California pharmacies that have indirectly purchased prescription drugs from Merck and make factual allegations similar to those in theAlameda Drug Company action discussed above. The
plaintiffs assert claims for violation of the Sherman Act, California antitrust law, and California law prohibiting unfair business practices. The plaintiffs demand, among other things, treble damages, restitution, disgorgement of unlawfully
obtained profits, and injunctive relief.

In February 2006, a lawsuit captionedChelsea Family Pharmacy, PLLC v. Medco Health Solutions,
Inc., was filed in the U.S. District Court for the Northern District of Oklahoma. The plaintiff, which seeks to represent a class of Oklahoma pharmacies that have contracted with the Company within the last three years, alleges, among other
things, that the Company has contracted with retail pharmacies at rates that are less than the prevailing rates paid by ordinary consumers and has denied consumers their choice of pharmacy by placing restrictions on the plaintiffs ability to
dispense pharmaceutical goods and services. The plaintiff asserts that the Companys activities violate the Oklahoma Third Party Prescription Act, and seeks, among other things, compensatory damages, attorneys fees, and injunctive relief.
On April 12, 2006, the Company filed a motion to dismiss the complaint.

The Company denies all allegations of wrongdoing and intends
to vigorously defend these cases.

Contract Litigation. In September 2004, the Companys former client, Horizon Blue Cross Blue
Shield of New Jersey (Horizon), filed an action in the Superior Court of New Jersey, Bergen County, alleging, among other things, that the Company breached its contract with Horizon in various respects. The Company has denied
Horizons allegations and is vigorously defending itself in this action. The Company has filed counterclaims against Horizon.



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In February 2005, a lawsuit captionedCAM Enterprises, Inc. v. Merck & Co., Inc. and Medco
Health Solutions, Inc., et al. was filed in the Circuit Court of Jefferson County, Alabama. The plaintiff, which seeks to represent a national class of independent retail pharmacies that have contracted with the Company under a formula that
included the Average Wholesale Price (AWP) as a method of reimbursement, alleges, among other things, that the Company has refused to reimburse the plaintiff using the correct AWP and has deceptively misled the plaintiff regarding the
nature of the Companys AWP reimbursement methodology for brand-name prescriptions. The plaintiff asserts claims for misrepresentation/suppression, breach of contract, unjust enrichment, and conspiracy. The plaintiff seeks compensatory damages,
punitive damages, imposition of a constructive trust, and injunctive relief. Upon motion by the plaintiff, the Court dismissed the complaint without prejudice in May 2006.

The Company denies all allegations of wrongdoing and intends to vigorously defend these cases.

Accredo. Accredo and an 80%-owned subsidiary of Accredo (the Joint Venture) provided contract pharmacy and related billing services to
a third-party pharmacy (the Local Pharmacy) that is the subject of a certain state agency audit. On January 20, 2006, the agency issued a preliminary assessment of its findings, which included allegations of overbilling and false
claims. Since that time, Accredo has been involved in a dialogue with the agency and is in the process of providing additional information and documents for the agency to consider in connection with its ultimate findings. Although the Joint
Venture is not currently involved with the audit, the contract pharmacy relationship is implicated, and the Local Pharmacy is seeking indemnification from the Joint Venture for any payments that the Local Pharmacy is required to pay to the
state agency.

Accredo, a former Accredo officer and a former Accredo officer who is a current Medco director are defendants in a class
action lawsuit filed in the United States District Court for the Western District of Tennessee. Certain former officers and former directors of Accredo are defendants in a related stockholders derivative suit filed in the Circuit Court of Shelby
County, Tennessee. Plaintiffs in the class action lawsuit allege that the actions and omissions of the current Medco director and former Accredo officer constitute violations of various sections of the Securities Exchange Act of 1934. Plaintiffs in
the derivative suit allege that the former officers and former directors have breached their fiduciary duty to Accredo.

Other. The
Company entered into an indemnification and insurance matters agreement with Merck in connection with the spin-off. To the extent that the Company is required to indemnify Merck for liabilities arising out of a lawsuit, an adverse outcome with
respect to Merck could result in the Company making indemnification payments in amounts that could be material, in addition to any damages that the Company is required to pay.

In 2003, the State of Maine enacted a statute entitled the Unfair Prescription Drug Practices Act (the MUPDPA), which imposed fiduciary
obligations upon pharmacy benefit managers. In September 2003, the PBM trade association, Pharmaceutical Care Management Association (PCMA), of which the Company is a member, filed an action in the U.S. District Court for the District of
Maine, challenging the validity of the MUPDPA on various grounds. In April 2005, the district court granted summary judgment in favor of the Maine Attorney General ruling, among other things, that ERISA did not pre-empt the MUPDPA, and allowing the
law to take effect. PCMA appealed the ruling to the United States Court of Appeals for the First Circuit and, on November 8, 2005, the Court of Appeals affirmed the district courts ruling. PCMA filed a petition for certiorari to the
United States Supreme Court and in June 2006, the Supreme Court denied PCMAs petition. As a result, implementation of the MUPDPA could potentially have an adverse effect on the Companys ability to conduct its business on commercially
reasonable terms in Maine.

The Company is also involved in various claims and legal proceedings of a nature considered normal to the
Companys business, principally employment and commercial matters.

The various lawsuits described above arise in an environment of
rising costs for prescription drugs and heightened public scrutiny of the pharmaceutical industry, including the PBM and specialty pharmacy industries and their practices. This public scrutiny is characterized by extensive press coverage, ongoing
attention in various state and federal



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government branches, and investigations and public statements by government officials. These factors contribute to the
uncertainty regarding the possible course and outcome of the proceedings discussed above. An adverse outcome in any one of the lawsuits described above could result in material fines and damages; changes to the Companys business practices;
loss of (or litigation with) clients; and other penalties. Moreover, an adverse outcome in any one of these lawsuits could have a material adverse effect on the Companys business, financial condition, liquidity and operating results. The
Company is vigorously defending each of the pending lawsuits described above.

Although the range of loss for many of the unresolved
matters above is not subject to reasonable estimation and it is not feasible to predict or determine the final outcome of any of the above proceedings with certainty, the Companys management does not believe that they will have a material
adverse effect on the Companys financial position or liquidity, either individually or in the aggregate. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially adversely
affected by the ultimate resolutions of one or more of these matters, or changes in the Companys assumptions or its strategies related to these proceedings. The Company believes that most of the claims made in these legal proceedings and
government investigations would not likely be covered by insurance.

Purchase Obligations. The Company has entered into agreements
with certain biopharmaceutical manufacturers and a brand-name pharmaceutical manufacturer that contain minimum purchasing volume commitments. As of July 1, 2006, these purchase obligations amounted to $219.3 million for the remainder of 2006
and $69.1 million for 2007, the majority of which is associated with Accredo.

12. RECENT ACCOUNTING PRONOUNCEMENT

In July 2006, the FASB released FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes  an Interpretation of FASB
Statement 109 (FIN 48 or the Interpretation), which clarifies the accounting for uncertainty in income taxes recognized in companies financial statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The evaluation of a
tax position in accordance with FIN 48 is a two-step process. The first step is recognition whereby companies must determine whether it is more likely than not that a tax position will be sustained upon examination. The second step is measurement
whereby a tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The Interpretation also provides guidance on derecognition of recognized tax
benefits, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. Earlier adoption is only permitted at the beginning of a
companys fiscal year, provided that interim financial statements for that fiscal year have not yet been issued. As a result, the Company expects to adopt the new requirements in the first quarter of 2007 and is currently evaluating
the impact that such adoption will have on its consolidated financial statements.



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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

This
Quarterly Report on Form 10-Q contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that may cause results to differ
materially from those set forth in the statements. No forward-looking statement can be guaranteed, and actual results may differ materially from those projected. We undertake no obligation to publicly update any forward-looking statement, whether as
a result of new information, future events or otherwise. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about the business and future financial results of
the pharmacy benefit management (PBM) and specialty pharmacy industries, and other legal, regulatory and economic developments. We use words such as anticipates, believes, plans, expects,
future, intends, may, will, should, could, estimates, predicts, potential, continue and similar expressions to identify these
forward-looking statements. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors. These factors include:



| |  |  | Risks associated with our acquisition of Accredo Health, Incorporated (Accredo), including the risk that we may fail to realize benefits such as the anticipated
synergies associated with cost savings and sales opportunities, and an increase in credit risk resulting from the payment streams associated with specialty pharmacy accounts receivable;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Governmental investigations, and governmental, qui tam and other liability claims asserted against us, and any associated mandatory changes to our business practices;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Competition in the PBM and specialty pharmacy industries and in the broader healthcare industry;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | Pressure on discounts and rebates from pharmaceutical manufacturers and margins in the PBM industry;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | Our ability to obtain new clients and the possible termination of, or unfavorable modification to, contracts with key clients;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | Risks and uncertainties regarding the implementation and ongoing execution of the Medicare Part D prescription drug benefit;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | Possible regulatory changes affecting pricing, rebates, discounts or other practices of pharmaceutical manufacturers;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | Risks associated with the secure storage and transmission of personal health information and other confidential data;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | Developments in the healthcare industry, including the effect of increases in overall healthcare costs, changes in drug utilization and cost patterns and the introduction of new
brand-name and/or generic drugs;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | New or existing governmental regulations or legislation and changes in, or the failure to comply with, governmental regulations or legislation;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The possibility of a material non-cash charge to income if our recorded intangible assets are impaired or require accelerated amortization from a change in the remaining useful
life;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Risks associated with our indebtedness and debt service obligations; and
| | - |  | ------------------------------------------------------------------------



| |  |  | General economic and business conditions.
| | - |  | -----------------------------------------

The foregoing
list of factors is not exhaustive. You should carefully consider the foregoing factors and the other uncertainties and potential events described in our Annual Report on Form 10-K and other documents filed from time to time with the Securities and
Exchange Commission (SEC).

Overview

We are one of the nations largest pharmacy benefit managers, and we provide sophisticated traditional and specialty pharmacy benefit programs and services for our clients, members of client-funded benefit plans,
and individual patients, including those served by the Medicare Part D Prescription Drug Program. Our business model requires collaboration with retail pharmacies, physicians, Medicare, and particularly in specialty pharmacy, Medicaid and other
payors such as insurers. Our programs and services help control the cost and enhance the quality of the prescription drug benefit. We accomplish this by providing PBM services through our national networks of retail pharmacies and our own mail-order
pharmacies, as well as through our specialty pharmacy operation, which became the nations largest specialty pharmacy



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based on revenues with the acquisition of Accredo on August 18, 2005 (the Accredo acquisition). When the
term mail order is used, we mean Medcos traditional pharmacy mail-order operations, and subsequent to the Accredo acquisition, we mean Medcos traditional pharmacy mail-order operations, as well as Accredos specialty
pharmacy operations. We have a large number of clients in each of the major industry categories, including Blue Cross/Blue Shield plans; managed care organizations; insurance carriers; third-party benefit plan administrators; employers; federal,
state and local government agencies; and union-sponsored benefit plans. Our clients are generally entities that provide a pharmacy benefit to their underlying membership, such as members of their plan or their employees, as examples.

We operate in a competitive market as clients and other payors seek to control the growth in the cost of providing prescription drug benefits.
Prescription drug costs have risen considerably over the past several years, largely as a result of inflation on brand-name drugs and increases in the number of prescriptions utilized, including the introduction of new products from brand-name
pharmaceutical and biopharmaceutical manufacturers. These prescription drug cost increases, known as drug trend, have garnered significant attention throughout the United States as they contribute to the rise in the national cost of healthcare. Our
business model is designed to reduce this rate of drug trend for our PBM clients. Specialty drug spending is growing at approximately 20% each year and provides us with further opportunity to reduce overall drug trend for our clients and specialty
payors.

