##### Table of Contents

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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 June 30, 2007

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 July 20, 2007 the registrant had 270,777,351 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)  June 30, 2007 and December 30, 2006                                       |  | 1 
|           |  |                                                                                                                              
|           |  | Condensed Consolidated Statements of Income (Unaudited)  Fiscal Quarters and Six Months Ended June 30, 2007 and July 1, 2006 |  | 2 
|           |  |                                                                                                                              
|           |  | Condensed Consolidated Statement of Stockholders Equity (Unaudited)  Fiscal Six Months Ended June 30, 2007                  |  | 3 
|           |  |                                                                                                                              
|           |  | Condensed Consolidated Statements of Cash Flows (Unaudited)  Fiscal Six Months Ended June 30, 2007 and July 1, 2006          |  | 4 
|           |  |                                                                                                                              
|           |  | Notes to Condensed Consolidated Financial Statements (Unaudited)                                                              |  | 5 
|           |  |                                                                                                                              
|Item 2.    |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                                         |  | 14
|           |  |                                                                                                                              
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                                                                    |  | 29
|           |  |                                                                                                                              
|Item 4.    |  | Controls and Procedures                                                                                                       |  | 29
|           |  |                                                                                                                              
|           |  | PART II  OTHER INFORMATION                                                                                                   |  |   
|           |  |                                                                                                                              
|Item 1.    |  | Legal Proceedings                                                                                                             |  | 30
|           |  |                                                                                                                              
|Item 1A.   |  | Risk Factors                                                                                                                  |  | 30
|           |  |                                                                                                                              
|Item 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                   |  | 31
|           |  |                                                                                                                              
|Item 3.    |  | Defaults Upon Senior Securities                                                                                               |  | 31
|           |  |                                                                                                                              
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                                           |  | 31
|           |  |                                                                                                                              
|Item 5.    |  | Other Information                                                                                                             |  | 32
|           |  |                                                                                                                              
|Item 6.    |  | Exhibits                                                                                                                      |  | 34
|           | 
|SIGNATURES |  | 35                                                                                                                           



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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)



|                                                                                                                                                        |  |              |          |   |                  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                        |  | June 30,2007 |          |   | December 30,2006 |  
|ASSETS                                                                                                                                                  |  |              |          |   |                  |   |          |  
|Current assets:                                                                                                                                         |  |              |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                               |  | $            | 983.7    |   |                  | $ | 818.5    |  
|Short-term investments                                                                                                                                  |  |              | 62.3     |   |                  |   | 68.4     |  
|Manufacturer accounts receivable, net                                                                                                                   |  |              | 1,620.7  |   |                  |   | 1,531.6  |  
|Client accounts receivable, net                                                                                                                         |  |              | 1,220.5  |   |                  |   | 1,294.9  |  
|Inventories, net                                                                                                                                        |  |              | 1,574.3  |   |                  |   | 1,676.8  |  
|Prepaid expenses and other current assets                                                                                                               |  |              | 275.0    |   |                  |   | 273.4    |  
|Deferred tax assets                                                                                                                                     |  |              | 206.9    |   |                  |   | 191.4    |  
|                                                                                                                                                        |  |              |          |   |                  |   |          |  
|Total current assets                                                                                                                                    |  |              | 5,943.4  |   |                  |   | 5,855.0  |  
|Income taxes receivable                                                                                                                                 |  |              | 218.8    |   |                  |   | 212.9    |  
|Property and equipment, net                                                                                                                             |  |              | 623.7    |   |                  |   | 649.7    |  
|Goodwill                                                                                                                                                |  |              | 5,106.7  |   |                  |   | 5,108.7  |  
|Intangible assets, net                                                                                                                                  |  |              | 2,413.8  |   |                  |   | 2,523.1  |  
|Other noncurrent assets                                                                                                                                 |  |              | 28.8     |   |                  |   | 38.7     |  
|                                                                                                                                                        |  |              |          |   |                  |   |          |  
|Total assets                                                                                                                                            |  | $            | 14,335.2 |   |                  | $ | 14,388.1 |  
|                                                                                                                                                        |  |              |          |   |                  |   |          |  
|                                                                                                                                                        |  |             
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                    |  |              |          |   |                  |   |          |  
|Current liabilities:                                                                                                                                    |  |              |          |   |                  |   |          |  
|Claims and other accounts payable                                                                                                                       |  | $            | 2,578.7  |   |                  | $ | 2,884.2  |  
|Client rebates and guarantees payable                                                                                                                   |  |              | 1,069.8  |   |                  |   | 886.1    |  
|Accrued expenses and other current liabilities                                                                                                          |  |              | 531.0    |   |                  |   | 656.2    |  
|Short-term debt                                                                                                                                         |  |              | 600.0    |   |                  |   | 325.0    |  
|Current portion of long-term debt                                                                                                                       |  |              |         |   |                  |   | 75.3     |  
|                                                                                                                                                        |  |              |          |   |                  |   |          |  
|Total current liabilities                                                                                                                               |  |              | 4,779.5  |   |                  |   | 4,826.8  |  
|Long-term debt, net                                                                                                                                     |  |              | 1,482.0  |   |                  |   | 866.4    |  
|Deferred tax liabilities                                                                                                                                |  |              | 1,124.6  |   |                  |   | 1,161.3  |  
|Other noncurrent liabilities                                                                                                                            |  |              | 142.0    |   |                  |   | 30.1     |  
|                                                                                                                                                        |  |              |          |   |                  |   |          |  
|Total liabilities                                                                                                                                       |  |              | 7,528.1  |   |                  |   | 6,884.6  |  
|                                                                                                                                                        |  |              |          |   |                  |   |          |  
|Commitments and contingencies (See Note 9)                                                                                                              |  |              |          |   |                  |   |          |  
|                                                                                                                                                        |  |             
|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: 321,597,630 shares at June 30, 2007 and 317,509,349 shares
at December 30, 2006 |  |              | 3.2      |   |                  |   | 3.2      |  
|Accumulated other comprehensive income                                                                                                                  |  |              | 14.2     |   |                  |   | 15.3     |  
|Additional paid-in capital                                                                                                                              |  |              | 7,389.2  |   |                  |   | 7,156.2  |  
|Retained earnings                                                                                                                                       |  |              | 2,404.0  |   |                  |   | 1,885.1  |  
|                                                                                                                                                        |  |              |          |   |                  |   |          |  
|                                                                                                                                                        |  |              | 9,810.6  |   |                  |   | 9,059.8  |  
|Treasury stock, at cost: 49,343,476 shares at June 30, 2007 and 29,060,895 shares at December 30, 2006                                                  |  |              | (3,003.5 | ) |                  |   | (1,556.3 | )
|                                                                                                                                                        |  |              |          |   |                  |   |          |  
|Total stockholders equity                                                                                                                              |  |              | 6,807.1  |   |                  |   | 7,503.5  |  
|                                                                                                                                                        |  |              |          |   |                  |   |          |  
|Total liabilities and stockholders equity                                                                                                              |  | $            | 14,335.2 |   |                  | $ | 14,388.1 |  
|                                                                                                                                                        |  |              |          |   |                  |   |          |  

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



1



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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
|                                                                                                                                                                                  |  | June 30, 2007  |          | July 1, 2006     |   | June 30, 2007 |  | July 1, 2006
|Product net revenues (Includes retail co-payments of $1,887 and $1,807 in the second quarters of 2007 and 2006, and $3,874 and $3,760 in the
six months of 2007 and 2006)         |  | $              | 10,912.3 |                  | $ | 10,458.9      |  | $            | 21,938.6 |  | $ | 20,902.3
|Service revenues                                                                                                                                                                  |  |                | 137.3    |                  |   | 129.9         |  |              | 270.6    |  |   | 250.1   
|                                                                                                                                                                                  |  |                |          |                  |   |               |  |              |          |  |   |         
|Total net revenues                                                                                                                                                                |  |                | 11,049.6 |                  |   | 10,588.8      |  |              | 22,209.2 |  |   | 21,152.4
|                                                                                                                                                                                  |  |                |          |                  |   |               |  |              |          |  |   |         
|Cost of operations:                                                                                                                                                               |  |                |          |                  |   |               |  |              |          |  |   |         
|Cost of product net revenues (Includes retail co-payments of $1,887 and $1,807 in the second quarters of 2007 and 2006, and $3,874 and $3,760
in the six months of 2007 and 2006) |  |                | 10,311.9 |                  |   | 9,977.6       |  |              | 20,661.8 |  |   | 19,968.4
|Cost of service revenues                                                                                                                                                          |  |                | 33.1     |                  |   | 27.7          |  |              | 69.1     |  |   | 62.2    
|                                                                                                                                                                                  |  |                |          |                  |   |               |  |              |          |  |   |         
|Total cost of revenues                                                                                                                                                            |  |                | 10,345.0 |                  |   | 10,005.3      |  |              | 20,730.9 |  |   | 20,030.6
|Selling, general and administrative expenses                                                                                                                                      |  |                | 274.0    |                  |   | 239.1         |  |              | 522.4    |  |   | 635.0   
|Amortization of intangibles                                                                                                                                                       |  |                | 54.6     |                  |   | 54.6          |  |              | 109.3    |  |   | 109.3   
|Interest and other (income) expense, net                                                                                                                                          |  |                | 21.9     |                  |   | 15.3          |  |              | 36.8     |  |   | 28.8    
|                                                                                                                                                                                  |  |                |          |                  |   |               |  |              |          |  |   |         
|Total cost of operations                                                                                                                                                          |  |                | 10,695.5 |                  |   | 10,314.3      |  |              | 21,399.4 |  |   | 20,803.7
|                                                                                                                                                                                  |  |                |          |                  |   |               |  |              |          |  |   |         
|Income before provision for income taxes                                                                                                                                          |  |                | 354.1    |                  |   | 274.5         |  |              | 809.8    |  |   | 348.7   
|Provision for income taxes                                                                                                                                                        |  |                | 139.2    |                  |   | 103.6         |  |              | 320.1    |  |   | 133.0   
|                                                                                                                                                                                  |  |                |          |                  |   |               |  |              |          |  |   |         
|Net income                                                                                                                                                                        |  | $              | 214.9    |                  | $ | 170.9         |  | $            | 489.7    |  | $ | 215.7   
|                                                                                                                                                                                  |  |                |          |                  |   |               |  |              |          |  |   |         
|Basic earnings per share:                                                                                                                                                         |  |                |          |                  |   |               |  |              |          |  |   |         
|Weighted average shares outstanding                                                                                                                                               |  |                | 277.2    |                  |   | 299.0         |  |              | 282.0    |  |   | 301.6   
|                                                                                                                                                                                  |  |                |          |                  |   |               |  |              |          |  |   |         
|Earnings per share                                                                                                                                                                |  | $              | 0.78     |                  | $ | 0.57          |  | $            | 1.74     |  | $ | 0.72    
|                                                                                                                                                                                  |  |                |          |                  |   |               |  |              |          |  |   |         
|Diluted earnings per share:                                                                                                                                                       |  |                |          |                  |   |               |  |              |          |  |   |         
|Weighted average shares outstanding                                                                                                                                               |  |                | 282.1    |                  |   | 302.9         |  |              | 286.8    |  |   | 305.8   
|                                                                                                                                                                                  |  |                |          |                  |   |               |  |              |          |  |   |         
|Earnings per share                                                                                                                                                                |  | $              | 0.76     |                  | $ | 0.56          |  | $            | 1.71     |  | $ | 0.71    
|                                                                                                                                                                                  |  |                |          |                  |   |               |  |              |          |  |   |         