The complicated environment in which we operate presents us with opportunities, challenges and risks. Our clients and membership
are paramount to our success; the retention and winning of new clients and members poses the greatest opportunity, and the loss thereof represents an ongoing risk. The preservation of our relationships with pharmaceutical manufacturers,
biopharmaceutical manufacturers and retail pharmacies is very important to the execution of our business strategies. Our future success will hinge on our ability to drive generic utilization from the nearly $45 billion in expected patent expirations
through 2010, our ability to continue to provide innovative and competitive clinical and other services to clients and patients, including our active participation in the Medicare Part D benefit and the rapidly growing specialty pharmacy industry.

On August 18, 2005, we acquired all of the outstanding common stock of Accredo, as described in Note 3, Acquisitions of
Businesses, to our audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

Key Indicators Reviewed by Management

Management reviews the following indicators in analyzing our consolidated financial
performance: net revenues, with a particular focus on mail-order revenue; adjusted prescription volume; generic dispensing rate; gross margin percentage; diluted earnings per share; Specialty Pharmacy segment operating income; Earnings before
Interest Income/Expense, Taxes, Depreciation, and Amortization (EBITDA); and EBITDA per adjusted prescription. See EBITDA further below for a definition and calculation of EBITDA and EBITDA per adjusted prescription. We
believe these measures highlight key business trends and are important in evaluating our overall performance. These measures are also reflective of the success of our execution of strategic objectives.

Financial Performance Summary for the Quarter and Six Months Ended July 1, 2006

In the second quarter of 2006, our net income was $170.9 million and diluted earnings per share were $0.56. In the six months of 2006, our net income was $215.7 million and diluted earnings per share were $0.71. These
results reflect a one-time pre-tax legal settlements charge of $162.6 million recorded in the first quarter, with a $99.9 million after-tax effect or $0.32 per diluted share. The one-time legal settlements charge reflected an agreement in principle
on financial terms with the U.S. Attorneys Office for the Eastern District of Pennsylvania to settle three previously disclosed legal matters. Final settlement is conditioned on reaching agreement on certain non-monetary aspects of the
proposed settlements, which are under negotiation and subject to final approval by the participating parties.

The $170.9 million in second
quarter net income represents a 24.4% increase over the second quarter of 2005. Diluted earnings per share of $0.56 in the second quarter of 2006 increased 16.7% over 2005, including an increase of approximately 19 million in diluted shares
outstanding. The $215.7 million in 2006 year-to-date net income represents a 19.7% decline from 2005. Excluding the one-time legal settlements charge, our net income increased 17.5% to $315.6 million for the six months of 2006, and diluted earnings
per share of $1.03 increased 8.4% including an approximate 24 million share increase in diluted shares outstanding.



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The diluted weighted average shares outstanding were 302.9 million and 305.8 million for the
second quarter and six months of 2006, respectively, and 283.8 million and 281.9 million for the second quarter and six months of 2005, respectively, representing increases of 6.7% for the quarter and 8.5% for the six months. These
increases result from shares issued in connection with the Accredo acquisition and the effect of stock options, partially offset by the purchase of 21.6 million shares of stock in connection with our share repurchase program since its inception
in the third quarter of 2005, of which approximately 10.4 million shares and approximately 13.9 million shares were purchased during the second quarter and six months of 2006, respectively.

As a result of the adoption of the Statement of Financial Accounting Standards No. 123R, Share-Based Payment (SFAS 123R) in
the first quarter of 2006, we have recorded stock option expenses in 2006; stock option expenses are not recorded in the 2005 results. Total stock option expense reflected in net income before provision for income taxes amounted to $14.8 million in
the second quarter of 2006 and $35.7 million for the six months of 2006, compared to a pro forma equivalent of $26.9 million in the second quarter of 2005 and $53.6 million for the six months of 2005. The majority of the stock option expenses are
recorded in selling, general and administrative (SG&A) expenses.

Net revenues increased 17.7% to $10,589 million in the
second quarter of 2006, and 19.2% to $21,152 million in the six months of 2006, compared to the same periods in the prior year. These increases reflect higher prices charged by pharmaceutical manufacturers including the effect of new and higher-cost
brand-name drugs, higher volumes including Accredos results and new business, partially offset by higher generic dispensing rates and higher levels of rebate sharing with clients.

Total prescription volume, adjusted for the difference in days supply between mail and retail, increased 3.5% to 179.6 million for the second
quarter of 2006, and 4.9% to 363.1 million for the six months of 2006, primarily as a result of higher mail and retail volumes from new clients. The mail-order penetration rate on an adjusted basis increased to 36.7% for the second quarter of
2006 compared to 36.1% for the second quarter of 2005 reflecting the recognition by clients and members of the value and convenience of Medcos mail service plan design offerings. For the six months, the mail-order penetration rate on an
adjusted basis was consistent in both years at 36.2%.

Our overall generic dispensing rate increased to 53.9% in the second quarter and
53.8% in the six months of 2006, compared to 51.0% in the second quarter and 50.8% in the six months of 2005, as a result of drugs that have lost patent protection at the end of 2005 and additional patent expirations in the first half of 2006. The
higher generic dispensing rates, which contribute to lower costs for clients and members, resulted in a reduction of approximately $300 million in net revenues for the second quarter of 2006 and approximately $600 million for the six months of 2006.

Earned brand-name pharmaceutical rebates of $875 million for the second quarter of 2006 and $1,732 million for the six months of 2006
increased 12.3% and 10.2%, respectively, as a result of improved formulary management and patient compliance, and favorable pharmaceutical manufacturer rebate contract revisions. The percentage of rebates retained by Medco decreased to approximately
21.2% in the second quarter and 21.9% for the six months of 2006, compared to approximately 28.1% in the second quarter and 28.9% in the six months of 2005. These percentage decreases primarily relate to a higher representation of clients
participating in pricing arrangements whereby a greater portion of rebates are shared in exchange for other elements of pricing, including higher claims processing administrative fees, which are reflected in service revenues. Our service revenues
increased 41.2% to $129.9 million in the second quarter of 2006, and increased 39.4% to $250.1 million for the six months of 2006.

The
overall gross margin was 5.5% in the second quarter and 5.3% for the six months of 2006, compared to 5.1% for both the second quarter and six months of 2005, driven by our increased generic dispensing rate, increased mail-order penetration, higher
service margins and higher gross margins experienced in our specialty pharmacy business.

SG&A expenses increased 36.3% to $239.1
million when compared to the second quarter of 2005, and amounted to $635.0 million for the six months of 2006, which includes the $162.6 million one-time pre-tax legal settlements charge recorded in the first quarter of 2006. Excluding the one-time
charge from the six months of 2006, SG&A expenses increased 34.9% to $472.4 million when compared to the six months of 2005. The increases for the second quarter and six months primarily result from the inclusion of Accredo expenses and stock
option expenses recorded in 2006.



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Amortization of intangible assets for the second quarter and the six months of 2006, increased $9.6
million and $19.3 million, respectively, when compared to the second quarter and six months of 2005, principally associated with the intangible assets acquired in the Accredo acquisition. Interest and other (income) expense, net, increased $8.9
million for the second quarter and $12.2 million for the six months of 2006, compared to the same periods in 2005. The variances primarily reflect higher interest expense from elevated debt levels related to the Accredo acquisition and higher
interest rates on floating rate debt.

Our effective tax rate (defined as the percentage relationship of provision for income taxes to
income before provision for income taxes) was 37.7% in the second quarter of 2006 and 38.1% for the six months of 2006, compared to 39.9% in the second quarter of 2005 and 39.8% for the six months of 2005. The reduction in the 2006 tax rates
reflects the impact of changes in our marginal state income tax rate, the favorable resolution of income taxes payable provided for prior to the spin-off date from Merck, and the closure of a state income tax audit.

Key Financial Statement Components

Consolidated Statements of Income. Our net revenues are comprised primarily of product net revenues and are derived from the sale of prescription drugs through our networks of contractually affiliated retail pharmacies and
through our mail-order pharmacies, and are recorded net of certain discounts, rebates and guarantees payable to clients and members. The majority of our product net revenues are derived on a fee-for-service basis. Specialty pharmacy product net
revenues represent revenues from the sale of primarily biopharmaceutical drugs and are reported at the net amount billed to third-party payors and patients.

Our product net revenues also include premiums associated with our Medicare Part D Prescription Drug Program (PDP) product offering. This product involves prescription dispensing for members covered under
the Center for Medicare & Medicaid Services (CMS)-sponsored Medicare Part D benefit. Commencing January 1, 2006, we began serving as a plan sponsor offering Medicare Part D prescription drug insurance coverage pursuant to
two contracts by and between CMS and two of our insurance company subsidiaries. We provide a standard drug benefit that represents either (i) the minimum level of benefits mandated by Congress, or (ii) enhanced coverage, on behalf of
certain clients, which represents benefits in excess of the standard drug benefit in exchange for additional premiums.

The PDP premiums
are determined based on our annual bid and related contractual arrangements with CMS. The PDP premiums are primarily comprised of amounts received from CMS as part of a direct subsidy and an additional subsidy from CMS for low income member
premiums, as well as premium payments by members. These premiums are recognized ratably to product net revenues over the period in which members are entitled to receive benefits. Premiums received in advance of the applicable benefit period are
recorded in accrued expenses and other current liabilities on the consolidated balance sheets. There is a possibility that the annual costs of drugs may be higher or lower than premium revenues. As a result, CMS provides a risk corridor adjustment
for the standard drug benefit that compares our actual annual drug costs incurred to the targeted premiums in our CMS-approved bid. Based on specific collars in the risk corridor, we will receive from CMS additional premium amounts or be required to
refund to CMS previously received premium amounts. We calculate the risk corridor adjustment on a quarterly basis based on drug cost experience to date and record an adjustment to product net revenues with a corresponding account receivable or
payable to CMS reflected on the consolidated balance sheets. In the second quarter of 2006, premium revenues for our PDP product were $136 million, or approximately 1% of total net revenues of $10.6 billion. For the six months of 2006, premium
revenues were $266 million, or approximately 1% of total net revenues of $21.2 billion.

In addition to premiums, there are certain
co-payments and deductibles (the cost share) due by members based on prescription orders by those members, some of which are subsidized by CMS in cases of low income membership. The subsidy amounts received in advance are recorded in
accrued expenses and other current liabilities on the consolidated balance sheets. At the end of the contract term and based on actual annual drug costs incurred, subsidies are reconciled with actual costs and residual subsidy advance receipts are
payable to CMS. The cost share is treated consistently as other co-payments derived from providing PBM services, as a component of product net revenues in the consolidated statements of income where the requirements of Emerging Issues Task Force
(EITF) No. 99-19, Reporting Gross Revenue as a Principal vs. Net as an Agent, are met. For further details, see our critical accounting policies included in



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Use of Estimates and Critical Accounting Policies and Estimates and Note 2, Summary of
Significant Accounting Policies, to our consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

Our agreements with CMS, as well as applicable Medicare Part D regulations and federal and state laws, require us to, among other obligations: (i) comply with certain disclosure, filing, record-keeping and
marketing rules; (ii) operate quality assurance, drug utilization management and medication therapy management programs; (iii) support e-prescribing initiatives; (iv) implement grievance, appeals and formulary exception processes;
(v) comply with payment protocols, which include the return of overpayments to CMS and, in certain circumstances, coordination with state pharmacy assistance programs; (vi) use approved networks and formularies, and provide access to such
networks to any willing pharmacy; (vii) provide emergency out-of-network coverage; and (viii) adopt a comprehensive Medicare and Fraud, Waste and Abuse compliance program. Contractual or regulatory non-compliance may entail significant
sanctions and monetary penalties.