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



2



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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 of CommonStock Issued |  | Shares ofTreasuryStock |  | $0.01 Par ValueCommon Stock |     | AccumulatedOtherComprehensiveIncome |   |      | AdditionalPaid-in Capital |  | RetainedEarnings |         | TreasuryStock |   |         | Total |  
|Balances at December 30, 2006                                                                        |  | 317,509                      |  | 29,061                 |  | $                           | 3.2 |                                     | $ | 15.3 |                           |  | $                | 7,156.2 |               | $ | 1,885.1 |       | $ | (1,556.3 | ) |  | $ | 7,503.5  |  
|                                                                                                     |  |                              |  |                        |  |                             |     |                                     |   |      |                           |  |                  |         |               |   |         |       |   |          |   |  |   |          |  
|Comprehensive income:                                                                                |  |                              |  |                        |  |                             |     |                                     |   |      |                           |  |                  |         |               |   |         |       |   |          |   |  |   |          |  
|                                                                                                     |  |                              |  |                        |  |                             |     |                                     |   |      |                           |  |                  |         |               |   |         |       |   |          |   |  |   |          |  
|Net income                                                                                           |  |                             |  |                       |  |                             |    |                                     |   |     |                           |  |                  |        |               |   | 489.7   |       |   |         |   |  |   | 489.7    |  
|                                                                                                     |  |                              |  |                        |  |                             |     |                                     |   |      |                           |  |                  |         |               |   |         |       |   |          |   |  |   |          |  
|Other comprehensive income, net of tax, related to defined benefit plans:                            |  |                              |  |                        |  |                             |     |                                     |   |      |                           |  |                  |         |               |   |         |       |   |          |   |  |   |          |  
|Amortization of prior service cost included in net periodic benefit cost, net of tax of $0.8 million |  |                             |  |                       |  |                             |    |                                     |   | (1.3 | )                         |  |                  |        |               |   |        |       |   |         |   |  |   | (1.3     | )
|Net gains (losses) included in net periodic benefit cost, net of tax of $(0.1) million               |  |                             |  |                       |  |                             |    |                                     |   | 0.2  |                           |  |                  |        |               |   |        |       |   |         |   |  |   | 0.2      |  
|                                                                                                     |  |                              |  |                        |  |                             |     |                                     |   |      |                           |  |                  |         |               |   |         |       |   |          |   |  |   |          |  
|Other comprehensive income                                                                           |  |                             |  |                       |  |                             |    |                                     |   | (1.1 | )                         |  |                  |        |               |   |        |       |   |         |   |  |   | (1.1     | )
|                                                                                                     |  |                              |  |                        |  |                             |     |                                     |   |      |                           |  |                  |         |               |   |         |       |   |          |   |  |   |          |  
|Total comprehensive income                                                                           |  |                             |  |                       |  |                             |    |                                     |   | (1.1 | )                         |  |                  |        |               |   | 489.7   |       |   |         |   |  |   | 488.6    |  
|Adoption of FASB Interpretation No. 48(1)                                                            |  |                             |  |                       |  |                             |    |                                     |   |     |                           |  |                  |        |               |   | 29.2    |       |   |         |   |  |   | 29.2     |  
|Issuance of common stock for options exercised, including tax benefit                                |  | 3,985                        |  |                       |  |                             |    |                                     |   |     |                           |  |                  | 181.9   |               |   |        |       |   |         |   |  |   | 181.9    |  
|Issuance of common stock under employee stock purchase plans                                         |  | 90                           |  |                       |  |                             |    |                                     |   |     |                           |  |                  | 5.4     |               |   |        |       |   |         |   |  |   | 5.4      |  
|Restricted stock and restricted stock unit activity, including tax benefit                           |  | 14                           |  |                       |  |                             |    |                                     |   |     |                           |  |                  | 23.3    |               |   |        |       |   |         |   |  |   | 23.3     |  
|Stock-based compensation related to options                                                          |  |                             |  |                       |  |                             |    |                                     |   |     |                           |  |                  | 22.4    |               |   |        |       |   |         |   |  |   | 22.4     |  
|Treasury stock acquired                                                                              |  |                             |  | 20,282                 |  |                             |    |                                     |   |     |                           |  |                  |        |               |   |        |       |   | (1,447.2 | ) |  |   | (1,447.2 | )
|                                                                                                     |  |                              |  |                        |  |                             |     |                                     |   |      |                           |  |                  |         |               |   |         |       |   |          |   |  |   |          |  
|Balances at June 30, 2007                                                                            |  | 321,598                      |  | 49,343                 |  | $                           | 3.2 |                                     | $ | 14.2 |                           |  | $                | 7,389.2 |               | $ | 2,404.0 |       | $ | (3,003.5 | ) |  | $ | 6,807.1  |  
|                                                                                                     |  |                              |  |                        |  |                             |     |                                     |   |      |                           |  |                  |         |               |   |         |       |   |          |   |  |   |          |  

---

|(1) | See Note 2, Recently
Adopted Financial Accounting Standard (FIN 48), for more information.
|--- | --------------------------------------------------------------------------------------------

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



3



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##### Table of Contents

MEDCO HEALTH SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

($ in millions)



|                                                                                  |  |                  |          |   |             |   |        |  
|--------------------------------------------------------------------------------- |  | ---------------- | -------- | - | ----------- | - | ------ | -
|                                                                                  |  | Six Months Ended |         
|                                                                                  |  | June 30,2007     |          |   | July 1,2006 |  
|Cash flows from operating activities:                                             |  |                  |          |   |             |   |        |  
|Net income                                                                        |  | $                | 489.7    |   |             | $ | 215.7  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                  |          |   |             |   |        |  
|Depreciation                                                                      |  |                  | 85.4     |   |             |   | 90.9   |  
|Amortization of intangibles                                                       |  |                  | 109.3    |   |             |   | 109.3  |  
|Deferred income taxes                                                             |  |                  | (69.8    | ) |             |   | (54.1  | )
|Stock-based compensation on employee stock plans                                  |  |                  | 46.5     |   |             |   | 51.1   |  
|Tax benefit on employee stock plans                                               |  |                  | 59.1     |   |             |   | 39.2   |  
|Excess tax benefits from stock-based compensation arrangements                    |  |                  | (38.7    | ) |             |   | (21.2  | )
|Other                                                                             |  |                  | 25.3     |   |             |   | 21.3   |  
|Net changes in assets and liabilities:                                            |  |                  |          |   |             |   |        |  
|Manufacturer accounts receivable, net                                             |  |                  | (89.1    | ) |             |   | (74.9  | )
|Client accounts receivable, net                                                   |  |                  | 51.6     |   |             |   | (143.2 | )
|Inventories, net                                                                  |  |                  | 102.5    |   |             |   | (4.8   | )
|Prepaid expenses and other current assets                                         |  |                  | (1.3     | ) |             |   | (96.8  | )
|Income taxes receivable                                                           |  |                  | (5.9     | ) |             |   |       |  
|Other noncurrent assets                                                           |  |                  | 10.0     |   |             |   | 15.1   |  
|Claims and other accounts payable                                                 |  |                  | (305.5   | ) |             |   | (90.9  | )
|Client rebates and guarantees payable                                             |  |                  | 183.7    |   |             |   | 32.0   |  
|Accrued expenses and other current and noncurrent liabilities                     |  |                  | 23.9     |   |             |   | 155.7  |  
|                                                                                  |  |                  |          |   |             |   |        |  
|Net cash provided by operating activities                                         |  |                  | 676.7    |   |             |   | 244.4  |  
|                                                                                  |  |                  |          |   |             |   |        |  
|Cash flows from investing activities:                                             |  |                  |          |   |             |   |        |  
|Capital expenditures                                                              |  |                  | (59.4    | ) |             |   | (56.3  | )
|Purchases of securities and other investments                                     |  |                  | (75.1    | ) |             |   | (58.3  | )
|Proceeds from sale of securities and other investments                            |  |                  | 80.3     |   |             |   | 56.3   |  
|                                                                                  |  |                  |          |   |             |   |        |  
|Net cash used by investing activities                                             |  |                  | (54.2    | ) |             |   | (58.3  | )
|                                                                                  |  |                  |          |   |             |   |        |  
|Cash flows from financing activities:                                             |  |                  |          |   |             |   |        |  
|Proceeds from long-term debt                                                      |  |                  | 1,000.0  |   |             |   |       |  
|Repayments on long-term debt                                                      |  |                  | (456.5   | ) |             |   | (37.7  | )
|Proceeds under accounts receivable financing facility                             |  |                  | 275.0    |   |             |   |       |  
|Debt issuance costs                                                               |  |                  | (1.6     | ) |             |   |       |  
|Purchase of treasury stock                                                        |  |                  | (1,447.2 | ) |             |   | (753.4 | )
|Excess tax benefits from stock-based compensation arrangements                    |  |                  | 38.7     |   |             |   | 21.2   |  
|Proceeds from employee stock plans                                                |  |                  | 134.3    |   |             |   | 104.3  |  
|                                                                                  |  |                  |          |   |             |   |        |  
|Net cash used by financing activities                                             |  |                  | (457.3   | ) |             |   | (665.6 | )
|                                                                                  |  |                  |          |   |             |   |        |  
|Net increase (decrease) in cash and cash equivalents                              |  |                  | 165.2    |   |             |   | (479.5 | )
|Cash and cash equivalents at beginning of period                                  |  |                  | 818.5    |   |             |   | 888.2  |  
|                                                                                  |  |                  |          |   |             |   |        |  
|Cash and cash equivalents at end of period                                        |  | $                | 983.7    |   |             | $ | 408.7  |  
|                                                                                  |  |                  |          |   |             |   |        |  

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



4



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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 audited consolidated financial statements and notes thereto as of December 30, 2006 included in the Companys Annual Report on Form 10-K. The Companys fiscal quarters for 2007 and 2006 each consisted of 13 weeks
and ended on June 30, 2007 and July 1, 2006, respectively. The change in goodwill for the six months ended June 30, 2007 results from converted option activity associated with the acquisition of Accredo Health, Incorporated
(Accredo).

Certain prior year amounts have been reclassified to conform to the current year presentation. Specifically, as
disclosed in Note 2, Summary of Significant Accounting Policies, to the Companys audited consolidated financial statements as of December 30, 2006 included in the Companys Annual Report on Form 10-K, the Company revised
its classification of certain components of accounts receivable, net. The Company has made conforming changes to its condensed consolidated statement of cash flows for the six months ended July 1, 2006.



|2. | RECENTLY ADOPTED FINANCIAL ACCOUNTING STANDARD (FIN 48)
|-- | -------------------------------------------------------

On December 31, 2006, the first day of the Companys 2007 fiscal year, the Company adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in
Income Taxes (FIN 48), 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 to 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. FIN 48 also provides guidance on derecognition of recognized tax benefits, classification, interest and penalties, accounting in interim
periods, disclosure and transition.

The Company has unrecognized tax benefits associated with previously accrued income taxes for periods
before and after the spin-off from Merck & Co., Inc. (Merck) on August 19, 2003. In connection with the spin-off from Merck, the Company entered into a tax responsibility allocation agreement with Merck. The tax
responsibility allocation agreement includes, among other items, terms for the filing and payment of income taxes through the spin-off date. Effective May 21, 2002, the Company converted from a limited liability company wholly-owned by Merck,
to a corporation (the incorporation). Prior to May 21, 2002, the Company was structured as a single member limited liability company, with Merck as the sole member. The Company is subject to examination in the U.S. federal
jurisdiction from the date of incorporation. For state income taxes prior to the Companys incorporation, Merck was taxed on the Companys income. This is also the case for the post incorporation period through the spin-off date in states
where Merck filed a unitary or combined tax return. While the Company is subject to state and local examinations by tax authorities, the Company is indemnified by Merck for these periods and tax filings. In states where Merck did not file a unitary
or combined tax return, the Company is responsible since incorporation for filing and paying the associated taxes. For the period up to the spin-off date, Merck incurred federal taxes on the Companys income as part of Mercks consolidated
tax return. Subsequent to the spin-off, the Company has filed its own federal and state tax returns and made the associated payments.