Service revenues consist principally of administrative fees and clinical program fees earned from
clients and other non-product related revenues, sales of prescription services and data to pharmaceutical manufacturers and other parties, and performance-oriented fees paid by specialty pharmacy manufacturers. For further details see our critical
accounting policies included in Use of Estimates and Critical Accounting Policies and Estimates and Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2005.

Cost of revenues is comprised primarily of cost of product net revenues and is
principally attributable to the dispensing of prescription drugs. Cost of product net revenues for prescriptions dispensed through our network of retail pharmacies includes the contractual cost of drugs dispensed by, and professional fees paid to,
retail pharmacies in the networks. Our cost of product net revenues relating to drugs dispensed by our mail-order pharmacies consists primarily of the cost of inventory dispensed and our costs incurred to process and dispense the prescriptions,
including the associated fixed asset depreciation. The operating costs of our call center pharmacies are also included in cost of product net revenues. In addition, cost of product net revenues includes a credit for rebates earned from brand-name
pharmaceutical manufacturers whose drugs are included in our formularies. These rebates generally take the form of formulary rebates, which are earned based on the volume of a specific drug dispensed, or market share rebates, which are earned based
on the achievement of contractually specified market share levels.

Our cost of product net revenues also includes the cost of drugs
dispensed in our mail-order pharmacies or retail network for members covered under our Medicare Part D PDP product offering and are recorded at cost as incurred. We receive a catastrophic reinsurance subsidy from CMS for approximately 80% of costs
incurred by individual members in excess of the individual annual out-of-pocket maximum of $3,600 (the threshold applicable for 2006). The subsidy is reflected as an offsetting credit in cost of product net revenues to the extent that catastrophic
costs are incurred. Catastrophic reinsurance subsidy amounts received in advance are recorded in accrued expenses and other current liabilities on the consolidated balance sheets. At the end of the contract term and based on actual annual drug costs
incurred, residual subsidy advance receipts are payable to CMS.

Cost of service revenues consist principally of labor and operating costs
for delivery of services provided, costs associated with member communication materials, and certain information acquisition costs.

Selling, general and administrative expenses reflect the costs of operations dedicated to overall corporate governance and general management, generating new sales, maintaining existing client relationships, managing clinical programs,
enhancing technology capabilities, directing pharmacy operations, performing reimbursement activities, finance, legal and other staff activities, and may also include the effect of legal settlements.

Interest and other (income) expense, net, primarily includes interest expense on our senior unsecured term loan facility, senior notes, and accounts
receivable financing facility, net of interest rate swap agreements on $200 million of the senior notes, partially offset by interest income generated by overnight deposits and short-term investments in marketable securities.



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Consolidated Balance Sheets. Our key assets include cash and short-term investments,
accounts receivable, inventories, fixed assets, deferred tax assets, goodwill and intangibles. Cash reflects the accumulation of positive cash flows from our operations. Accounts receivable balances primarily include amounts due from brand-name
pharmaceutical manufacturers for earned rebates and other prescription services. The accounts receivable balances also represent amounts due from clients, other payors and patients for prescriptions dispensed from retail pharmacies in our networks
or from our mail-order pharmacies, including fees due to us, net of allowances for doubtful accounts, as well as contractual allowances and any applicable rebate liabilities or payments due to clients under guarantees. When rebates due to be passed
back to clients are greater than the corresponding client accounts receivable balances, the net liability is reclassified to claims and other accounts payable. Our accounts receivable also include premiums receivable, including the risk corridor
adjustment, from CMS for our Medicare Part D PDP product offering and premiums from members. Inventories reflect the cost of prescription products held for dispensing by our mail-order pharmacies and are recorded on a first-in, first-out basis, net
of allowances for losses. Fixed assets include investments in our corporate headquarters, mail-order pharmacies, call center pharmacies, account service offices, and information technology, including capitalized software development. Deferred tax
assets primarily represent temporary differences between the financial statement basis and the tax basis of certain accrued expenses and client rebate pass-back liabilities. Goodwill and intangible assets are comprised primarily of the push-down of
goodwill and intangibles related to our acquisition in 1993 by Merck & Co., Inc. (Merck), goodwill for the excess of the Accredo purchase price over net assets acquired, and intangible assets recorded from our acquisition of
Accredo.

Our primary liabilities include claims and other accounts payable, accrued expenses and other current liabilities, debt and
deferred tax liabilities. Claims and other accounts payable primarily consist of amounts payable to retail network pharmacies for prescriptions dispensed and services rendered, amounts payable for mail-order prescription inventory purchases, and
reclassified net client rebate pass-back liabilities. Accrued expenses and other current liabilities primarily consist of employee- and facility-related cost accruals incurred in the normal course of business, as well as income taxes payable.
Accrued expenses and other current liabilities also include certain premium and catastrophic reinsurance pre-payments from CMS for our Medicare Part D PDP product offering. Our debt is primarily comprised of a senior unsecured term loan facility,
senior notes and an accounts receivable financing facility. In addition, we have a net deferred tax liability primarily associated with our recorded intangible assets. We do not have any off-balance sheet arrangements, other than purchase
commitments and lease obligations. See  Contractual Obligations further below.

Our stockholders equity as of
December 31, 2005 includes an offset for net unearned compensation, representing the market value at the time of grant of restricted stock and restricted stock units granted to our employees and directors less the amount of compensation expense
amortized over the associated vesting period. This amount was closed into additional paid-in capital in connection with our adoption of SFAS 123R effective January 1, 2006. Stockholders equity also includes an offset for treasury stock
purchases under our share repurchase program originally announced in August 2005.

Consolidated Statements of Cash Flows. An
important element of our operating cash flows is the timing of billing cycles, which are two-week periods of accumulated billings for retail and mail-order prescriptions. We bill the cycle activity to clients on this biweekly schedule and generally
collect from our clients before we pay our obligations to the retail pharmacies for that same cycle. At the end of any given reporting period, unbilled PBM receivables can represent up to two weeks of dispensing activity and will fluctuate at the
end of a fiscal month depending on the timing of these billing cycles. A portion of the specialty pharmacy business includes reimbursement by payors, such as insurance companies, under a medical benefit, or by Medicare or Medicaid. These
transactions involve higher patient co-payments than experienced in the PBM business. As a result, this portion of the specialty pharmacy business, which yields a higher margin than the PBM business, experiences slower accounts receivable turnover
than in the aforementioned PBM cycle. We also generate operating cash flows associated with our Medicare Part D PDP product offering including premiums and various subsidies received from CMS.

We pay for our mail-order prescription drug inventory in accordance with payment terms offered by our suppliers to take advantage of appropriate
discounts. Effective mail-order inventory management generates further positive cash flows. Earned brand-name pharmaceutical manufacturers rebates are recorded monthly based upon prescription dispensing, with actual bills rendered on a
quarterly basis and paid by the manufacturers within an agreed-upon term. Payments of rebates to clients are generally made after our receipt of the rebates from the brand-name pharmaceutical manufacturers, although some clients may receive more
accelerated rebate payments in exchange for other elements of pricing in their contracts.



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Our cash primarily includes time deposits with banks or other financial institutions. Our short-term
investments include U.S. government securities that have average maturities of less than one year and that are held to satisfy statutory capital requirements for our insurance subsidiaries.

Ongoing cash outflows are associated with expenditures to support our mail-order, retail pharmacy network operations, call center pharmacies and other
selling, general and administrative functions. The largest components of these expenditures include mail-order inventory purchases, payments to retail pharmacies, rebate and guarantee payments to clients, employee payroll and benefits, facility
operating expenses, capital expenditures including technology investments, interest and principal payments on our outstanding debt, income taxes and share repurchases. Acquisitions will also generally result in cash outflows.

Client-Related Information

Revenues from
UnitedHealth Group, which is currently our largest client, amounted to approximately $2,200 million and $4,400 million, or 21% of our net revenues, in the second quarter and six months of 2006, respectively, and $2,100 million and $4,200 million, or
23% of our net revenues, in the second quarter and six months of 2005, respectively. None of our other clients individually represented more than 10% of our net revenues in the second quarter or six months of 2006 or 2005.

Segment Discussion

As a result of our acquisition of
Accredo on August 18, 2005, we have two reportable segments, PBM and Specialty Pharmacy. The PBM segment involves sales of traditional prescription drugs to our clients and their members, either through our networks of contractually affiliated
retail pharmacies or our mail-order pharmacies. The Specialty Pharmacy segment, which was formed upon the Accredo acquisition, includes the sale of higher margin specialty pharmacy products and services for the treatment of chronic and potentially
life-threatening diseases. The results of Accredo are included in the Specialty Pharmacy segment results and the consolidated statements of income effective with the August 18, 2005 acquisition. The Specialty Pharmacy segment also includes the
specialty pharmacy activity previously included within our PBM business. We define the Specialty Pharmacy segment based on a product set and associated services, broadly characterized to include drugs that are high-cost, usually developed by
biotechnology companies and often injectable, and which require elevated levels of patient support. When dispensed, these products frequently require a significant amount of ancillary administration equipment, special packaging, and a much higher
degree of patient-oriented customer service than is required in the traditional PBM business model. In addition, specialty pharmacy products and services are often covered through medical benefit programs with the primary payors being insurance
companies and government programs, along with patients, with a smaller but growing percentage of PBM clients as payors.

The Specialty
Pharmacy segment was formed as a result of the Accredo acquisition on August 18, 2005 in response to a management desire to manage the acquired business together with our pre-existing specialty pharmacy activity as a separate business from our
PBM operations. This acquisition complemented our pre-existing Medco specialty pharmacy operation, which was evolving in 2005.

The PBM
segment is measured and managed on an integrated basis, and there is no distinct measurement that separates the performance and profitability of mail order and retail. We offer fully integrated PBM services to virtually all of our PBM clients and
their members. The PBM services we provide to our clients are generally delivered and managed under a single contract for each client. Both the PBM and the Specialty Pharmacy segments operate in one geographic region, which includes the United
States and Puerto Rico.

As a result of the nature of our integrated PBM services and contracts, the chief operating decision maker views
Medcos PBM operations as a single segment for purposes of making decisions about resource allocations and in assessing performance.