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##### Table of Contents

As a result of the implementation of FIN 48, the Company recognized a decrease of $43.4 million in the
liability for income tax contingencies no longer required under the more-likely-than-not accounting model of FIN 48, and a $29.2 million corresponding increase, net of federal income tax benefit, to the December 31, 2006 (the first day of
fiscal year 2007) balance of retained earnings. The Companys total liabilities for income tax contingencies as of December 31, 2006 amounted to $89.8 million, remain subject to audit, and may be released as a result of the expiration of
statutes of limitations. The majority of these statutes of limitations are expected to expire by the end of 2010, including certain amounts scheduled to expire over the next twelve months, and are not expected to have a significant impact on
earnings.

As of December 31, 2006, the Companys liabilities for income tax contingencies that, if recognized, would affect
income tax expense amounted to $58.3 million, net of federal income tax benefit.

The Company recognizes interest related to liabilities
for income tax contingencies in the provision for income taxes for which the Company had approximately $12.4 million accrued at December 31, 2006.

In the third quarter of 2006, the IRS commenced a routine examination of the Companys U.S. income tax returns for the period subsequent to the spin-off, from August 20, 2003 through December 31, 2005,
that is anticipated to be completed by the end of 2008. The Company has agreed to extend the statute of limitations for the 2003 tax period from September 15, 2007 to September 15, 2008. The Company is also undergoing various routine
examinations by state and local tax authorities for various filing periods. The Company has income taxes receivable representing amounts due from the IRS and state and local taxing authorities associated with the approval of a favorable accounting
method change received from the IRS in 2006 for the timing of the deductibility of certain rebates passed back to clients.



|3. | EARNINGS PER SHARE (EPS)
|-- | --------------------------

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



|                                                                       |  |                |  |                  |  |               |  |             
|---------------------------------------------------------------------- |  | -------------- |  | ---------------- |  | ------------- |  | ------------
|                                                                       |  | Quarters Ended |  | Six Months Ended
|                                                                       |  | June 30, 2007  |  | July 1, 2006     |  | June 30, 2007 |  | July 1, 2006
|Weighted average shares outstanding                                    |  | 277.2          |  | 299.0            |  | 282.0         |  | 301.6       
|Dilutive common stock equivalents:                                     |  |                |  |                  |  |               |  |             
|Outstanding stock options, restricted stock units and restricted stock |  | 4.9            |  | 3.9              |  | 4.8           |  | 4.2         
|                                                                       |  |                |  |                  |  |               |  |             
|Weighted average shares outstanding assuming dilution                  |  | 282.1          |  | 302.9            |  | 286.8         |  | 305.8       
|                                                                       |  |                |  |                  |  |               |  |             

Statement of Financial Accounting Standards (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 on a grant
by grant basis, 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 benefit that would be recorded in additional
paid-in capital when the award becomes deductible, are assumed to be used to repurchase shares at the average market price during the period. For the quarter and six months ended June 30, 2007, there were outstanding options to purchase
3.2 million and 2.6 million shares of Medco stock, respectively, which were not dilutive to the EPS calculations when applying the SFAS 128 treasury stock method. These outstanding options may be dilutive to future EPS calculations. 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. The decrease in the weighted average shares outstanding and
diluted weighted average shares outstanding results from the repurchase of 49.3 million shares of stock in connection with the Companys share repurchase program since its inception in 2005, compared to an equivalent amount of
21.6 million shares repurchased inception-to-date as of the second quarter of 2006. The Company repurchased approximately 20.3 million shares of stock in the first six months of 2007. These decreases in shares outstanding were partially
offset by the issuance of stock under employee stock plans and the dilutive effect of outstanding stock options. In accordance with SFAS 128, weighted average treasury shares are not considered part of the basic or diluted shares outstanding.



6



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|4. | ACCOUNTS RECEIVABLE
|-- | -------------------

The Company separately reports
accounts receivable due from manufacturers and accounts receivable due from clients. As of June 30, 2007 and December 30, 2006, total manufacturer accounts receivable, net, amounted to $1,620.7 million and $1,531.6 million, respectively.
As of June 30, 2007 and December 30, 2006, total client accounts receivable, net, amounted to $1,220.5 million and $1,294.9 million, respectively. Client accounts receivable are presented net of allowance for doubtful accounts and include
a credit for rebates and guarantees payable to clients when such are settled on a net basis in the form of an invoice credit.

The
Companys allowance for doubtful accounts as of June 30, 2007 and December 30, 2006 of $80.5 million and $81.8 million, respectively, includes $62.8 million and $65.1 million, respectively, for specialty pharmacy. The relatively
higher allowance for specialty pharmacy reflects a different credit risk profile than the pharmacy benefit management (PBM) business, and is characterized by reimbursement through medical coverage, including government agencies, and
higher patient co-payments. See Note 8, Segment Reporting, for more information on the Specialty Pharmacy segment. As of June 30, 2007 and December 30, 2006, identified net specialty pharmacy accounts receivable, primarily due
from payors and patients, amounted to $389.9 million and $401.5 million, respectively.



|5. | INTANGIBLE ASSETS, NET
|-- | ----------------------

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



|                            |  |                    |         |                         |   |         |  |                    |         |                         |   |         |  |   |         |  |   |        
|--------------------------- |  | ------------------ | ------- | ----------------------- | - | ------- |  | ------------------ | ------- | ----------------------- | - | ------- |  | - | ------- |  | - | -------
|                            |  | June 30, 2007      |         | December 31, 2006      
|                            |  | GrossCarryingValue |         | AccumulatedAmortization |   | Net     |  | GrossCarryingValue |         | AccumulatedAmortization |   | Net    
|Intangible assets:          |  |                    |         |                         |   |         |  |                    |         |                         |   |         |  |   |         |  |   |        
|PBM client relationships(1) |  | $                  | 3,172.2 |                         | $ | 1,481.4 |  | $                  | 1,690.8 |                         | $ | 3,172.2 |  | $ | 1,391.4 |  | $ | 1,780.8
|Accredo(2)                  |  |                    | 793.5   |                         |   | 70.5    |  |                    | 723.0   |                         |   | 793.5   |  |   | 51.2    |  |   | 742.3  
|                            |  |                    |         |                         |   |         |  |                    |         |                         |   |         |  |   |         |  |   |        
|Total                       |  | $                  | 3,965.7 |                         | $ | 1,551.9 |  | $                  | 2,413.8 |                         | $ | 3,965.7 |  | $ | 1,442.6 |  | $ | 2,523.1
|                            |  |                    |         |                         |   |         |  |                    |         |                         |   |         |  |   |         |  |   |        

---

|(1) | Principally comprised of the recorded value of Medcos
client relationships at the time of the acquisition of the Company by Merck 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.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

Aggregate
intangible asset amortization expense in each of the five succeeding fiscal years is estimated to be approximately $218 million. The weighted average useful life of intangible assets subject to amortization is 23 years in total and by major
intangible asset class is approximately 23 years for the PBM client relationships and approximately 22 years for the Accredo acquired intangible assets.



|6. | DEBT AND REFINANCING
|-- | --------------------

The Companys debt
consists of the following ($ in millions):



|                                                         |  |              |         |   |                  |   |         |  
|-------------------------------------------------------- |  | ------------ | ------- | - | ---------------- | - | ------- | -
|                                                         |  | June 30,2007 |         |   | December 30,2006 |  
|Short-term debt:                                         |  |              |         |   |                  |   |         |  
|Current portion of long-term debt                        |  | $            |        |   |                  | $ | 75.3    |  
|Accounts receivable financing facility                   |  |              | 600.0   |   |                  |   | 325.0   |  
|                                                         |  |              |         |   |                  |   |         |  
|Total short-term debt                                    |  |              | 600.0   |   |                  |   | 400.3   |  
|                                                         |  |              |         |   |                  |   |         |  
|Long-term debt:                                          |  |              |         |   |                  |   |         |  
|Senior unsecured term loan                               |  |              | 1,000.0 |   |                  |   | 381.3   |  
|7.25% senior notes due 2013, net of unamortized discount |  |              | 497.2   |   |                  |   | 497.0   |  
|Fair value adjustment for interest rate swap agreements  |  |              | (15.2   | ) |                  |   | (11.9   | )
|                                                         |  |              |         |   |                  |   |         |  
|Total long-term debt                                     |  |              | 1,482.0 |   |                  |   | 866.4   |  
|                                                         |  |              |         |   |                  |   |         |  
|Total debt                                               |  | $            | 2,082.0 |   |                  | $ | 1,266.7 |  
|                                                         |  |              |         |   |                  |   |         |  



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On April 30, 2007, the Company entered into a new senior unsecured credit agreement which, in
addition to replacing the Companys existing senior unsecured bank credit facility, is available to support the Company's recently expanded share repurchase program, general corporate activities, working capital requirements and capital
expenditures. In connection with the new credit facility, the Companys previously existing senior bank credit facility was extinguished and the Companys existing indebtedness outstanding pursuant to such facility was paid in full. The
new facility is comprised of a $1 billion, 5-year senior unsecured term loan and a $2 billion, 5-year senior unsecured revolving credit facility, compared with the previously existing $750 million senior unsecured term loan facility and the $750
million senior unsecured revolving credit facility. The new term loan matures on April 30, 2012, at which time the outstanding balance is required to be repaid, compared with the previously existing credit facility, under which the Company had
quarterly installment payments. At current debt ratings, the new credit facility bears interest at London Interbank Offered Rate (LIBOR) plus a 0.45 percent margin, with a 10 basis point commitment fee due on the unused revolving credit
facility. The previously existing credit facility incurred interest at the LIBOR plus a 0.5% margin.

As of June 30, 2007, there was
$1 billion outstanding under the term loan facility. In addition, the Company had no amounts outstanding and had $1.987 billion available for borrowing, exclusive of $13 million in issued letters of credit, under its revolving credit facility.



|7. | 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 net cost for the Companys pension
plans consisted of the following components ($ in millions):



|                                     |  |                |      |   |                  |   |      |              |  |   |             |   |  |   |      |  
|------------------------------------ |  | -------------- | ---- | - | ---------------- | - | ---- | ------------ |  | - | ----------- | - |  | - | ---- | -
|                                     |  | Quarters Ended |      |   | Six Months Ended |  
|                                     |  | June 30,2007   |      |   | July 1,2006      |   |      | June 30,2007 |  |   | July 1,2006 |  
|Service cost                         |  | $              | 4.7  |   |                  | $ | 4.3  |              |  | $ | 9.1         |   |  | $ | 8.6  |  
|Interest cost                        |  |                | 2.3  |   |                  |   | 1.6  |              |  |   | 4.0         |   |  |   | 3.2  |  
|Expected return on plan assets       |  |                | (3.2 | ) |                  |   | (2.3 | )            |  |   | (5.6        | ) |  |   | (4.6 | )
|Net amortization of actuarial losses |  |                | (0.1 | ) |                  |   | 0.1  |              |  |   |            |   |  |   | 0.2  |  
|                                     |  |                |      |   |                  |   |      |              |  |   |             |   |  |   |      |  
|Net pension cost                     |  | $              | 3.7  |   |                  | $ | 3.7  |              |  | $ | 7.5         |   |  | $ | 7.4  |  
|                                     |  |                |      |   |                  |   |      |              |  |   |             |   |  |   |      |  

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



|                                         |  |                |      |   |                  |   |      |              |  |   |             |   |  |   |      |  
|---------------------------------------- |  | -------------- | ---- | - | ---------------- | - | ---- | ------------ |  | - | ----------- | - |  | - | ---- | -
|                                         |  | Quarters Ended |      |   | Six Months Ended |  
|                                         |  | June 30,2007   |      |   | July 1,2006      |   |      | June 30,2007 |  |   | July 1,2006 |  
|Service cost                             |  | $              | 0.2  |   |                  | $ | 0.4  |              |  | $ | 0.4         |   |  | $ | 0.9  |  
|Interest cost                            |  |                | 0.2  |   |                  |   | 0.5  |              |  |   | 0.4         |   |  |   | 0.9  |  
|Amortization of prior service credit     |  |                | (1.1 | ) |                  |   | (1.0 | )            |  |   | (2.2        | ) |  |   | (2.1 | )
|Net amortization of actuarial losses     |  |                | 0.1  |   |                  |   | 0.4  |              |  |   | 0.3         |   |  |   | 0.8  |  
|                                         |  |                |      |   |                  |   |      |              |  |   |             |   |  |   |      |  
|Net postretirement benefit (credit) cost |  | $              | (0.6 | ) |                  | $ | 0.3  |              |  | $ | (1.1        | ) |  | $ | 0.5  |  
|                                         |  |                |      |   |                  |   |      |              |  |   |             |   |  |   |      |  

The Company amended the postretirement healthcare benefit plan in 2003, which reduced and capped
benefit obligations, the effect of which is reflected in the amortization of the prior service credit component of the net postretirement benefit cost. In the third quarter of 2006, there was a change in assumption regarding retiree participation
based on recent plan experience under the amended plan design. The activity for the quarter and six months ended June 30, 2007 reflects that change in assumption.



|8. | SEGMENT REPORTING
|-- | -----------------

Reportable Segments.As a
result of the Companys acquisition of Accredo in August 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 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



8



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##### Table of Contents

acquisition and is also comprised of specialty pharmacy activity previously included within Medcos PBM business, includes the sale of higher margin
specialty pharmacy products and services for the treatment of chronic and complex (potentially life-threatening) diseases.

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 ancillary administration equipment, special packaging, and a 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, as well as PBM clients as payors.

Selected Segment Income and Asset Information.Total net revenues and operating income are measures used by the chief operating decision maker to
assess the performance of each of the Companys operating segments. The following tables present selected financial information about the Companys reportable segments, including a reconciliation of operating income to income before
provision for income taxes ($ in millions):



|                                                              |     |                                |                   |                               |       |         |     |   |                   |  |       |          |  |   |         |  |   |         
|------------------------------------------------------------- | --- | ------------------------------ | ----------------- | ----------------------------- | ----- | ------- | --- | - | ----------------- |  | ----- | -------- |  | - | ------- |  | - | --------
|Quarterly Results:                                            |     | Quarter Ended June 30, 2007    |                   | Quarter Ended July 1, 2006   
|                                                              | PBM |                                | SpecialtyPharmacy |                               | Total |         | PBM |   | SpecialtyPharmacy |  | Total
|Product net revenues                                          |     | $                              | 9,431.5           |                               | $     | 1,480.8 |     | $ | 10,912.3          |  | $     | 9,140.3  |  | $ | 1,318.6 |  | $ | 10,458.9
|Total service revenues                                        |     |                                | 123.3             |                               |       | 14.0    |     |   | 137.3             |  |       | 115.2    |  |   | 14.7    |  |   | 129.9   
|                                                              |     |                                |                   |                               |       |         |     |   |                   |  |       |          |  |   |         |  |   |         
|Total net revenues                                            |     |                                | 9,554.8           |                               |       | 1,494.8 |     |   | 11,049.6          |  |       | 9,255.5  |  |   | 1,333.3 |  |   | 10,588.8
|Total cost of revenues                                        |     |                                | 8,969.1           |                               |       | 1,375.9 |     |   | 10,345.0          |  |       | 8,782.7  |  |   | 1,222.6 |  |   | 10,005.3
|Selling, general and administrative expenses                  |     |                                | 219.1             |                               |       | 54.9    |     |   | 274.0             |  |       | 187.9    |  |   | 51.2    |  |   | 239.1   
|Amortization of intangibles                                   |     |                                | 45.0              |                               |       | 9.6     |     |   | 54.6              |  |       | 45.0     |  |   | 9.6     |  |   | 54.6    
|                                                              |     |                                |                   |                               |       |         |     |   |                   |  |       |          |  |   |         |  |   |         
|Operating income                                              |     | $                              | 321.6             |                               | $     | 54.4    |     | $ | 376.0             |  | $     | 239.9    |  | $ | 49.9    |  | $ | 289.8   
|Reconciling item to income before provision for income taxes: |     |                                |                   |                               |       |         |     |   |                   |  |       |          |  |   |         |  |   |         
|Interest and other (income) expense, net                      |     |                                |                   |                               |       |         |     |   | 21.9              |  |       |          |  |   |         |  |   | 15.3    
|                                                              |     |                                |                   |                               |       |         |     |   |                   |  |       |          |  |   |         |  |   |         
|Income before provision for income taxes                      |     |                                |                   |                               |       |         |     | $ | 354.1             |  |       |          |  |   |         |  | $ | 274.5   
|                                                              |     |                                |                   |                               |       |         |     |   |                   |  |       |          |  |   |         |  |   |         
|                                                              |     |                                |                   |                               |       |        
|Capital expenditures                                          |     | $                              | 29.0              |                               | $     | 5.4     |     | $ | 34.4              |  | $     | 22.2     |  | $ | 6.4     |  | $ | 28.6    
|                                                              |     |                               
|Year-to-Date Results:                                         |     | Six Months Ended June 30, 2007 |                   | Six Months Ended July 1, 2006
|                                                              | PBM |                                | SpecialtyPharmacy |                               | Total |         | PBM |   | SpecialtyPharmacy |  | Total
|Product net revenues                                          |     | $                              | 19,022.8          |                               | $     | 2,915.8 |     | $ | 21,938.6          |  | $     | 18,267.8 |  | $ | 2,634.5 |  | $ | 20,902.3
|Total service revenues                                        |     |                                | 241.9             |                               |       | 28.7    |     |   | 270.6             |  |       | 222.1    |  |   | 28.0    |  |   | 250.1   
|                                                              |     |                                |                   |                               |       |         |     |   |                   |  |       |          |  |   |         |  |   |         
|Total net revenues                                            |     |                                | 19,264.7          |                               |       | 2,944.5 |     |   | 22,209.2          |  |       | 18,489.9 |  |   | 2,662.5 |  |   | 21,152.4
|Total cost of revenues                                        |     |                                | 18,021.5          |                               |       | 2,709.4 |     |   | 20,730.9          |  |       | 17,579.0 |  |   | 2,451.6 |  |   | 20,030.6
|Selling, general and administrative expenses                  |     |                                | 414.5             |                               |       | 107.9   |     |   | 522.4             |  |       | 536.9    |  |   | 98.1    |  |   | 635.0   
|Amortization of intangibles                                   |     |                                | 90.0              |                               |       | 19.3    |     |   | 109.3             |  |       | 90.0     |  |   | 19.3    |  |   | 109.3   
|                                                              |     |                                |                   |                               |       |         |     |   |                   |  |       |          |  |   |         |  |   |         
|Operating income                                              |     | $                              | 738.7             |                               | $     | 107.9   |     | $ | 846.6             |  | $     | 284.0    |  | $ | 93.5    |  | $ | 377.5   
|Reconciling item to income before provision for income taxes: |     |                                |                   |                               |       |         |     |   |                   |  |       |          |  |   |         |  |   |         
|Interest and other (income) expense, net                      |     |                                |                   |                               |       |         |     |   | 36.8              |  |       |          |  |   |         |  |   | 28.8    
|                                                              |     |                                |                   |                               |       |         |     |   |                   |  |       |          |  |   |         |  |   |         
|Income before provision for income taxes                      |     |                                |                   |                               |       |         |     | $ | 809.8             |  |       |          |  |   |         |  | $ | 348.7   
|                                                              |     |                                |                   |                               |       |         |     |   |                   |  |       |          |  |   |         |  |   |         
|                                                              |     |                                |                   |                               |       |        
|Capital expenditures                                          |     | $                              | 49.0              |                               | $     | 10.4    |     | $ | 59.4              |  | $     | 43.4     |  | $ | 12.9    |  | $ | 56.3    
|                                                              |     |                               
|Identifiable Assets                                           |     | As of June 30, 2007            |                   | As of December 30, 2006      
|                                                              | PBM |                                | SpecialtyPharmacy |                               | Total |         | PBM |   | SpecialtyPharmacy |  | Total
|Total identifiable assets                                     |     | $                              | 11,080.7          |                               | $     | 3,254.5 |     | $ | 14,335.2          |  | $     | 11,146.3 |  | $ | 3,241.8 |  | $ | 14,388.1



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|9. | 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.

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 other counts for a total of $7.8 million. On July 2, 2007, the Company settled this matter.

The
Company is aware of the existence of two sealed qui tammatters. 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 these two qui tammatters during settlement
negotiations with the Department of Justice in mid-2006. The Company does not know the identities of the relators or the other defendants in either of these matters. These two qui tammatters were not considered in the Companys
settlement with the Department of Justice discussed in Note 3, Legal Settlements Charge, to the Companys audited consolidated financial statements as of December 30, 2006 included in the Companys Annual Report on Form
10-K.

The Company continues to believe that its business practices comply in all material respects with applicable laws and regulations
and intends to vigorously defend itself in these actions.

ERISA and Similar Litigation.In December 1997, a lawsuit captioned
Gruer 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 had breached fiduciary obligations under ERISA in a variety of ways. After the Gruercase 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 the Gruerseries 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 Gruer series of 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 U.S. 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 are pending.

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 Gruersettlement 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



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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 Gruersettlement discussed above on the Jonesaction has not yet been litigated. In addition to these cases, a proposed class action complaint against
Merck and the Company has been filed in the U.S. District Court for the Northern District of California by trustees of another benefit plan, the United Food and Commercial Workers Local Union No. 1529 and Employers Health and Welfare Plan
Trust. This plan has elected to opt out of the Gruer settlement. The United Food and Commercial Workers Local Union No. 1529 and Employers Health and Welfare Plan Trust v. Medco Health Solutions, Inc. and Merck & Co., Inc.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.

In September 2002, a lawsuit captioned Miles 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. The Milescase 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.

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 the claims as described above.

Antitrust and Related Litigation.In August 2003, a lawsuit captioned Brady 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 had 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 class certification is currently pending.

In October 2003,
a lawsuit captioned North 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 December 2005, a lawsuit captioned Mike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 had contracted with the Company and California pharmacies that had indirectly
purchased prescription drugs from Merck and make factual allegations similar to those in the Alameda Drug Companyaction discussed below. 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 April 2006, the Bradyplaintiffs filed a petition to transfer and consolidate various antitrust actions against PBMs, including North
Jackson, Brady,and Mikes Medical Centerbefore a single federal judge. The motion was granted on August 24, 2006. These actions are now consolidated for pretrial purposes in the U.S. District Court for the Eastern District of
Pennsylvania. The consolidated action is known as In re Pharmacy Benefit Managers Antitrust Litigation.



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In January 2004, a lawsuit captioned Alameda 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 had contracted with the Company and that had 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-in-intervention filed by the U.S. Attorney for the Eastern District of Pennsylvania, discussed in Note 3, Legal Settlements Charge, to the Companys audited consolidated financial
statements as of December 30, 2006 included in the Companys Annual Report on Form 10-K. 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 had 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 the 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 February 2006, a lawsuit captioned Chelsea 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 had 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 June 12, 2006, the Company filed a
motion to stay the action pending arbitration. That motion is pending.

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

Contract Litigation.In July 2003, a lawsuit captioned Group 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. A jury trial is scheduled to commence in October 2007.

In October 2002, the Company filed a declaratory judgment action, captioned Medco 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 counterclaim 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.
On June 27, 2007, the Company settled these two matters.

Accredo.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



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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.

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.