26



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##### Table of Contents

Results of Operations

The following table presents selected consolidated comparative results of operations and volume performance ($ and volumes in millions):



|                                    |  |                          |          |   |                    |   |         |                           |  |      |                             |  |   |                    |   |  |                               |          |   |  |   |         |   |  |      |   |  |   |          |  
|----------------------------------- |  | ------------------------ | -------- | - | ------------------ | - | ------- | ------------------------- |  | ---- | --------------------------- |  | - | ------------------ | - |  | ----------------------------- | -------- | - |  | - | ------- | - |  | ---- | - |  | - | -------- | -
|                                    |  | QuarterEndedJuly 1, 2006 |          |   | Increase(Decrease) |   |         | QuarterEndedJune 25, 2005 |  |      | Six MonthsEndedJuly 1, 2006 |  |   | Increase(Decrease) |   |  | Six Months EndedJune 25, 2005 |         
|Net Revenues                        |  |                          |          |   |                    |   |         |                           |  |      |                             |  |   |                    |   |  |                               |          |   |  |   |         |   |  |      |   |  |   |          |  
|Retail product(1)                   |  | $                        | 6,453.1  |   |                    | $ | 724.4   |                           |  | 12.6 | %                           |  | $ | 5,728.7            |   |  | $                             | 12,874.1 |   |  | $ | 1,614.7 |   |  | 14.3 | % |  | $ | 11,259.4 |  
|Mail-order product                  |  |                          | 4,005.8  |   |                    |   | 827.8   |                           |  | 26.0 | %                           |  |   | 3,178.0            |   |  |                               | 8,028.2  |   |  |   | 1,725.0 |   |  | 27.4 | % |  |   | 6,303.2  |  
|                                    |  |                          |          |   |                    |   |         |                           |  |      |                             |  |   |                    |   |  |                               |          |   |  |   |         |   |  |      |   |  |   |          |  
|Total product(1)                    |  | $                        | 10,458.9 |   |                    | $ | 1,552.2 |                           |  | 17.4 | %                           |  | $ | 8,906.7            |   |  | $                             | 20,902.3 |   |  | $ | 3,339.7 |   |  | 19.0 | % |  | $ | 17,562.6 |  
|                                    |  |                          |          |   |                    |   |         |                           |  |      |                             |  |   |                    |   |  |                               |          |   |  |   |         |   |  |      |   |  |   |          |  
|Client and other service            |  |                          | 82.8     |   |                    |   | 28.9    |                           |  | 53.6 | %                           |  |   | 53.9               |   |  |                               | 160.9    |   |  |   | 58.0    |   |  | 56.4 | % |  |   | 102.9    |  
|Manufacturer service                |  |                          | 47.1     |   |                    |   | 9.0     |                           |  | 23.6 | %                           |  |   | 38.1               |   |  |                               | 89.2     |   |  |   | 12.7    |   |  | 16.6 | % |  |   | 76.5     |  
|                                    |  |                          |          |   |                    |   |         |                           |  |      |                             |  |   |                    |   |  |                               |          |   |  |   |         |   |  |      |   |  |   |          |  
|Total service                       |  | $                        | 129.9    |   |                    | $ | 37.9    |                           |  | 41.2 | %                           |  | $ | 92.0               |   |  | $                             | 250.1    |   |  | $ | 70.7    |   |  | 39.4 | % |  | $ | 179.4    |  
|                                    |  |                          |          |   |                    |   |         |                           |  |      |                             |  |   |                    |   |  |                               |          |   |  |   |         |   |  |      |   |  |   |          |  
|Total net revenues(1)               |  | $                        | 10,588.8 |   |                    | $ | 1,590.1 |                           |  | 17.7 | %                           |  | $ | 8,998.7            |   |  | $                             | 21,152.4 |   |  | $ | 3,410.4 |   |  | 19.2 | % |  | $ | 17,742.0 |  
|                                    |  |                          |          |   |                    |   |         |                           |  |      |                             |  |   |                    |   |  |                               |          |   |  |   |         |   |  |      |   |  |   |          |  
|Cost of Revenues                    |  |                          |          |   |                    |   |         |                           |  |      |                             |  |   |                    |   |  |                               |          |   |  |   |         |   |  |      |   |  |   |          |  
|Product(1)                          |  | $                        | 9,977.6  |   |                    | $ | 1,458.7 |                           |  | 17.1 | %                           |  | $ | 8,518.9            |   |  | $                             | 19,968.4 |   |  | $ | 3,178.8 |   |  | 18.9 | % |  | $ | 16,789.6 |  
|Service                             |  |                          | 27.7     |   |                    |   | 3.2     |                           |  | 13.1 | %                           |  |   | 24.5               |   |  |                               | 62.2     |   |  |   | 12.7    |   |  | 25.7 | % |  |   | 49.5     |  
|                                    |  |                          |          |   |                    |   |         |                           |  |      |                             |  |   |                    |   |  |                               |          |   |  |   |         |   |  |      |   |  |   |          |  
|Total cost of revenues(1)           |  | $                        | 10,005.3 |   |                    | $ | 1,461.9 |                           |  | 17.1 | %                           |  | $ | 8,543.4            |   |  | $                             | 20,030.6 |   |  | $ | 3,191.5 |   |  | 19.0 | % |  | $ | 16,839.1 |  
|                                    |  |                          |          |   |                    |   |         |                           |  |      |                             |  |   |                    |   |  |                               |          |   |  |   |         |   |  |      |   |  |   |          |  
|Gross Margin(2)                     |  |                          |          |   |                    |   |         |                           |  |      |                             |  |   |                    |   |  |                               |          |   |  |   |         |   |  |      |   |  |   |          |  
|Product                             |  | $                        | 481.3    |   |                    | $ | 93.5    |                           |  | 24.1 | %                           |  | $ | 387.8              |   |  | $                             | 933.9    |   |  | $ | 160.9   |   |  | 20.8 | % |  | $ | 773.0    |  
|Product gross margin percentage     |  |                          | 4.6      | % |                    |   | 0.2     | %                         |  |      |                             |  |   | 4.4                | % |  |                               | 4.5      | % |  |   | 0.1     | % |  |      |   |  |   | 4.4      | %
|Service                             |  | $                        | 102.2    |   |                    | $ | 34.7    |                           |  | 51.4 | %                           |  | $ | 67.5               |   |  | $                             | 187.9    |   |  | $ | 58.0    |   |  | 44.6 | % |  | $ | 129.9    |  
|Service gross margin percentage     |  |                          | 78.7     | % |                    |   | 5.3     | %                         |  |      |                             |  |   | 73.4               | % |  |                               | 75.1     | % |  |   | 2.7     | % |  |      |   |  |   | 72.4     | %
|Total gross margin                  |  | $                        | 583.5    |   |                    | $ | 128.2   |                           |  | 28.2 | %                           |  | $ | 455.3              |   |  | $                             | 1,121.8  |   |  | $ | 218.9   |   |  | 24.2 | % |  | $ | 902.9    |  
|Gross margin percentage             |  |                          | 5.5      | % |                    |   | 0.4     | %                         |  |      |                             |  |   | 5.1                | % |  |                               | 5.3      | % |  |   | 0.2     | % |  |      |   |  |   | 5.1      | %
|                                    |  |                          |          |   |                    |   |         |                           |  |      |                             |  |   |                    |   |  |                               |          |   |  |   |         |   |  |      |   |  |   |          |  
|Volume Information                  |  |                          |          |   |                    |   |         |                           |  |      |                             |  |   |                    |   |  |                               |          |   |  |   |         |   |  |      |   |  |   |          |  
|Retail                              |  |                          | 113.7    |   |                    |   | 2.9     |                           |  | 2.6  | %                           |  |   | 110.8              |   |  |                               | 231.7    |   |  |   | 10.8    |   |  | 4.9  | % |  |   | 220.9    |  
|Mail-order                          |  |                          | 22.1     |   |                    |   | 1.2     |                           |  | 5.7  | %                           |  |   | 20.9               |   |  |                               | 44.1     |   |  |   | 2.4     |   |  | 5.8  | % |  |   | 41.7     |  
|                                    |  |                          |          |   |                    |   |         |                           |  |      |                             |  |   |                    |   |  |                               |          |   |  |   |         |   |  |      |   |  |   |          |  
|Total volume                        |  |                          | 135.8    |   |                    |   | 4.1     |                           |  | 3.1  | %                           |  |   | 131.7              |   |  |                               | 275.8    |   |  |   | 13.2    |   |  | 5.0  | % |  |   | 262.6    |  
|                                    |  |                          |          |   |                    |   |         |                           |  |      |                             |  |   |                    |   |  |                               |          |   |  |   |         |   |  |      |   |  |   |          |  
|Adjusted prescriptions(3)           |  |                          | 179.6    |   |                    |   | 6.1     |                           |  | 3.5  | %                           |  |   | 173.5              |   |  |                               | 363.1    |   |  |   | 17.1    |   |  | 4.9  | % |  |   | 346.0    |  
|                                    |  |                          |          |   |                    |   |         |                           |  |      |                             |  |   |                    |   |  |                               |          |   |  |   |         |   |  |      |   |  |   |          |  
|Adjusted mail-order penetration(4)  |  |                          | 36.7     | % |                    |   | 0.6     | %                         |  |      |                             |  |   | 36.1               | % |  |                               | 36.2     | % |  |   | 0.0     | % |  |      |   |  |   | 36.2     | %
|                                    |  |                          |          |   |                    |   |         |                          
|Generic Dispensing Rate Information |  |                          |          |   |                    |   |         |                           |  |      |                             |  |   |                    |   |  |                               |          |   |  |   |         |   |  |      |   |  |   |          |  
|Retail generic dispensing rate      |  |                          | 56.0     | % |                    |   | 3.3     | %                         |  |      |                             |  |   | 52.7               | % |  |                               | 55.9     | % |  |   | 3.3     | % |  |      |   |  |   | 52.6     | %
|Mail-order generic dispensing rate  |  |                          | 43.1     | % |                    |   | 1.3     | %                         |  |      |                             |  |   | 41.8               | % |  |                               | 42.7     | % |  |   | 1.2     | % |  |      |   |  |   | 41.5     | %
|Overall generic dispensing rate     |  |                          | 53.9     | % |                    |   | 2.9     | %                         |  |      |                             |  |   | 51.0               | % |  |                               | 53.8     | % |  |   | 3.0     | % |  |      |   |  |   | 50.8     | %

---

|(1) | Includes retail co-payments of $1,807 million and $1,796 million for the second quarters of 2006 and 2005, and $3,760
million and $3,632 million for the six months of 2006 and 2005.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Defined as net revenues minus cost of revenues.
|--- | -----------------------------------------------

|(3) | Estimated adjusted prescription volume equals the majority of mail-order prescriptions multiplied by 3, plus retail
prescriptions. These mail-order prescriptions are multiplied by 3 to adjust for the fact that they include approximately 3 times the amount of product days supplied compared with retail prescriptions.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | The percentage of adjusted mail-order prescriptions
to total adjusted prescriptions.
|--- | ------------------------------------------------------------------------------------

Net Revenues. The $724 million increase in retail net
revenues for the second quarter is attributable to net price increases of $543 million driven by higher prices charged by pharmaceutical manufacturers, volume increases of $152 million primarily related to new business, favorable closure of a client
rebate matter of $19 million and settlement of a client audit matter of $10 million. For the six months, the increase in retail net revenues of $1,615 million is attributable to net price increases of $1,019 million, volume increases of $551
million, as well as the aforementioned client-related matters including an additional client-related benefit of $16 million recorded in the first quarter of 2006. The aforementioned net price variance includes the offsetting effect of price
decreases of approximately $245 million for the second quarter and approximately $485 million for the six months from a greater representation of generic drugs in 2006, as well as a reduction of $74 million for the second quarter and $150 million
for the six months related to higher levels of rebate sharing with clients, further discussed in the gross margin section.



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##### Table of Contents

The $828 million increase in mail-order net revenues for the second quarter of 2006 reflects volume
increases of $578 million including new business and the effect of Accredo, and net price increases of $250 million. For the six months, the $1,725 million increase in mail-order net revenues reflects volume increases of $1,183 million including new
business and the effect of Accredo, and net price increases of $542 million. Mail-order penetration on an adjusted basis was 36.7% for the second quarter of 2006 and 36.2% for the six months of 2006, above the 36.1% for the second quarter of 2005
and consistent with the 36.2% for the six months of 2005. The net price increases are driven by higher prices charged by pharmaceutical manufacturers, partially offset by higher levels of rebate sharing with clients, resulting in reductions to
mail-order revenue of $55 million for the second quarter and $86 million for the six months. Also contributing as an offset within the net price increases are decreases of approximately $55 million and approximately $115 million from a higher
representation of generic drugs for the second quarter and six months of 2006, respectively.