There is 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 that contain
minimum purchasing volume commitments. As of June 30, 2007, these purchase obligations, which amounted to $44.3 million for the remainder of 2007, were all associated with the Specialty Pharmacy segment.



|10. | RECENT ACCOUNTING PRONOUNCEMENT
|--- | -------------------------------

In February 2007,
the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment of FASB Statement No. 115, (SFAS 159) which is effective for fiscal years beginning after
November 15, 2007. SFAS 159 permits entities to measure eligible financial assets, financial liabilities and firm commitments at fair value, on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair
value under other U.S. generally accepted accounting principles. The fair value measurement election is irrevocable and subsequent changes in fair value must be recorded in earnings. The Companys adoption of SFAS 159 in 2008 is not expected to
have a material impact 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. 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, projects, 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:



| |  |  | Competition in the PBM, specialty pharmacy and the broader healthcare industry is intense and could impair our ability to attract and retain clients;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Failure to retain key clients could result in significantly decreased revenues and could harm our profitability;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | If we do not continue to earn and retain purchase discounts and rebates from manufacturers at current levels, our gross margins may decline;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | If we fail to comply with complex and rapidly evolving laws and regulations, we could suffer penalties, or be required to pay substantial damages or make
significant changes to our operations;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Government efforts to reduce healthcare costs and alter healthcare financing practices could lead to a decreased demand for our services or to reduced
profitability;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Failure to execute our Medicare Part D prescription drug benefits strategy could adversely impact our business and financial results;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | PBMs could be subject to claims under ERISA if they are found to be a fiduciary of a health benefit plan governed by ERISA;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | Pending litigation could adversely impact our business practices and have a material adverse effect on our business, financial condition, liquidity and operating
results;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We are subject to a corporate integrity agreement that requires certain changes in our business practices, and the noncompliance with which may impede our ability
to conduct business with the federal government;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Legislative or regulatory initiatives that restrict or prohibit the PBM industrys ability to use patient identifiable medical information could limit our
ability to use information that is critical to the operation of our business;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our specialty pharmacy business is dependent on our relationships with a limited number of biopharmaceutical suppliers and the loss of any of these relationships
could significantly impact our ability to sustain or increase our revenues;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our ability to grow our specialty pharmacy business could be limited if we do not expand our existing base of drugs or if we lose patients;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our specialty pharmacy business and Medicare Part D offerings expose us to increased credit risk;
| | - |  | -------------------------------------------------------------------------------------------------



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| |  |  | Changes in industry pricing benchmarks could adversely affect our financial performance;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | The terms and covenants relating to our existing indebtedness could adversely impact our financial performance;
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | Prescription volumes may decline, and our net revenues and profitability may be negatively impacted, if products are withdrawn from the market or if increased
safety risk profiles of specific drugs result in utilization decreases;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We may be subject to liability claims for damages and other expenses that are not covered by insurance;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | The success of our business depends on maintaining a well-secured pharmacy operation and technology infrastructure and failure to execute could adversely impact our
business;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We could be required to record a material non-cash charge to income if our recorded intangible assets are impaired, or if we shorten intangible asset useful lives;
and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Anti-takeover provisions of the Delaware General Corporation Law (DGCL), our certificate of incorporation and our bylaws could delay or deter a change
in control and make it more difficult to remove incumbent officers and directors.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.

Overview

We are the nations
leading pharmacy benefit manager based on net revenues. We provide sophisticated traditional and specialty prescription drug benefit programs and services for our clients, members of client-funded benefit plans or those served by the Medicare Part D
Prescription Drug Program (Medicare Part D), and individual patients. Our business model requires collaboration with retail pharmacies, physicians, the Centers for Medicare & Medicaid Services (CMS) for Medicare Part
D, and particularly in specialty pharmacy, collaboration with state Medicaid agencies, and other payors such as insurers. Our programs and services help control the cost and enhance the quality of prescription drug benefits. 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, Accredo Health Group, which became the nations largest specialty pharmacy based
on revenues with the acquisition of Accredo Health, Incorporated (Accredo) on August 18, 2005 (the Accredo acquisition). See Note 4, Acquisitions of Businesses, to our audited consolidated financial
statements included in our Annual Report on Form 10-K for the fiscal year ended December 30, 2006 for more information. When we use the term mail order, we mean Medcos mail-order pharmacy operations, as well as Accredos
specialty pharmacy operations. When we use Medco, we, us and our, we mean Medco Health Solutions, Inc., a Delaware corporation, and its consolidated subsidiaries.

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 in light of the significant brand-name drug patent expirations expected to occur over the
next several years, and 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 growing specialty pharmacy industry.

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 revenue and operating income; Earnings Before



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##### Table of Contents

Interest Income/Expense, Taxes, Depreciation, and Amortization (EBITDA); and EBITDA per adjusted prescription. See EBITDA 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.

Financial Performance Summary for the Quarter and Six Months Ended June 30, 2007

Our net income increased 25.7% to $214.9 million and diluted earnings per share increased 35.7% to $0.76 in the second quarter of 2007 compared to $170.9
million and $0.56 per share, respectively, in the second quarter of 2006. Our net income increased 127.0% to $489.7 million and diluted earnings per share increased 140.8% to $1.71 in the six months of 2007 compared to $215.7 million and $0.71 per
share, respectively, in the six months of 2006. The 2006 results reflect a 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. Excluding the legal
settlements charge from 2006, our six-month 2007 net income increased 55.2% and diluted earnings per share increased 66.0%. These increases reflect higher generic dispensing rates and mail-order penetration, and a decrease in the diluted weighted
average shares outstanding.

The diluted weighted average shares outstanding were 282.1 million for the second quarter of 2007 and
286.8 million for the six months of 2007, compared to 302.9 million for the second quarter of 2006 and 305.8 million for the six months of 2006, representing decreases of 6.9% and 6.2%, respectively. These decreases result from the
repurchase of 49.3 million shares of stock in connection with our share repurchase program since its inception in 2005, compared to an equivalent amount of 21.6 million shares repurchased inception-to-date as of the second quarter of 2006.
There were approximately 8.7 million and 20.3 million shares repurchased in the second quarter and six months of 2007, respectively, compared to 10.4 million and 13.9 million shares repurchased in the second quarter and six
months of 2006. These repurchases were partially offset by the dilutive effect of stock options.

Total net revenues increased 4.4% to
$11,049.6 million for the second quarter of 2007, and increased 5.0% to $22,209.2 for the six months of 2007, compared to the same periods last year. Product net revenues increased 4.3% to $10,912.3 million for the second quarter, and increased 5.0%
to $21,938.6 million for the six months, which reflect higher prices charged by pharmaceutical manufacturers, higher volumes including new business, partially offset by higher generic dispensing rates and steeper client discounts including higher
levels of rebate sharing. Additionally, our service revenues increased 5.7% to $137.3 million for the second quarter of 2007, and increased 8.2% to $270.6 million for the six months of 2007, which is attributable to higher client and other service
revenues, reflecting higher claims processing administrative fees and service fees including clinical programs, partially offset by lower manufacturer service revenues.

Total prescription volume, adjusted for the difference in days supply between mail and retail, increased 3.7% to 186.2 million for the second quarter of 2007, and increased 3.5% to 375.7 million for the six
months of 2007, as a result of higher volumes from new clients, partially offset by client terminations. The adjusted mail-order penetration rate increased to 37.7% for the second quarter of 2007, compared to 36.7% for the second quarter of 2006.
For the six months, the adjusted mail-order penetration rate increased to 37.3% in 2007, from 36.2% in 2006.

Our overall generic
dispensing rate increased to 58.9% in the second quarter of 2007 and 58.6% in the six months of 2007, compared to 53.9% in the second quarter and 53.8% in the six months of 2006, as a result of significant brand-name drugs that have lost patent
protection during the mid-year of 2006 through the second quarter of 2007. The higher generic dispensing rates, which contribute to lower costs for clients and members, resulted in a reduction of approximately $720 million in net revenues for the
second quarter of 2007 and $1,350 million for the six months of 2007.

The increases in overall gross margin to 6.4% and 6.7% in the second
quarter and six months of 2007, respectively, from 5.5% and 5.3% in the second quarter and six months of 2006, respectively, were primarily driven by our increased generic dispensing rates and mail-order penetration.

Selling, general and administrative (SG&A) expenses of $274 million for the second quarter of 2007 increased from the second quarter of
2006 by $35 million, or 14.6%, primarily as a result of higher employee-related costs associated with business growth across the Company, including higher performance bonus expenses, and client and product support activity. SG&A expenses for the
six months of 2007 decreased from 2006 by $113 million, or 17.7%, primarily as a result of the $162.6 million pre-tax legal settlements charge recorded in the first quarter of 2006, partially offset by higher employee-related costs.



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Interest and other (income) expense, net, increased $7 million compared to the second quarter of 2006,
and increased $8 million compared to the six months of 2006, primarily reflecting higher interest expense from higher interest rates and increased borrowings from our debt refinancing that took place at the end of April 2007, to support the funding
of our share repurchase initiative and other general expenditures.

Our effective tax rate (defined as the percentage relationship of
provision for income taxes to income before provision for income taxes) was 39.3% for the second quarter and 39.5% for the six months of 2007, up from 37.7% for the second quarter and 38.1% for the six months of 2006. The 2006 tax rates reflected
the favorable resolution of certain income taxes payable and the closure of state income tax audits.

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) risk-based
product offering. This product involves prescription dispensing for members covered under the 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 received from 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 and six months of 2007, premium revenues for our PDP product were $57 million and $134 million,
respectively, or less than 1% of total net revenues. In the second quarter and six months of 2006, premium revenues for our PDP product were $136 million and $266 million, respectively, or approximately 1% of total net revenues.

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 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 Use of



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Estimates and Critical Accounting Policies and Estimates and Note 2, Summary of Significant Accounting Policies, to our audited
consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 30, 2006.

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. As a CMS-approved PDP, our policies and practices associated with executing the program are
subject to audit, and if material contractual or regulatory non-compliance was to be identified, applicable sanctions and/or monetary penalties may be imposed.

Service revenues consist principally of administrative fees and clinical program fees earned from clients and other non-product-related revenues, sales of prescription services to pharmaceutical manufacturers and data
to other parties, and performance-oriented fees paid by specialty pharmacy manufacturers.

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 by 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 $3,850 for coverage year 2007 and $3,600 for coverage year 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, as well as
costs associated with member communication materials.

SG&A expenses reflect the costs of operations dedicated to executive management,
the generation of new sales, maintenance of existing client relationships, management of clinical programs, enhancement of technology capabilities, direction of pharmacy operations, and performance of reimbursement activities, in addition to
finance, legal and other staff activities, and the effect of certain legal settlements.

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

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 audited consolidated financial statements included in our Annual Report on Form
10-K for the fiscal year ended December 30, 2006.



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##### Table of Contents

Consolidated Balance Sheets.Our assets include cash and cash equivalent investments, 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 and financing activities, and primarily includes time deposits with
banks or other financial institutions, and money market mutual funds. 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.