Our product net revenues were also favorably
impacted by the commencement of our Medicare Part D PDP product offering. In the second quarter of 2006, premium revenues for our PDP product were $136 million, or approximately 1% of total net revenues of $10.6 billion. For the six months of 2006,
premium revenues were $266 million, or approximately 1% of total net revenues of $21.2 billion.

Our overall generic dispensing rate
increased to 53.9% for the second quarter of 2006 and to 53.8% for the six months of 2006, compared to 51.0% for the second quarter of 2005 and 50.8% for the six months of 2005. Mail-order generic dispensing rates increased to 43.1% for the second
quarter of 2006 and 42.7% for the six months of 2006, compared to 41.8% and 41.5% for the second quarter and six months of 2005, respectively. Retail generic dispensing rates increased to 56.0% for the second quarter of 2006 and 55.9% for the six
months of 2006, compared to 52.7% and 52.6% for the second quarter and six months of 2005, respectively. These increases reflect the introduction of new generic products during these periods, the effect of client plan design changes promoting the
use of lower-cost and more steeply discounted generics, and our programs designed to encourage generic utilization.

Service revenues
increased $37.9 million in the second quarter of 2006 and $70.7 million in the six months of 2006 as a result of higher client and other service revenues of $28.9 million and $58.0 million, respectively, and higher manufacturer service revenues of
$9.0 million and $12.7 million, respectively. The higher client and other service revenues reflect higher claims processing administrative fees, including higher fees on a per prescription basis as compensation for higher rebate-sharing arrangements
with our clients, and the aforementioned overall higher retail volumes, as well as client revenues generated from clinical programs and Medicare Part D-related support. The higher manufacturer revenues result from Accredo manufacturer service fees,
partially offset by lower administrative fees earned as a result of a manufacturer contract revision.

Gross Margin.
Our client contracts include several pricing variables, such as price discounts for brand-name drugs, generic drugs and specialty drugs, separate price discounts for mail order and retail prescriptions, fees for various administrative and clinical
services, and terms regarding levels of rebate sharing and other guarantees. Clients have varied preferences regarding the pricing model best suited to their needs, and we negotiate these variables to generate an appropriate aggregate level of gross
margin. As an example, certain clients may prefer a model whereby more rebates are shared in exchange for higher fees or lower price discounts, while others may prefer steeper price discounts in exchange for lower rebates. We experienced a
year-over-year decline in rebate retention reflecting changes in the pricing composition within our contracts. Gross margin reflects these changes, as well as changes in the generic drug representation, mail or retail composition in our prescription
base, specialty drug content, and Medicare Part D financial performance.

Our product gross margin percentage was 4.6% for the second
quarter of 2006 compared to 4.4% for the second quarter of 2005, and 4.5% for the six months of 2006 compared to 4.4% for the six months of 2005, with 2006 including Accredo product gross margin. The rate of change in cost of product net revenues
was consistent with the rate of change in product net revenues for the second quarter and six months. The consistent rates reflect higher prescription prices charged by pharmaceutical manufacturers, partially offset by the greater utilization of
lower-cost generic products and increased brand-name pharmaceutical rebates. Our gross margin percentage also reflects the higher levels of rebate sharing with our clients which increased $129 million and $236 million for the second quarter and six
months of 2006, respectively. The higher product gross margin percentage in the second quarter of 2006 from the second quarter of 2005 also reflects the effect of the aforementioned higher adjusted mail-order penetration.



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Rebates from brand-name pharmaceutical manufacturers, which are reflected as a reduction in cost of
product net revenues, totaled $875 million in the second quarter of 2006 and $779 million in the second quarter of 2005, with formulary rebates representing 52.8% and 50.3% of total rebates, respectively. Rebates totaled $1,732 million in the six
months of 2006 and $1,572 million in the six months of 2005, with formulary rebates representing 52.3% and 50.6% of total rebates, respectively. The increases in rebates earned in the second quarter and six months reflect improved formulary
management and patient compliance, and favorable pharmaceutical manufacturer rebate contract revisions. We retained approximately $186 million, or 21.2% of total rebates in the second quarter of 2006, and $219 million, or 28.1% in the second quarter
of 2005. For the six months, we retained approximately $379 million, or $21.9% of total rebates, in 2006, and approximately $455 million, or 28.9%, in 2005. The gross margin effect of overall higher rebate sharing levels is partially mitigated by
other elements of pricing including higher claims processing, administrative and other client service fees, higher generic dispensing rates, and increased specialty drug volumes.

Service gross margin percentage improved to 78.7% in the second quarter of 2006 from 73.4% in the second quarter of 2005, and to 75.1% in the six months
of 2006 from 72.4% in the six months of 2005. This reflects the increase in service revenues of 41.2% for the second quarter and 39.4% for the six months of 2006, driven by the aforementioned client and other service revenue increases, partially
offset by an increase in cost of service revenues of 13.1% for the second quarter and 25.7% for the six months of 2006. The increase in cost of service revenues is primarily related to higher start up expenses of $3 million for the second quarter
and $14 million for the six months associated with enrollment-related activities for our Medicare Part D PDP product offering.

The
following table presents additional selected consolidated comparative results of operations ($ in millions):



|                                             |  |                          |       |                    |   |       |                           |      |                             |  |                    |       |  |                              |         |  |   |       |   |  |       |    |  |   |      
|-------------------------------------------- |  | ------------------------ | ----- | ------------------ | - | ----- | ------------------------- | ---- | --------------------------- |  | ------------------ | ----- |  | ---------------------------- | ------- |  | - | ----- | - |  | ----- | -- |  | - | -----
|                                             |  | QuarterEndedJuly 1, 2006 |       | Increase(Decrease) |   |       | QuarterEndedJune 25, 2005 |      | Six MonthsEndedJuly 1, 2006 |  | Increase(Decrease) |       |  | Six MonthsEndedJune 25, 2005
|Gross margin                                 |  | $                        | 583.5 |                    | $ | 128.2 |                           | 28.2 | %                           |  | $                  | 455.3 |  | $                            | 1,121.8 |  | $ | 218.9 |   |  | 24.2  | %  |  | $ | 902.9
|Selling, general and administrative expenses |  |                          | 239.1 |                    |   | 63.7  |                           | 36.3 | %                           |  |                    | 175.4 |  |                              | 635.0   |  |   | 284.8 |   |  | 81.3  | %  |  |   | 350.2
|Amortization of intangibles                  |  |                          | 54.6  |                    |   | 9.6   |                           | 21.3 | %                           |  |                    | 45.0  |  |                              | 109.3   |  |   | 19.3  |   |  | 21.4  | %  |  |   | 90.0 
|Interest and other (income) expense, net     |  |                          | 15.3  |                    |   | 8.9   |                           | N/M  | *                           |  |                    | 6.4   |  |                              | 28.8    |  |   | 12.2  |   |  | 73.5  | %  |  |   | 16.6 
|                                             |  |                          |       |                    |   |       |                           |      |                             |  |                    |       |  |                              |         |  |   |       |   |  |       |    |  |   |      
|Income before provision for income taxes     |  |                          | 274.5 |                    |   | 46.0  |                           | 20.1 | %                           |  |                    | 228.5 |  |                              | 348.7   |  |   | (97.4 | ) |  | (21.8 | )% |  |   | 446.1
|Provision for income taxes                   |  |                          | 103.6 |                    |   | 12.5  |                           | 13.7 | %                           |  |                    | 91.1  |  |                              | 133.0   |  |   | (44.5 | ) |  | (25.1 | )% |  |   | 177.5
|                                             |  |                          |       |                    |   |       |                           |      |                             |  |                    |       |  |                              |         |  |   |       |   |  |       |    |  |   |      
|Net income                                   |  | $                        | 170.9 |                    | $ | 33.5  |                           | 24.4 | %                           |  | $                  | 137.4 |  | $                            | 215.7   |  | $ | (52.9 | ) |  | (19.7 | )% |  | $ | 268.6
|                                             |  |                          |       |                    |   |       |                           |      |                             |  |                    |       |  |                              |         |  |   |       |   |  |       |    |  |   |      

---

|* | Not meaningful as a percentage.
|- | -------------------------------

Selling, General and Administrative Expenses. SG&A expenses of $239 million in the second quarter of 2006 increased from the second quarter of 2005 by $64 million, or 36.3%. This increase reflects Accredo expenses of $44
million, stock option expense of $12 million, higher restricted stock unit expense of $4 million and other expenses of $4 million, including an adjustment to increase performance-based compensation expense.

SG&A expenses for the six months of 2006 amounting to $635 million increased from the six months of 2005 by $285 million, or 81.3%, which includes
the aforementioned $162.6 million one-time pre-tax legal settlements charge. The one-time pre-tax legal settlements charge reflected the agreement in principle on financial terms with the U.S. Attorneys Office for the Eastern District of
Pennsylvania with regard to three previously disclosed matters. Excluding the one-time charge, selling, general and administrative expenses for the six months of 2006 increased from 2005 by $122 million to $472 million, or 34.9%. This increase
reflects Accredo expenses of $84 million, as well as stock option expense of $30 million and higher restricted stock unit expenses of $8 million.

Amortization of Intangibles. Amortization of intangible assets of $54.6 million for the second quarter of 2006 and $109.3 million for the six months of 2006 increased by $9.6 million from the second quarter of 2005 and $19.3
million from the six months of 2005, primarily reflecting the additional intangible amortization associated with the intangible assets acquired in the Accredo acquisition.



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Interest and Other (Income) Expense, Net. Interest and other (income) expense, net,
increased $9 million for the second quarter of 2006 and $12 million for the six months of 2006 from the same periods in 2005. The second quarter variance results from higher interest expense of $8 million and slightly lower interest income of $1
million. The variance for the six months of 2006 reflects higher interest expense of $15 million, partially offset by higher interest income of $3 million. The higher interest expense for the second quarter and six months reflects elevated debt
levels from the debt refinancing in August 2005 related to the Accredo acquisition and higher interest rates on floating rate debt. The lower interest income for the second quarter reflects lower average daily cash balances as a result of the
Accredo acquisition and the share repurchase program. The higher interest income for the six months reflects the benefit of higher interest rates in 2006, partially offset by the lower average daily cash balances. Total debt amounted to $1,423
million as of July 1, 2006 compared to $976 million as of June 25, 2005. The estimated weighted average interest rate on our indebtedness was approximately 6.3% for the second quarter of 2006 and 6.1% for the six months of 2006, compared
to 5.9% for the second quarter of 2005 and 5.8% for the six months of 2005, reflecting increases in floating interest rates on our term loans and accounts receivable financing facility.

Provision for Income Taxes.Our effective tax rate (defined as the percentage relationship of provision for income taxes to income before
provision for income taxes) was 37.7% in the second quarter of 2006 and 38.1% for the six months of 2006, compared to 39.9% in the second quarter of 2005 and 39.8% for the six months of 2005. The reduction in the second quarter rate reflects
benefits of $16.3 million including $9.1 million from the favorable resolution of income tax payables provided for prior to the spin-off from Merck, $4.0 million from the favorable closure of a state income tax audit, and a $3.2 million benefit from
the adjustment of our net deferred tax liabilities due to the enactment of a state income tax law change. These benefits were partially offset by a $10.4 million increase in the second quarter 2006 provision relating to increases in the overall
state marginal income tax rate due to various state law changes including a corresponding increase to our net deferred tax liabilities.

Based on the current facts and circumstances associated with the one-time legal settlements charge, we believe it is probable the settlement amount will be tax deductible. Accordingly, our six month provision for income taxes reflects an
estimated tax benefit of approximately $63 million associated with the one-time charge.

We may achieve additional state income tax savings
in the second half of 2006, some of which relate to state income tax payables provided for prior to the spin-off date from Merck. To the extent that these state tax savings are realized, they will be recorded as a reduction of state income tax
expense at the time approval is received from the respective state taxing jurisdiction or when the applicable statute of limitations has expired.

Net Income and Earnings per Share. Net income as a percentage of net revenues was 1.6% in the second quarter of 2006 and 1.0% in the six months of 2006, including a 0.5% reduction resulting from the one-time legal
settlements charge for the six months. Excluding the one-time charge, net income as a percentage of net revenues was 1.5% in the six months of 2006.

Diluted earnings per share increased 16.7% to $0.56 for the second quarter of 2006 and decreased 25.3% to $0.71 for the six months of 2006, including the one-time legal settlements charge for the six months. Excluding
the one-time charge, diluted earnings per share increased 8.4% to $1.03 for the six months of 2006. The diluted weighted average shares outstanding were 302.9 million and 305.8 million for the second quarter and six months of 2006, and
283.8 million and 281.9 million for the second quarter and six months of 2005.

The increase in the diluted weighted average
shares outstanding reflects approximately 24 million shares issued in August 2005 for the Accredo acquisition, as well as the issuance of stock under employee stock plans and the dilutive effect of outstanding stock options, partially offset by
the purchase of 21.6 million shares of stock in connection with our share repurchase program since its inception in the third quarter of 2005, of which approximately 10.4 million and approximately 13.9 million were purchased during
the second quarter and six months of 2006, respectively.



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Specialty Pharmacy Segment. For the second quarter and six months of 2006 and 2005, we have
identified the revenues associated with Medcos pre-existing specialty pharmacy business based on a data extract of sales for the specialty product set. We have also calculated the estimated operating income for the second quarter and six
months of 2005 based on the best information available for the pre-acquisition period and the detailed post-acquisition segment results. Specialty Pharmacy total net revenues of $1.3 billion for the second quarter of 2006 and $2.7 billion for the
six months of 2006 increased $0.6 billion and $1.3 billion compared to the second quarter and six months of 2005, respectively, primarily as a result of the Accredo acquisition. The total net revenues include revenue for the seasonal drug, Synagis,
of $6.3 million and $74.1 million for the second quarter and six months of 2006, respectively. Operating income increased $36 million to $50 million in the second quarter 2006, and increased $69 million to $94 million for the six months of 2006,
reflecting the increased revenue, as well as the inclusion of higher-margin Accredo products.

Liquidity and Capital Resources

Cash Flows.The following table presents selected data from our unaudited interim condensed consolidated statements of cash
flows ($ in millions):



|                                                     |  |                              |        |   |                    |   |        |                               |  |   |         |  
|---------------------------------------------------- |  | ---------------------------- | ------ | - | ------------------ | - | ------ | ----------------------------- |  | - | ------- | -
|                                                     |  | Six Months EndedJuly 1, 2006 |        |   | Increase(Decrease) |   |        | Six Months EndedJune 25, 2005 | 
|Net cash provided by operating activities            |  | $                            | 244.4  |   |                    | $ | (32.9  | )                             |  | $ | 277.3   |  
|Net cash used by investing activities                |  |                              | (58.3  | ) |                    |   | (7.4   | )                             |  |   | (50.9   | )
|Net cash used by financing activities                |  |                              | (665.6 | ) |                    |   | (589.2 | )                             |  |   | (76.4   | )
|                                                     |  |                              |        |   |                    |   |        |                               |  |   |         |  
|Net (decrease) increase in cash and cash equivalents |  |                              | (479.5 | ) |                    |   | (629.5 | )                             |  |   | 150.0   |  
|Cash and cash equivalents at beginning of period     |  |                              | 888.2  |   |                    |   | (257.3 | )                             |  |   | 1,145.5 |  
|                                                     |  |                              |        |   |                    |   |        |                               |  |   |         |  
|Cash and cash equivalents at end of period           |  | $                            | 408.7  |   |                    | $ | (886.8 | )                             |  | $ | 1,295.5 |  
|                                                     |  |                              |        |   |                    |   |        |                               |  |   |         |  

Operating Activities. The net cash provided by operating activities of $244
million for the six months of 2006 primarily reflects cash provided by operating activities from net income of $216 million, with adjustments for depreciation and amortization of $200 million, partially offset by a $222 million decrease in cash
flows from accounts receivable, net, mainly due to an increase in Medicare Part D receivables from CMS associated with the new product offering, and an increase in rebates receivable from brand-name pharmaceutical manufacturers resulting from
increases in volume and improved formulary compliance. The decrease in net cash provided by operating activities in the first six months of 2006 compared to the first six months of 2005 of $33 million substantially results from an increase in cash
outflows of $115 million from accounts receivable, net, due to the aforementioned factors, and an increase in cash outflows of $81 million from prepaid expenses and other current assets, primarily due to the timing within our fiscal calendar of a
significant prepaid client rebate. These decreases were partially offset by an increase of $168 million in current liabilities and other noncurrent liabilities, primarily resulting from prepaid premiums and catastrophic reinsurance from CMS
associated with our Medicare Part D PDP product offering and the one-time legal settlements liability that was recorded in the first quarter of 2006.

Investing Activities. The net cash used by investing activities of $58 million for the six months of 2006 is primarily attributable to capital expenditures associated with capitalized software
development in connection with our Medicare Part D PDP product offering, client-related programs, productivity initiatives, as well as investments in customer service and pharmacy operations. We expect that our full year 2006 capital expenditures
will not exceed $150 million. The increase in net cash used by investing activities for the six months of 2006 compared to the prior year of $7 million primarily results from the timing of capital expenditures.

Financing Activities. The net cash used by financing activities of $666 million for the six months of 2006 results from $753 million
in treasury stock repurchases, partially offset by proceeds from employee stock plans of $104 million. The increase in net cash used by financing activities for the six months of 2006 of $589 million is primarily due to the treasury stock
repurchases in 2006, partially offset by lower debt pay downs.

Total cash and short-term investments as of July 1, 2006 were $466.9
million, including $408.7 million in cash and cash equivalents. Total cash and short-term investments as of December 31, 2005 were $944.8 million, including $888.2 million in cash and cash equivalents. The decrease of $477.9 million in cash and
short-term investments for the six months of 2006 primarily reflects share repurchase activity, partially offset by cash flows from operations and employee stock plans.



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##### Table of Contents

Financing Facilities

Senior Bank Credit Facilities. We have a $1.25 billion senior unsecured credit facility, comprised of a $750 million term loan and a $500 million revolving credit facility. There was $493.8 million under
our term loan outstanding as of July 1, 2006. We had no amounts outstanding under our revolving credit facility as of July 1, 2006. The credit facilities bear interest at the London Interbank Offered Rate (LIBOR) plus a 0.625%
margin.

Accounts Receivable Financing Facility. Through a wholly-owned subsidiary, as of July 1, 2006, we had a $500
million, 364-day renewable accounts receivable financing facility that is collateralized by our pharmaceutical manufacturer rebate accounts receivable. There was $450 million outstanding under this accounts receivable financing facility as of
July 1, 2006. We pay interest on amounts borrowed under the agreement based on the funding rates of the bank-related commercial paper programs that provide the financing, plus an applicable margin determined by our credit rating.

Subsequent to the quarter ended July 1, 2006 and effective July 31, 2006, the accounts receivable financing facility was increased to $600
million, and on August 1, 2006, we drew down an additional $150 million under the facility, bringing the total amount outstanding under the facility to $600 million.

Interest Rates and Covenants

The estimated weighted average annual interest
rate on our indebtedness was approximately 6.3% and 6.1% for the second quarter and six months of 2006, respectively, and 5.9% and 5.8% for the second quarter and six months of 2005, respectively. Several factors could change the weighted average
annual interest rate, including but not limited to a change in reference rates used under our credit facilities and swap agreements.

Our
senior unsecured credit facility, senior notes and accounts receivable financing facility contain covenants, including, among other items, minimum interest coverage, maximum leverage ratios, as well as restrictions on dividends, share repurchases,
and asset sales and liens. We were in compliance with all financial covenants at July 1, 2006.

Share Repurchase Program

On August 22, 2005, we announced that our Board of Directors had authorized a share repurchase program to repurchase up to $500
million of our common stock in the open market over two years. On December 7, 2005, we announced that our Board of Directors had approved a $1 billion increase to the existing share repurchase program, bringing the total value of the current
program to $1.5 billion and extending the purchase period until December 31, 2007. We purchased approximately 10.4 million shares at a cost of $549.0 million, and approximately 13.9 million shares at a cost of $753.4 million during
the second quarter and six months of 2006, respectively. Inception-to-date purchases through July 1, 2006 under this program total approximately 21.6 million shares at a cost of approximately $1.2 billion. Our Board of Directors
periodically reviews the program and approves trading parameters.

EBITDA

We calculate and use EBITDA and EBITDA per adjusted prescription as indicators of our ability to generate cash from our reported operating results. These
measurements are used in concert with net income and cash flows from operations, which measure actual cash generated in the period. In addition, we believe that EBITDA and EBITDA per adjusted prescription are supplemental measurement tools used by
analysts and investors to help evaluate overall operating performance and the ability to incur and service debt and make capital expenditures. EBITDA does not represent funds available for our discretionary use and is not intended to represent or to
be used as a substitute for net income or cash flows from operations data as measured under U.S. generally accepted accounting principles (GAAP). The items excluded from EBITDA but included in the calculation of our reported net income
are significant components of our consolidated statements of income, and must be considered in performing a comprehensive assessment of our overall financial performance. EBITDA, and the associated year-to-year trends, should not be considered in
isolation. Our calculation of EBITDA may not be consistent with calculations of EBITDA used by other companies.



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##### Table of Contents

EBITDA per adjusted prescription is calculated by dividing EBITDA by the adjusted prescription volume for
the period. This measure is used as an indicator of our EBITDA performance on a per-unit basis, providing insight into the cash-generating potential of each prescription. EBITDA per adjusted prescription reflects the level of efficiency in the
business and is affected by changes in prescription volumes between retail and mail order, as well as the relative representation of brand-name, generic and specialty drugs.