Manufacturer accounts receivable balances primarily include amounts due from brand-name pharmaceutical
manufacturers for earned rebates and other prescription services. Client accounts receivable 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 rebates and guarantees payable when such are settled on a net basis in the form of an invoice credit. In cases where
rebates and guarantees are settled with the client on a net basis, and the rebates and guarantees payable are greater than the corresponding client accounts receivable balances, the net liability is reclassified to client rebates and guarantees
payable. When these payables are settled in the form of a check or wire, they are recorded on a gross basis and the entire liability is reflected in client rebates and guarantees payable. Our client 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. Deferred tax assets primarily represent temporary
differences between the financial statement basis and the tax basis of certain accrued expenses, stock-based compensation, and client rebate pass-back liabilities. Income taxes receivable represents amounts due from the IRS and state and local
taxing authorities associated with the approval of a favorable accounting method change received from the IRS in 2006 for the timing of the deductibility of certain rebates passed back to clients. Fixed assets include investments in our corporate
headquarters, mail-order pharmacies, call center pharmacies, account service offices, and information technology, including capitalized software development. Goodwill and intangible assets are comprised primarily of the push-down of goodwill and
intangibles related to our acquisition in 1993 by Merck, and, for the specialty pharmacy business, 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, client rebates and guarantees 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 by the retail pharmacies, as well as
amounts payable for mail-order prescription inventory purchases and other purchases made in the normal course of business. Client rebates and guarantees payable include amounts due to clients that will ultimately be settled in the form of a check or
wire, as well as any residual liability in cases where the payable is settled as an invoice credit and exceeds the corresponding client accounts receivable balances. 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 premiums, cost share, and catastrophic reinsurance payments received in
advance 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 below.

Our stockholders equity includes an offset for treasury stock purchases under our share repurchase program. The accumulated other comprehensive
income component of stockholders equity includes the net gains and losses and prior service costs and credits related to our pension and other postretirement benefit plans in accordance with Statement of Financial Accounting Standards
(SFAS) No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plansan amendment of Financial Accounting Standards Board (FASB) Statements No. 87, 88, 106, and
132(R).

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 bi-weekly 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



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##### Table of Contents

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 also 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, cost share, and various subsidies received in advance 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. 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. Ongoing cash outflows are associated with expenditures to support our mail-order, retail pharmacy network operations, call center pharmacies and other SG&A 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 Incorporated, which is currently our largest client, amounted
to approximately $2,500 million and $5,000 million, or 22%, of our net revenues in the second quarter and six months of 2007, respectively, and approximately $2,200 million and $4,400 million, or 21%, of our net revenues in the second quarter and
six months of 2006, respectively. None of our other clients individually represented more than 10% of our net revenues in the second quarter and six months of 2007 or 2006.



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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):



|                                    |  |                           |          |   |                    |   |       |                          |  |       |                               |  |   |                    |   |  |                               |          |   |  |   |         |    |  |       |    |  |   |          |  
|----------------------------------- |  | ------------------------- | -------- | - | ------------------ | - | ----- | ------------------------ |  | ----- | ----------------------------- |  | - | ------------------ | - |  | ----------------------------- | -------- | - |  | - | ------- | -- |  | ----- | -- |  | - | -------- | -
|                                    |  | QuarterEndedJune 30, 2007 |          |   | Increase(Decrease) |   |       | QuarterEndedJuly 1, 2006 |  |       | Six Months EndedJune 30, 2007 |  |   | Increase(Decrease) |   |  | Six Months Ended July 1, 2006 |         
|Net Revenues                        |  |                           |          |   |                    |   |       |                          |  |       |                               |  |   |                    |   |  |                               |          |   |  |   |         |    |  |       |    |  |   |          |  
|Retail product(1)                   |  | $                         | 6,603.3  |   |                    | $ | 150.2 |                          |  | 2.3   | %                             |  | $ | 6,453.1            |   |  | $                             | 13,315.6 |   |  | $ | 441.5   |    |  | 3.4   | %  |  | $ | 12,874.1 |  
|Mail-order product                  |  |                           | 4,309.0  |   |                    |   | 303.2 |                          |  | 7.6   | %                             |  |   | 4,005.8            |   |  |                               | 8,623.0  |   |  |   | 594.8   |    |  | 7.4   | %  |  |   | 8,028.2  |  
|                                    |  |                           |          |   |                    |   |       |                          |  |       |                               |  |   |                    |   |  |                               |          |   |  |   |         |    |  |       |    |  |   |          |  
|Total product(1)                    |  | $                         | 10,912.3 |   |                    | $ | 453.4 |                          |  | 4.3   | %                             |  | $ | 10,458.9           |   |  | $                             | 21,938.6 |   |  | $ | 1,036.3 |    |  | 5.0   | %  |  | $ | 20,902.3 |  
|                                    |  |                           |          |   |                    |   |       |                          |  |       |                               |  |   |                    |   |  |                               |          |   |  |   |         |    |  |       |    |  |   |          |  
|Client and other service            |  |                           | 100.8    |   |                    |   | 18.0  |                          |  | 21.7  | %                             |  |   | 82.8               |   |  |                               | 197.6    |   |  |   | 36.7    |    |  | 22.8  | %  |  |   | 160.9    |  
|Manufacturer service                |  |                           | 36.5     |   |                    |   | (10.6 | )                        |  | (22.5 | )%                            |  |   | 47.1               |   |  |                               | 73.0     |   |  |   | (16.2   | )  |  | (18.2 | )% |  |   | 89.2     |  
|                                    |  |                           |          |   |                    |   |       |                          |  |       |                               |  |   |                    |   |  |                               |          |   |  |   |         |    |  |       |    |  |   |          |  
|Total service                       |  | $                         | 137.3    |   |                    | $ | 7.4   |                          |  | 5.7   | %                             |  | $ | 129.9              |   |  | $                             | 270.6    |   |  | $ | 20.5    |    |  | 8.2   | %  |  | $ | 250.1    |  
|                                    |  |                           |          |   |                    |   |       |                          |  |       |                               |  |   |                    |   |  |                               |          |   |  |   |         |    |  |       |    |  |   |          |  
|Total net revenues(1)               |  | $                         | 11,049.6 |   |                    | $ | 460.8 |                          |  | 4.4   | %                             |  | $ | 10,588.8           |   |  | $                             | 22,209.2 |   |  | $ | 1,056.8 |    |  | 5.0   | %  |  | $ | 21,152.4 |  
|                                    |  |                           |          |   |                    |   |       |                          |  |       |                               |  |   |                    |   |  |                               |          |   |  |   |         |    |  |       |    |  |   |          |  
|Cost of Revenues                    |  |                           |          |   |                    |   |       |                          |  |       |                               |  |   |                    |   |  |                               |          |   |  |   |         |    |  |       |    |  |   |          |  
|Product(1)                          |  | $                         | 10,311.9 |   |                    | $ | 334.3 |                          |  | 3.4   | %                             |  | $ | 9,977.6            |   |  | $                             | 20,661.8 |   |  | $ | 693.4   |    |  | 3.5   | %  |  | $ | 19,968.4 |  
|Service                             |  |                           | 33.1     |   |                    |   | 5.4   |                          |  | 19.5  | %                             |  |   | 27.7               |   |  |                               | 69.1     |   |  |   | 6.9     |    |  | 11.1  | %  |  |   | 62.2     |  
|                                    |  |                           |          |   |                    |   |       |                          |  |       |                               |  |   |                    |   |  |                               |          |   |  |   |         |    |  |       |    |  |   |          |  
|Total cost of revenues(1)           |  | $                         | 10,345.0 |   |                    | $ | 339.7 |                          |  | 3.4   | %                             |  | $ | 10,005.3           |   |  | $                             | 20,730.9 |   |  | $ | 700.3   |    |  | 3.5   | %  |  | $ | 20,030.6 |  
|                                    |  |                           |          |   |                    |   |       |                          |  |       |                               |  |   |                    |   |  |                               |          |   |  |   |         |    |  |       |    |  |   |          |  
|Gross Margin(2)                     |  |                           |          |   |                    |   |       |                          |  |       |                               |  |   |                    |   |  |                               |          |   |  |   |         |    |  |       |    |  |   |          |  
|Product                             |  | $                         | 600.4    |   |                    | $ | 119.1 |                          |  | 24.7  | %                             |  | $ | 481.3              |   |  | $                             | 1,276.8  |   |  | $ | 342.9   |    |  | 36.7  | %  |  | $ | 933.9    |  
|Product gross margin percentage     |  |                           | 5.5      | % |                    |   | 0.9   | %                        |  |       |                               |  |   | 4.6                | % |  |                               | 5.8      | % |  |   | 1.3     | %  |  |       |    |  |   | 4.5      | %
|Service                             |  | $                         | 104.2    |   |                    | $ | 2.0   |                          |  | 2.0   | %                             |  | $ | 102.2              |   |  | $                             | 201.5    |   |  | $ | 13.6    |    |  | 7.2   | %  |  | $ | 187.9    |  
|Service gross margin percentage     |  |                           | 75.9     | % |                    |   | (2.8  | )%                       |  |       |                               |  |   | 78.7               | % |  |                               | 74.5     | % |  |   | (0.6    | )% |  |       |    |  |   | 75.1     | %
|Total gross margin                  |  | $                         | 704.6    |   |                    | $ | 121.1 |                          |  | 20.8  | %                             |  | $ | 583.5              |   |  | $                             | 1,478.3  |   |  | $ | 356.5   |    |  | 31.8  | %  |  | $ | 1,121.8  |  
|Gross margin percentage             |  |                           | 6.4      | % |                    |   | 0.9   | %                        |  |       |                               |  |   | 5.5                | % |  |                               | 6.7      | % |  |   | 1.4     | %  |  |       |    |  |   | 5.3      | %
|                                    |  |                           |          |   |                    |   |       |                          |  |       |                               |  |   |                    |   |  |                               |          |   |  |   |         |    |  |       |    |  |   |          |  
|Volume Information                  |  |                           |          |   |                    |   |       |                          |  |       |                               |  |   |                    |   |  |                               |          |   |  |   |         |    |  |       |    |  |   |          |  
|Retail                              |  |                           | 115.9    |   |                    |   | 2.2   |                          |  | 1.9   | %                             |  |   | 113.7              |   |  |                               | 235.4    |   |  |   | 3.7     |    |  | 1.6   | %  |  |   | 231.7    |  
|Mail-order                          |  |                           | 23.5     |   |                    |   | 1.4   |                          |  | 6.3   | %                             |  |   | 22.1               |   |  |                               | 47.0     |   |  |   | 2.9     |    |  | 6.6   | %  |  |   | 44.1     |  
|                                    |  |                           |          |   |                    |   |       |                          |  |       |                               |  |   |                    |   |  |                               |          |   |  |   |         |    |  |       |    |  |   |          |  
|Total volume                        |  |                           | 139.4    |   |                    |   | 3.6   |                          |  | 2.7   | %                             |  |   | 135.8              |   |  |                               | 282.4    |   |  |   | 6.6     |    |  | 2.4   | %  |  |   | 275.8    |  
|                                    |  |                           |          |   |                    |   |       |                          |  |       |                               |  |   |                    |   |  |                               |          |   |  |   |         |    |  |       |    |  |   |          |  
|Adjusted prescriptions(3)           |  |                           | 186.2    |   |                    |   | 6.6   |                          |  | 3.7   | %                             |  |   | 179.6              |   |  |                               | 375.7    |   |  |   | 12.6    |    |  | 3.5   | %  |  |   | 363.1    |  
|                                    |  |                           |          |   |                    |   |       |                          |  |       |                               |  |   |                    |   |  |                               |          |   |  |   |         |    |  |       |    |  |   |          |  
|Adjusted mail-order penetration(4)  |  |                           | 37.7     | % |                    |   | 1.0   | %                        |  |       |                               |  |   | 36.7               | % |  |                               | 37.3     | % |  |   | 1.1     | %  |  |       |    |  |   | 36.2     | %
|                                    |  |                           |          |   |                    |   |       |                         
|Generic Dispensing Rate Information |  |                           |          |   |                    |   |       |                          |  |       |                               |  |   |                    |   |  |                               |          |   |  |   |         |    |  |       |    |  |   |          |  
|Retail generic dispensing rate      |  |                           | 60.8     | % |                    |   | 4.8   | %                        |  |       |                               |  |   | 56.0               | % |  |                               | 60.5     | % |  |   | 4.6     | %  |  |       |    |  |   | 55.9     | %
|Mail-order generic dispensing rate  |  |                           | 49.9     | % |                    |   | 6.8   | %                        |  |       |                               |  |   | 43.1               | % |  |                               | 49.1     | % |  |   | 6.4     | %  |  |       |    |  |   | 42.7     | %
|Overall generic dispensing rate     |  |                           | 58.9     | % |                    |   | 5.0   | %                        |  |       |                               |  |   | 53.9               | % |  |                               | 58.6     | % |  |   | 4.8     | %  |  |       |    |  |   | 53.8     | %

---

|(1) | Includes retail co-payments of $1,887 million and $1,807
million for the second quarters of 2007 and 2006, and $3,874 million and $3,760 million for the six months of 2007 and 2006.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(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 $150 million increase in retail net revenues for the second
quarter of 2007 is attributable to net volume increases of $124 million primarily from new business, partially offset by client terminations, and net price increases of $26 million driven by higher prices charged by pharmaceutical manufacturers. For
the six months, the $442 million increase in retail net revenues is attributable to net price increases of $231 million driven by higher prices charged by pharmaceutical manufacturers, and net volume increases of $211 million primarily from new
business, partially offset by client terminations. The aforementioned net price variance includes the offsetting effect of approximately $440 million for the second quarter and approximately $830 million for the six months from a greater
representation of generic drugs in 2007, as well as a reduction of $41 million for the second quarter and $71 million for the six months related to higher levels of rebate sharing with clients, which is further discussed in the gross margin section.
Also contributing as an offset to the retail net revenue increases are the beneficial effects in 2006 of the closure of various client-related matters amounting to $29 million recorded in the second quarter of 2006 and $16 million recorded in the
first quarter of 2006.