The following table reconciles our reported net income to EBITDA and presents EBITDA per adjusted prescription for each of the respective periods (in
millions, except for EBITDA per adjusted prescription data):



|                                         |  |                 |       |                  |   |                 |  |   |               |     |  |   |       |    
|---------------------------------------- |  | --------------- | ----- | ---------------- | - | --------------- |  | - | ------------- | --- |  | - | ----- | ---
|                                         |  | Quarters Ended  |       | Six Months Ended |  
|                                         |  | July 1, 2006(1) |       | June 25, 2005    |   | July 1, 2006(1) |  |   | June 25, 2005 |    
|Net income                               |  | $               | 170.9 |                  | $ | 137.4           |  | $ | 215.7         |     |  | $ | 268.6 |    
|One-time legal settlements charge        |  |                 |      |                  |   |                |  |   | 99.9          | (2) |  |   |      |    
|                                         |  |                 |       |                  |   |                 |  |   |               |     |  |   |       |    
|Net income, excluding one-time charge    |  |                 | 170.9 |                  |   | 137.4           |  |   | 315.6         |     |  |   | 268.6 |    
|Add:                                     |  |                 |       |                  |   |                 |  |   |               |     |  |   |       |    
|Interest and other (income) expense, net |  |                 | 15.3  |                  |   | 6.4             |  |   | 28.8          |     |  |   | 16.6  | (3)
|Provision for income taxes               |  |                 | 103.6 |                  |   | 91.1            |  |   | 195.7         |     |  |   | 177.5 |    
|Depreciation expense                     |  |                 | 41.4  |                  |   | 39.6            |  |   | 90.9          |     |  |   | 80.8  |    
|Amortization expense                     |  |                 | 54.6  |                  |   | 45.0            |  |   | 109.3         |     |  |   | 90.0  |    
|                                         |  |                 |       |                  |   |                 |  |   |               |     |  |   |       |    
|EBITDA                                   |  | $               | 385.8 |                  | $ | 319.5           |  | $ | 740.3         |     |  | $ | 633.5 |    
|                                         |  |                 |       |                  |   |                 |  |   |               |     |  |   |       |    
|Adjusted prescriptions(4)                |  |                 | 179.6 |                  |   | 173.5           |  |   | 363.1         |     |  |   | 346.0 |    
|                                         |  |                 |       |                  |   |                 |  |   |               |     |  |   |       |    
|EBITDA per adjusted prescription         |  | $               | 2.15  |                  | $ | 1.84            |  | $ | 2.04          |     |  | $ | 1.83  |    
|                                         |  |                 |       |                  |   |                 |  |   |               |     |  |   |       |    

---

|(1) | Includes the operating results of Accredo, which was
acquired on August 18, 2005.
|--- | ---------------------------------------------------------------------------------

|(2) | This represents the after-tax effect of
the one-time pre-tax legal settlements charge of $162.6 million recorded in the first quarter of 2006. This charge reflects an agreement in principle on financial terms with the U.S. Attorneys Office for the Eastern District of
Pennsylvania to settle three pending legal matters.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | 2005 includes the write-off of deferred debt
issuance costs amounting to $0.7 million associated with accelerated term loan payments.
|--- | -------------------------------------------------------------------------------------------------------------------------------------

|(4) | Estimated adjusted prescription volume equals the
majority of mail-order prescriptions multiplied by 3, plus retail prescriptions. These mail-order prescriptions are multiplied by 3 to adjust for the fact that they include approximately 3 times the amount of product days supplied compared with
retail prescriptions.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

EBITDA increased 20.8% for the second quarter and 16.9% for the six months of 2006 from the
same periods in 2005, compared to net income increases of 24.4% and 17.5%, respectively, excluding the one-time charge for the six months. The lower rate of increase for EBITDA compared with net income reflects the exclusions of favorable tax items
recorded in the second quarter of 2006. EBITDA per adjusted prescription increased $0.31 or 16.8% to $2.15 in the second quarter of 2006 compared with $1.84 in the second quarter of 2005. For the six months, EBITDA per adjusted prescription
increased $0.21 or 11.5% to $2.04 compared to $1.83 in the six months of 2005. The higher increase for the second quarter of 2006 compared to the six months of 2006 reflects the increased adjusted mail-order penetration, mail-order generic
dispensing rate, and Specialty Pharmacy operating income.



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##### Table of Contents

Contractual Obligations

The following table presents our contractual obligations as of July 1, 2006, as well as our long-term debt obligations, including the current portion of long-term debt ($ in millions):

Payments Due By Period



|                                                         |  |       |         |                  |   |           |  |           |       |            |   |       |  |   |      
|-------------------------------------------------------- |  | ----- | ------- | ---------------- | - | --------- |  | --------- | ----- | ---------- | - | ----- |  | - | -----
|                                                         |  | Total |         | Remainderof 2006 |   | 2007-2008 |  | 2009-2010 |       | Thereafter
|Long-term debt obligations, including current portion(1) |  | $     | 994.2   |                  | $ | 37.7      |  | $         | 150.3 |            | $ | 306.2 |  | $ | 500.0
|Interest expense on long-term debt obligations(2)        |  |       | 348.0   |                  |   | 32.8      |  |           | 120.3 |            |   | 99.7  |  |   | 95.2 
|Operating lease obligations(3)                           |  |       | 108.8   |                  |   | 18.0      |  |           | 52.8  |            |   | 28.8  |  |   | 9.2  
|Purchase obligations(4)                                  |  |       | 288.4   |                  |   | 219.3     |  |           | 69.1  |            |   |      |  |   |     
|                                                         |  |       |         |                  |   |           |  |           |       |            |   |       |  |   |      
|Total                                                    |  | $     | 1,739.4 |                  | $ | 307.8     |  | $         | 392.5 |            | $ | 434.7 |  | $ | 604.4
|                                                         |  |       |         |                  |   |           |  |           |       |            |   |       |  |   |      

---

|(1) | Long-term debt obligations exclude the $3.1 million
of unamortized discount on the senior notes and a fair value adjustment of $18.2 million associated with the interest rate swap agreements on $200 million of the senior notes.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The variable component of interest expense for the
term loan facility is based on the second quarter 2006 LIBOR. The LIBOR fluctuates and may result in differences in the presented interest expense on long-term debt obligations.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Reflects contractual operating lease commitments to
lease pharmacy and call center pharmacy facilities, offices and warehouse space throughout the United States, as well as pill dispensing and counting devices and other operating equipment for use in our mail-order pharmacies and computer equipment
for use in our data centers.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Reflects contractual commitments to purchase
inventory from certain biopharmaceutical manufacturers and a brand-name pharmaceutical manufacturer.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------

As of July 1, 2006, we had letters of credit outstanding of approximately $14.9 million, of which approximately $13.9 million were issued under our
senior unsecured revolving credit facility.

Recently Adopted Financial Accounting Standard

On January 1, 2006, we adopted SFAS 123R, which requires the measurement and recognition of compensation expense for all stock-based compensation
awards made to employees and directors including employee stock options and employee stock purchase plans. SFAS 123R supersedes our previous accounting under APB Opinion No. 25, Accounting for Stock Issued to Employees (APB
25), for periods subsequent to December 31, 2005. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB 107) which provides interpretative guidance in applying the provisions of SFAS 123R. We have applied
the provisions of SAB 107 in our adoption of SFAS 123R.

We adopted SFAS 123R using the modified prospective transition method, which
requires the application of the accounting standard as of January 1, 2006, the first day of our 2006 fiscal year. Our unaudited interim condensed consolidated financial statements as of and for the fiscal quarter and six months ended
July 1, 2006 reflect the impact of SFAS 123R. In accordance with the modified prospective transition method, our consolidated financial statements for periods prior to January 1, 2006 have not been restated to reflect, and do not include,
the impact of SFAS 123R as we did not record stock-based compensation expense related to employee stock options and employee stock purchase plans. Stock-based compensation expense related to employee stock options and employee stock purchase plans
recognized under SFAS 123R for the fiscal quarter and six months ended July 1, 2006 amounted to $14.8 million pre-tax and $35.7 million pre-tax, respectively. See Note 5, Stock-Based Compensation, to the accompanying unaudited
interim condensed consolidated financial statements for additional information.

SFAS 123R requires companies to estimate the fair value of
stock-based awards on the date of grant using an option-pricing model. The portion of the value that is ultimately expected to vest is recognized as expense over the requisite service period. Prior to the adoption of the SFAS 123R, we accounted for
stock-based awards using the intrinsic value method in accordance with APB 25 as allowed under SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123). Under the intrinsic value method, no stock-based
compensation expense had been recognized related to options because the exercise price of our stock options granted equaled the fair market value of the underlying stock at the date of the grant.



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SFAS 123R also requires the benefits of realized tax deductions in excess of tax benefits on compensation
expense to be reported as a component of cash flows from financing activities rather than as an operating cash flow, as previously required. The reported excess amounts to $21.2 million for the six months ended July 1, 2006. In accordance with
SAB 107, we classify stock-based compensation within cost of product net revenues and selling, general and administrative expenses to correspond with the line items in which cash compensation paid to employees and directors is recorded.

Stock-based compensation expense recognized in our unaudited interim condensed consolidated statements of income for the fiscal quarter and six months
ended July 1, 2006 includes compensation expense for stock-based compensation awards granted prior to, but not yet vested as of December 31, 2005, based on the grant-date fair value estimated in accordance with the pro forma provisions of
SFAS 123. Additionally, our unaudited interim condensed consolidated statements of income for the fiscal quarter and six months ended July 1, 2006 includes compensation expense for the stock-based compensation awards granted subsequent to
December 31, 2005 based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. In conjunction with the adoption of SFAS 123R, we changed our method of attributing the value of stock-based compensation to expense
from the accelerated multiple-option approach under Financial Accounting Standards Board Interpretation No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans (FIN 28) to the
straight-line single option method.

As stock-based compensation expense recognized in our unaudited interim condensed consolidated
statements of income is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. We estimate forfeitures in the same manner under SFAS 123R as we did prior to our adoption.

Recent Accounting Pronouncement

In July 2006, the FASB released FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes  an Interpretation of FASB Statement 109 (FIN 48 or the Interpretation), which clarifies the accounting for uncertainty in income taxes recognized in companies financial
statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. The evaluation of a tax position in accordance with FIN 48 is a two-step process. The first step is recognition whereby companies must determine whether it is more likely than not that a tax position will be
sustained upon examination. The second step is measurement whereby a tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The Interpretation
also provides guidance on derecognition of recognized tax benefits, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006.
Earlier adoption is only permitted at the beginning of a companys fiscal year, provided that interim financial statements for that fiscal year have not yet been issued. As a result, we expect to adopt the new requirements in the first quarter
of 2007 and are currently evaluating the impact that such adoption will have on our consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We have floating rate debt with our
credit facilities and investments in marketable securities that are subject to interest rate volatility. In addition, in 2004, we entered into interest rate swap agreements on $200 million of the $500 million in 7.25% senior notes. As a result of
the interest rate swap agreements, the $200 million of senior notes is subject to interest rate volatility. A 25 basis point change in the weighted average annual interest rate relating to the credit facilities balances outstanding and
interest rate swap agreements as of July 1, 2006, which are subject to variable interest rates based on the LIBOR, and the accounts receivable financing facility, which is subject to the commercial paper rate, would yield a change of
approximately $2.9 million in annual interest expense. We have no plans to enter into further swap agreements. We do not expect our cash flows to be affected to any significant degree by a sudden change in market interest rates.

We operate our business within the United States and Puerto Rico and execute all transactions in U.S. dollars and, therefore, we have no foreign exchange
risk.



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Item 4. Controls and Procedures

The Companys management, with the participation of its Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Companys disclosure controls and procedures. Based on their evaluation, as of the end of the period covered by this Quarterly Report on Form 10-Q, the
Companys Chief Executive Officer and Chief Financial Officer have concluded that the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) are
effective. There have been no changes in internal control over financial reporting for the period covered by this report that have been materially affected, or are reasonably likely to materially affect, the Companys internal control over
financial reporting.