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The $303 million increase in mail-order net revenues for the second quarter of 2007 reflects net volume
increases of $369 million primarily from new business, partially offset by net price reductions of $66 million. For the six months, the $595 million increase in mail-order net revenues reflects net volume increases of $660 million primarily from new
business, partially offset by net price reductions of $65 million. The net price reductions are driven by approximately $280 million from a higher representation of generic drugs for the second quarter of 2007 and $520 million for the six months of
2007. Also contributing to the net price reductions are higher levels of rebate sharing with clients resulting in reductions to mail-order revenue of $45 million for the second quarter and $102 million for the six months, partially offset by higher
prices charged by pharmaceutical manufacturers.

Our product net revenues include premium revenues for our Medicare Part D PDP risk-based
product offering. In the second quarter and six months of 2007, premium revenues for our PDP product were $57 million and $134 million, respectively, or less than 1% of total net revenues. In the second quarter and six months of 2006, premium
revenues for our PDP product were $136 million and $266 million, respectively, or approximately 1% of total net revenues. The 2007 decreases result from lower CMS auto-assigned dual-eligible individuals.

Mail-order generic dispensing rates increased to 49.9% for the second quarter of 2007 and 49.1% for the six months of 2007, compared to 43.1% and 42.7%
for the second quarter and six months of 2006, respectively. Retail generic dispensing rates increased to 60.8% for the second quarter of 2007 and 60.5% for the six months of 2007, compared to 56.0% and 55.9% for the second quarter and six months of
2006, 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 $7.4 million in the second quarter of 2007 and $20.5 million in the six months
of 2007 as a result of higher client and other service revenues of $18.0 million and $36.7 million, respectively, partially offset by lower manufacturer service revenues of $10.6 million and $16.2 million, respectively. The higher client and other
service revenues reflect higher claims processing administrative fees, service fees including clinical programs, and data fee revenues. The lower manufacturer revenues result from lower administrative fees earned as a result of manufacturer contract
revisions.

Gross Margin.Our product gross margin percentage was 5.5% for the second quarter of 2007 compared to 4.6% for the
second quarter of 2006, and 5.8% for the six months of 2007 compared to 4.5% for the six months of 2006. The lower rates of increase in the cost of product net revenues compared with product net revenues for 2007 reflect the greater representation
of lower-cost generic products, including the benefit of strategic purchases of a short-lived generic product primarily in the first quarter of 2007. Also contributing to the lower rates of increase in cost of product net revenues are higher
mail-order volumes, and favorable retail pharmacy reimbursement rates, as well as increased brand-name purchasing discounts and increased brand-name pharmaceutical rebates, partially offset by higher prescription drug prices charged by
pharmaceutical manufacturers. Our gross margin percentage also reflects a reduction associated with higher levels of rebate sharing with our clients, which increased $86 million for the second quarter of 2007 and $173 million for the six months of
2007.

Rebates from brand-name pharmaceutical manufacturers, which are reflected as a reduction in cost of product net revenues, totaled
$918 million in the second quarter of 2007, and $875 million in the second quarter of 2006, with formulary rebates representing 50.0% and 52.8% of total rebates, respectively. Rebates totaled $1,837 million in the six months of 2007, and $1,732
million in the six months of 2006, with formulary rebates representing 49.5% and 52.3% of total rebates, respectively. The increase in rebates earned in the second quarter and six months reflects improved formulary management and patient compliance,
as well as favorable pharmaceutical manufacturer rebate contract revisions, partially offset by brand-name drugs that have lost patent protection. We retained approximately $143 million, or 15.6%, of total rebates in the second quarter of 2007,
compared to $186 million, or 21.2%, in the second quarter of 2006. For the six months, we retained approximately $311 million, or 16.9%, of total rebates in 2007, compared to $379 million, or 21.9%, in 2006. It is anticipated that the rebate
retention percentage will decline marginally further throughout the remainder of 2007 as a result of client contract renewals that are effective after the end of the second quarter.

The service gross margin percentage was 75.9% for the second quarter and 74.5% for the six months of 2007, substantially consistent with 78.7% in the
second quarter and 75.1% in the six months of 2006. This reflects the increase



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in service revenues of $7.4 million for the second quarter and $20.5 for the six months, driven by the aforementioned client and other service revenue
increases, partially offset by increases in cost of service revenues of $5.4 million for the second quarter and $6.9 for the six months.

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



|                                             |  |                           |       |                    |   |       |                          |      |                              |  |                    |       |  |                              |         |  |   |        |   |  |       |    |  |   |        
|-------------------------------------------- |  | ------------------------- | ----- | ------------------ | - | ----- | ------------------------ | ---- | ---------------------------- |  | ------------------ | ----- |  | ---------------------------- | ------- |  | - | ------ | - |  | ----- | -- |  | - | -------
|                                             |  | QuarterEndedJune 30, 2007 |       | Increase(Decrease) |   |       | QuarterEndedJuly 1, 2006 |      | Six MonthsEndedJune 30, 2007 |  | Increase(Decrease) |       |  | Six Months EndedJuly 1, 2006
|Gross margin                                 |  | $                         | 704.6 |                    | $ | 121.1 |                          | 20.8 | %                            |  | $                  | 583.5 |  | $                            | 1,478.3 |  | $ | 356.5  |   |  | 31.8  | %  |  | $ | 1,121.8
|Selling, general and administrative expenses |  |                           | 274.0 |                    |   | 34.9  |                          | 14.6 | %                            |  |                    | 239.1 |  |                              | 522.4   |  |   | (112.6 | ) |  | (17.7 | )% |  |   | 635.0  
|Amortization of intangibles                  |  |                           | 54.6  |                    |   | 0.0   |                          | 0.0  | %                            |  |                    | 54.6  |  |                              | 109.3   |  |   | 0.0    |   |  | 0.0   | %  |  |   | 109.3  
|Interest and other (income) expense, net     |  |                           | 21.9  |                    |   | 6.6   |                          | 43.1 | %                            |  |                    | 15.3  |  |                              | 36.8    |  |   | 8.0    |   |  | 27.8  | %  |  |   | 28.8   
|                                             |  |                           |       |                    |   |       |                          |      |                              |  |                    |       |  |                              |         |  |   |        |   |  |       |    |  |   |        
|Income before provision for income taxes     |  |                           | 354.1 |                    |   | 79.6  |                          | 29.0 | %                            |  |                    | 274.5 |  |                              | 809.8   |  |   | 461.1  |   |  | 132.2 | %  |  |   | 348.7  
|Provision for income taxes                   |  |                           | 139.2 |                    |   | 35.6  |                          | 34.4 | %                            |  |                    | 103.6 |  |                              | 320.1   |  |   | 187.1  |   |  | 140.7 | %  |  |   | 133.0  
|                                             |  |                           |       |                    |   |       |                          |      |                              |  |                    |       |  |                              |         |  |   |        |   |  |       |    |  |   |        
|Net income                                   |  | $                         | 214.9 |                    | $ | 44.0  |                          | 25.7 | %                            |  | $                  | 170.9 |  | $                            | 489.7   |  | $ | 274.0  |   |  | 127.0 | %  |  | $ | 215.7  
|                                             |  |                           |       |                    |   |       |                          |      |                              |  |                    |       |  |                              |         |  |   |        |   |  |       |    |  |   |        

Selling, General and Administrative Expenses.SG&A expenses for the second quarter of
2007 were $274 million and increased from the second quarter of 2006 by $35 million, or 14.6%. This reflects higher employee-related costs associated with business growth across the Company of $28 million, including higher performance bonus
expenses, and client and product support activity, expenses associated with strategic initiatives such as Medicare Part D of $3 million, and other expense increases of $4 million.

SG&A expenses for the six months of 2007 were $522 million and decreased from the six months of 2006 by $113 million, or 17.7%. This reflects the
aforementioned $163 million pre-tax legal settlements charge recorded in the first quarter of 2006, partially offset by the aforementioned employee-related costs of $40 million, and expenses associated with strategic initiatives such as Medicare
Part D of $10 million.

Amortization of Intangibles.Amortization of intangibles was $54.6 million for the second quarter of 2007
and $109.3 for the six months of 2007, consistent with the second quarter and six months of 2006.

Interest and Other (Income) Expense,
Net.Interest and other (income) expense, net, increased $7 million for the second quarter, and $8 million for the six months of 2007, from the same periods last year. The variances result from higher interest expense of $8 million for both the
second quarter and six months, respectively, partially offset by higher interest income of $1 million for the quarter. The interest expense variances reflect higher interest rates and increased borrowings from our debt refinancing that took place at
the end of April 2007 to support our share repurchase program, general corporate activities, working capital requirements and capital expenditures. The interest income variance reflects higher average daily cash balances.

The estimated weighted average interest rate on our indebtedness was approximately 6.4% and 6.6% for the second quarter and six months of 2007,
respectively, compared to 6.3% and 6.1% for the second quarter and six months of 2006, respectively, and reflects increases in floating interest rates on our term loan 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 39.3% in the second quarter of 2007 and 39.5% for the six months of 2007, up from 37.7% for the second quarter and 38.1% for the six months of 2006. The 2006 tax rates reflected the favorable resolution of certain
income taxes payable and the closure of state income tax audits, partially offset by a net increase in our marginal state income tax rate due to various state law changes.



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Net Income and Earnings per Share.Net income as a percentage of net revenues increased to 1.9% in
the second quarter of 2007 from 1.6% in the second quarter of 2006, and increased to 2.2% in the six months of 2007 from 1.0% in the six months of 2006 as a result of the aforementioned factors. The six months of 2006 includes a 0.5% reduction
resulting from the legal settlements charge. Excluding the charge, net income as a percentage of net revenues was 1.5% in the six months of 2006.

Diluted earnings per share increased 35.7% to $0.76 for the second quarter of 2007 and 140.8% to $1.71 for the six months of 2007, from $0.56 for the second quarter of 2006 and $0.71 for the six months of 2006, including the legal
settlements charge of $0.32 per share recorded in the first quarter of 2006. Excluding the 2006 charge, the six-month 2007 diluted earnings per share of $1.71 increased 66.0% compared to $1.03 for the six months of 2006.