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##### Table of Contents

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Descriptions of certain legal proceedings to which the Company is a party are
contained in Note 3, Legal Settlements Charge, and Note 11, Commitments and Contingencies, to the unaudited interim condensed consolidated financial statements included in Part I of this Quarterly Report on Form 10-Q. Such
descriptions include the following recent developments:

The Company has learned of the existence of two new sealed qui tam matters.
The first action is filed in the Eastern District of Pennsylvania. It appears to allege that the Company billed government payors using invalid or out-of-date national drug codes (NDCs). The second action is filed in the District of New
Jersey and appears to allege that the Company charged government payors a different rate than it reimbursed pharmacies; engaged in duplicate billing; refilled prescriptions too soon; and billed government payors for prescriptions written by
unlicensed physicians and physicians with invalid Drug Enforcement Agency authorizations. The Department of Justice has not yet made any decision as to whether it will intervene in either of these matters. The matters are under seal and U.S.
District Court orders prohibit the Company from answering inquiries about the complaints. The Company was notified of the existence of the two new qui tam matters during its current settlement negotiations with the Department of Justice. The
Company does not know the identities of the relators or the other defendants in either of these matters. The two new qui tam matters are not currently being considered in the Companys ongoing settlement negotiations with the Department
of Justice.

In February 2005, a lawsuit captionedCAM Enterprises, Inc. v. Merck & Co., Inc. and Medco Health Solutions, Inc.,
et al. was filed in the Circuit Court of Jefferson County, Alabama. The plaintiff, which seeks to represent a national class of independent retail pharmacies that have contracted with the Company under a formula that included the Average
Wholesale Price (AWP) as a method of reimbursement, alleges, among other things, that the Company has refused to reimburse the plaintiff using the correct AWP and has deceptively misled the plaintiff regarding the nature of the
Companys AWP reimbursement methodology for brand-name prescriptions. The plaintiff asserts claims for misrepresentation/suppression, breach of contract, unjust enrichment, and conspiracy. The plaintiff seeks compensatory damages, punitive
damages, imposition of a constructive trust, and injunctive relief. Upon motion by the plaintiff, the Court dismissed the complaint without prejudice in May 2006.

Item 1A. Risk Factors

Reference is made to the risk factors set forth in Part I, Item 1A of our
Annual Report on Form 10-K for the fiscal year ended December 31, 2005. There have been no material changes with regard to the risk factors disclosed in such Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following is a summary of the
Companys share repurchase activity for the three months ended July 1, 2006:

Issuer Purchases of Equity Securities(1)



|                           |  |                 |  |                          |       |                                                                                      |            |                                                                                              |   |        
|-------------------------- |  | --------------- |  | ------------------------ | ----- | ------------------------------------------------------------------------------------ | ---------- | -------------------------------------------------------------------------------------------- | - | -------
|Fiscal Period              |  | SharesPurchased |  | AveragePriceper Share(2) |       | Total Number ofSharesPurchased asPart of aPubliclyAnnouncedProgram
SinceInception(3) |            | ApproximateDollar Value ofShares that May Yet bePurchased Underthe
Program(4) (in thousands)
|Balances at April 1, 2006  |  |                 |  |                          |       |                                                                                      | 11,229,876 |                                                                                              | $ | 888,299
|                           |  |                 |  |                          |       |                                                                                      |            |                                                                                              |   |        
|Fiscal April 2006          |  | 2,160,500       |  | $                        | 55.87 |                                                                                      | 2,160,500  |                                                                                              | $ | 767,590
|Fiscal May 2006            |  | 5,294,800       |  | $                        | 51.77 |                                                                                      | 5,294,800  |                                                                                              | $ | 493,503
|Fiscal June 2006           |  | 2,912,700       |  | $                        | 52.93 |                                                                                      | 2,912,700  |                                                                                              | $ | 339,348
|                           |  |                 |  |                          |       |                                                                                      |            |                                                                                              |   |        
|Second quarter 2006 totals |  | 10,368,000      |  | $                        | 52.95 |                                                                                      | 10,368,000 |                                                                                              |   |        
|                           |  |                 |  |                          |       |                                                                                      |            |                                                                                              |   |        

---

|(1) | On August 22, 2005, the Company announced that its Board of Directors had authorized a share repurchase program to purchase up to $500 million of its common stock in the
open market over two years. On December 7, 2005, the Company announced that its Board of Directors approved a $1 billion increase to the existing share repurchase program, bringing the total value of the current program to $1.5 billion and
extending the purchase period until December 31, 2007.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(2) | Dollar amounts include transaction costs. The total
average price paid per share in the table above represents the average price paid per share for repurchases initiated during the three months ended July 1,2006. The average price paid per share for repurchases initiated since inception is
$53.74.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | The Company purchased all of the above-referenced
shares of its common stock through its publicly announced share repurchase program.
|--- | -------------------------------------------------------------------------------------------------------------------------------------

|(4) | The amounts in the table above reflect the remaining
authorized purchases based on the increase in the authorized repurchases approved on December 7, 2005.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

The Company held its Annual Meeting of
Shareholders on May 24, 2006. At the meeting, the Companys shareholders voted on the following two proposals and cast their votes as follows:

Proposal 1: To elect the following nominees as directors:



|                                  |  |             |  |          
|--------------------------------- |  | ----------- |  | ---------
|Nominee                           |  | For         |  | Withhold 
|Lawrence S. Lewin                 |  | 256,363,841 |  | 3,016,867
|Charles M. Lillis                 |  | 253,886,774 |  | 5,493,935
|Edward H. Shortliffe, M.D., Ph.D. |  | 256,428,871 |  | 2,951,837
|David D. Stevens                  |  | 255,919,878 |  | 3,460,830

Proposal 2: To ratify the appointment of PricewaterhouseCoopers LLP as our independent
registered public accounting firm for the fiscal year ending December 30, 2006:



|            |  |           |  |           |  |                 
|----------- |  | --------- |  | --------- |  | ----------------
|For         |  | Against   |  | Abstain   |  | Broker Non-votes
|255,418,888 |  | 2,363,934 |  | 1,597,884 |  | 0               



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##### Table of Contents

Item 5. Other Information

Rule 10b5-1 Sales Plans

Medcos comprehensive compliance program includes a broad policy against insider trading. The procedures promulgated under that policy include
regularly scheduled blackout periods that apply to over 600 employees. Executive officers are prohibited from trading during the period that begins on the first day of the last month of the fiscal period and ends on the third trading day after the
release of earnings. In addition, executive officers are required to pre-clear all of their trades. Medcos executive officers are also subject to share ownership guidelines and retention requirements that further limit their ability to access
gain from stock option exercises.

To facilitate compliance with the ownership guidelines and retention requirements, the Board of
Directors authorized the use of prearranged trading plans under Rule 10b5-1 of the Securities and Exchange Act of 1934. Rule 10b5-1 permits insiders to adopt predetermined plans for selling specified amounts of stock or exercising stock options
under specified conditions and at specified times. Executive officers may only enter into a trading plan during an open trading window and they must not possess material nonpublic information regarding the company at the time they adopt the plan.
Using trading plans, insiders can diversify their investment portfolios while avoiding concerns about transactions occurring at a time when they might possess material nonpublic information. Under Medcos policy, sales under a trading plan are
permitted to execute during a blackout period. In addition, the use of trading plans provides Medco with a greater ability to monitor trading and compliance with its stock ownership guidelines.

All trading plans adopted by Medco executives are reviewed and approved by the Office of the General Counsel. For ease of administration, executives have
been permitted to add new orders to existing plans rather than requiring the adoption of a new plan. Once modified, a plan cannot be changed for at least 90 days. Both new plans and modifications are subject to a minimum two week delay before the
plan or modification can become effective. This mandatory quiet period is designed to safeguard the plans from manipulation or market timing.

The following table, which we are providing on a voluntary basis, sets forth the Rule 10b5-1 sales plans entered into by our executive officers and existing as of August 1, 2006(1):



|                                                                        |  |                                        |  |                                                                                                                                                                          |  |                                   |  |                                 
|----------------------------------------------------------------------- |  | -------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------------- |  | --------------------------------
|Name and Position                                                       |  | Number ofShares tobe Soldunderthe Plan |  | Timing of Sales under the Plan                                                                                                                                           |  | Number ofSharesSold underthe Plan |  | ProjectedBeneficialOwnership (2)
|Kenneth O. Klepper, President & Chief Operating Officer                 |  | 43,500                                 |  | Option exercises are triggered when stock reaches
specified prices and up to 14,500 shares can be sold with respect to each option exercise                              |  | 14,500                            |  | 98,856                          
|Karin Princivalle, Senior Vice President  Human Resources              |  | 11,700                                 |  | Option exercise and sale of all shares if stock reaches
a specified price                                                                                                |  |                                  |  | 19,674                          
|JoAnn A. Reed, Senior Vice President, Finance & Chief Financial Officer |  | 133,916                                |  | Option exercises are triggered when stock reaches
specified prices and a number of shares ranging from 20,110 to 63,013 can be sold with respect to each option exercise |  |                                  |  | 344,915                         

---

|(1) | This table does not include any trading plans entered into by any executive officer that has expired by its terms or has been fully executed. No plans entered into
by executive officers were voluntarily terminated.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | This column reflects an estimate of the number of shares each identified executive officer will beneficially own following the sale of all shares under the Rule
10b5-1 sales plans currently in effect. This information reflects the beneficial ownership of our common stock as of August 1, 2006, and includes shares of our common stock subject to options that were then exercisable or that will have
become exercisable by August 31, 2006 and restricted stock units that will vest by August 31, 2006. The estimates do not reflect any changes to beneficial ownership that may have occurred since July 31,
2006.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Item 6. Exhibits



|       |  |                                                                                                                                                                                            |  |                          
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------
|Number |  | Description                                                                                                                                                                                |  | Method of Filing         
|10.1   |  | Description of Medco Health Solutions, Inc. non-employee director compensation (incorporated by reference to Item 1.01 of the Registrants Current Report on Form 8-K filed July 24,
2006) |  | Incorporated by reference
|       |  |                                                                                                                                                                                           
|31.1   |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                         |  | Filed with this document 
|       |  |                                                                                                                                                                                           
|31.2   |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                         |  | Filed with this document 
|       |  |                                                                                                                                                                                           
|32.1   |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                          |  | Filed with this document 
|       |  |                                                                                                                                                                                           
|32.2   |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                          |  | Filed with this document 



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##### Table of Contents

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|                     |  |                              |  |                        
|-------------------- |  | ---------------------------- |  | -----------------------
|                     |  | MEDCO HEALTH SOLUTIONS, INC.
|                     |  |                             
|Date: August 4, 2006 |  | By:                          |  | /s/ David B. Snow, Jr. 
|                     |  | Name:                        |  | David B. Snow, Jr.     
|                     |  | Title:                       |  | Chairman, and          
|                     |  |                              |  | Chief Executive Officer



|                     |  |        |  |                                   
|-------------------- |  | ------ |  | ----------------------------------
|Date: August 4, 2006 |  | By:    |  | /s/ JoAnn A. Reed                 
|                     |  | Name:  |  | JoAnn A. Reed                     
|                     |  | Title: |  | Senior Vice President, Finance and
|                     |  |        |  | Chief Financial Officer           



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Index to Exhibits



|       |  |                                                                                                                                                                                           
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |  | Description                                                                                                                                                                               
|10.1   |  | Description of Medco Health Solutions, Inc. non-employee director compensation (incorporated by reference to Item 1.01 of the Registrants Current Report on Form 8-K filed July 24,
2006)
|       | 
|31.1   |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                        
|       | 
|31.2   |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                        
|       | 
|32.1   |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                         
|       | 
|32.2   |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002