The diluted weighted average shares outstanding were 282.1 million for the second quarter of 2007 and 286.8 million for the six months of 2007,
compared to 302.9 million for the second quarter of 2006 and 305.8 million for the six months of 2006, representing decreases of 6.9% and 6.2%, respectively. These decreases result from the repurchase of 49.3 million shares of stock
in connection with our share repurchase program since its inception in 2005, compared to an equivalent amount of 21.6 million shares repurchased inception-to-date as of the second quarter of 2006. There were approximately 8.7 million and
20.3 million shares repurchased in the second quarter and six months of 2007, respectively, compared to 10.4 million and 13.9 million shares repurchased in the second quarter and six months of 2006, respectively. The effect of these
repurchases was partially offset by the dilutive effect of stock options.

Specialty Pharmacy Segment.Specialty Pharmacy total net revenues of $1,495 million for the second quarter of 2007 increased $162 million compared to the second-quarter 2006 revenues of $1,333 million. Specialty Pharmacy total net
revenues of $2,945 million for the six months of 2007 increased $282 million compared to revenues of $2,663 million for the six months of 2006. The increases primarily result from higher mail-order volumes, reflecting new clients and increased
utilization. Also contributing are higher volumes, including intravenous immuno-globulin (IVIG) product lines, partially offset by a decrease in Synagis®volume. Gross margin, defined as net revenues minus cost of revenues, were 8.0% of net revenues for the second quarter and six months
of 2007, compared to 8.3% for the second quarter of 2006 and 7.9% for the six months of 2006. Operating income of $54.4 million for the second quarter of 2007 increased $4.5 million compared to the second-quarter 2006 operating income of $49.9
million. Operating income of $107.9 million for the six months of 2007 increased $14.4 million compared to the six months of 2006 operating income of $93.5 million. The increased operating income primarily results from the aforementioned higher
revenues including the further execution of an initiative to convert retail prescriptions to mail-order prescriptions, as well as favorable product mix for the six months of 2007. The product mix component primarily results from increased volume of
higher margin products including IVIG, and decreased volume of Synagis®, which is a lower
margin product. See Note 8, Segment Reporting, for additional information on the Specialty Pharmacy segment.

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 EndedJune 30, 2007 |        |   | Variance |   |       | Six Months EndedJuly 1, 2006 | 
|Net cash provided by operating activities            |  | $                             | 676.7  |   |          | $ | 432.3 |                              |  | $ | 244.4  |  
|Net cash used by investing activities                |  |                               | (54.2  | ) |          |   | 4.1   |                              |  |   | (58.3  | )
|Net cash used by financing activities                |  |                               | (457.3 | ) |          |   | 208.3 |                              |  |   | (665.6 | )
|                                                     |  |                               |        |   |          |   |       |                              |  |   |        |  
|Net increase (decrease) in cash and cash equivalents |  |                               | 165.2  |   |          |   | 644.7 |                              |  |   | (479.5 | )
|Cash and cash equivalents at beginning of period     |  |                               | 818.5  |   |          |   | (69.7 | )                            |  |   | 888.2  |  
|                                                     |  |                               |        |   |          |   |       |                              |  |   |        |  
|Cash and cash equivalents at end of period           |  | $                             | 983.7  |   |          | $ | 575.0 |                              |  | $ | 408.7  |  
|                                                     |  |                               |        |   |          |   |       |                              |  |   |        |  

Operating Activities.Net cash provided by operating activities of $677 million for
the first six months of 2007 reflects net income of $490 million, with adjustments for depreciation and amortization of $195 million. Additionally, there was an increase in cash flows of $184 million for client rebates and guarantees payable
reflecting increased rebate sharing with clients and payment timing. Also contributing was an increase in cash flows from inventories, net, of $103



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##### Table of Contents

million due to the timing of brand-name pharmaceutical purchases and increased representation of lower-cost generic products. These increases were partially
offset by a $306 million decrease in claims and other accounts payable due to retail pharmacy volumes and payment cycles.

The $432 million
increase in net cash provided by operating activities in the first six months of 2007 compared to the first six months of 2006 is primarily due to increased net income of $274 million. Also contributing is a $195 million increase in cash flows from
client accounts receivable, net, primarily resulting from the commencement of the Medicare Part D PDP product offering in 2006. There was also a $95 million increase in cash flows from prepaid expenses and other current assets, reflecting timing
within our fiscal calendar of a significant prepaid client rebate, as well as increases in cash flows of $152 million and $107 million associated with the aforementioned increase in client rebates and guarantees payable and inventories, net,
respectively. These increases were partially offset by a decrease in cash flows of $215 million from the aforementioned claims and other accounts payable trending, as well as a decrease in cash flows of $132 million from accrued expenses and other
current and noncurrent liabilities, primarily due to the legal settlements charge recorded in the first quarter of 2006 and paid in October 2006.

Investing Activities.The net cash used by investing activities of $54 million is primarily attributable to capital expenditures primarily associated with capitalized software development in connection with client-related
programs and our Medicare Part D PDP product offering, and technology and pharmacy operations hardware investments. We expect that our 2007 capital expenditures will be approximately $150 million.

Financing Activities.The net cash used by financing activities of $457 million in the first six months of 2007 primarily results from
$1,447 million in share repurchases and repayments on long-term debt of $457 million, partially offset by proceeds from long-term debt of $1 billion as a result of our recent refinancing discussed below, proceeds under the accounts receivable
financing facility of $275 million, and proceeds from employee stock plans of $134 million. The decrease in net cash used by financing activities of $208 million in the first six months of 2007 compared to the first six months of 2006 is due to an
increase in proceeds from debt of $1,275 million primarily reflecting the refinancing, partially offset by repayments on debt of $419 million, and share repurchases of $694 million.

Total cash and short-term investments as of June 30, 2007 were $1,046 million, including $984 million in cash and cash equivalents. Total cash and
short-term investments as of December 30, 2006 were $887 million, including $819 million in cash and cash equivalents. The increase of $159 million in cash and short-term investments for the six months of 2007 primarily reflects cash flows from
operations and the recent refinancing, partially offset by share repurchase activity.

Financing Facilities

Senior Bank Credit Facility and Refinancing.On April 30, 2007, we entered into a new senior unsecured credit agreement which, in
addition to replacing our previously existing senior unsecured bank credit facility, is available to support our recently expanded share repurchase program, general corporate activities, working capital requirements and capital expenditures. In
connection with the new credit facility, our previously existing senior bank credit facility was terminated and our existing indebtedness outstanding pursuant to such facility was paid in full. The new facility is comprised of a $1 billion, 5-year
senior unsecured term loan and a $2 billion, 5-year senior unsecured revolving credit facility, compared with the previously existing $750 million senior unsecured term loan facility and the $750 million senior unsecured revolving credit facility.
The new term loan matures on April 30, 2012, at which time the outstanding balance is required to be repaid, compared with the previously existing credit facility, under which we had quarterly installment payments. At current debt ratings, the
new credit facility bears interest at London Interbank Offered Rate (LIBOR) plus a 0.45 percent margin, with a 10 basis point commitment fee due on the unused revolving credit facility. The previously existing credit facility incurred
interest at the LIBOR plus a 0.5% margin.

As of June 30, 2007, we had $1 billion outstanding under the term loan facility. In
addition, we had no amounts outstanding and had $1.987 billion available for borrowing, exclusive of $13 million in issued letters of credit, under the revolving credit facility.



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Accounts Receivable Financing Facility.Through a wholly-owned subsidiary, we have a $600
million, 364-day renewable accounts receivable financing facility that is collateralized by our pharmaceutical manufacturer rebate accounts receivable. At June 30, 2007, there was $600 million outstanding with no additional amounts available
for borrowing under the facility. 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.
During the first six months of 2007, we drew down $275 million under the facility.

Interest Rates and Covenants.The
estimated weighted average annual interest rate on our indebtedness was approximately 6.4% and 6.6% for the second quarter and six months of 2007, respectively, and 6.3% and 6.1% for the second quarter and six months of 2006, respectively. Several
factors could change the weighted average annual interest rate, including but not limited to a change in reference rates used under our bank credit facility and swap agreements.

Our senior unsecured credit facility, senior notes, and accounts receivable financing facility contain covenants, including, among other items, maximum
leverage ratios. We were in compliance with all financial covenants at June 30, 2007. As a result of the aforementioned refinancing, our financial covenants are slightly less restrictive.

Debt Ratings.Medcos debt ratings, all of which represent investment grade, reflect the following as of the filing date of this
Quarterly Report on Form 10-Q: Moodys Investors Service, Baa3 (stable outlook); Fitch Ratings, BBB (stable outlook); Standard & Poors, BBB (stable outlook). These ratings reflect the recent refinancing.

Share Repurchase Program

On
February 21, 2007, we announced that our Board of Directors had authorized the expansion of our share repurchase plan by an incremental $3 billion to be repurchased over the next two years, bringing the amount authorized under such repurchase
plan to a cumulative total of $5.5 billion. We may draw down additional debt as a result of our share repurchase program. The original share repurchase plan, which was approved in August 2005, authorized share repurchases of $500 million. The plan
was increased in $1 billion increments in December 2005 and November 2006. We repurchased approximately 8.7 million shares at a cost of $665.3 million, and approximately 20.3 million shares at a cost of $1,447.2 million during the second
quarter and six months of 2007, respectively. Inception-to-date repurchases through June 30, 2007 under this program total approximately 49.3 million shares at a cost of approximately $3.0 billion and an average per-share price of $60.87.
Our Board of Directors periodically reviews the program and approves the associated trading parameters. See Part II, Item 2, Unregistered Sales of Equity Securities and Use of Proceeds, for more information.

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. 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. Additionally, we have
calculated the 2006 EBITDA excluding the legal settlements charge recorded in the first quarter, as this is not considered an indicator of our ongoing performance.

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 is affected by the changes in prescription volumes between retail and mail-order, the relative representation of brand-name, generic and specialty
drugs, as well as the level of efficiency in the business.



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##### Table of Contents

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
|                                                                              |  | June 30, 2007  |       | July 1, 2006     |   | June 30, 2007 |  | July 1, 2006
|Net income                                                                    |  | $              | 214.9 |                  | $ | 170.9         |  | $            | 489.7   |  | $ | 215.7
|Add:                                                                          |  |                |       |                  |   |               |  |              |         |  |   |      
|Interest and other (income) expense, net                                      |  |                | 21.9  |                  |   | 15.3          |  |              | 36.8    |  |   | 28.8 
|Provision for income taxes                                                    |  |                | 139.2 |                  |   | 103.6         |  |              | 320.1   |  |   | 133.0
|Depreciation expense                                                          |  |                | 43.9  |                  |   | 41.4          |  |              | 85.4    |  |   | 90.9 
|Amortization expense                                                          |  |                | 54.6  |                  |   | 54.6          |  |              | 109.3   |  |   | 109.3
|                                                                              |  |                |       |                  |   |               |  |              |         |  |   |      
|EBITDA                                                                        |  | $              | 474.5 |                  | $ | 385.8         |  | $            | 1,041.3 |  | $ | 577.7
|2006 legal settlements charge(1)                                              |  |                |      |                  |   |              |  |              |        |  |   | 162.6
|                                                                              |  |                |       |                  |   |               |  |              |         |  |   |      
|EBITDA, excluding the 2006 legal settlements charge                           |  | $              | 474.5 |                  | $ | 385.8         |  | $            | 1,041.3 |  | $ | 740.3
|                                                                              |  |                |       |                  |   |               |  |              |         |  |   |      
|Adjusted prescriptions(2)                                                     |  |                | 186.2 |                  |   | 179.6         |  |              | 375.7   |  |   | 363.1
|                                                                              |  |                |       |                  |   |               |  |              |         |  |   |      
|EBITDA per adjusted prescription                                              |  | $              | 2.55  |                  | $ | 2.15          |  | $            | 2.77    |  | $ | 1.59 
|                                                                              |  |                |       |                  |   |               |  |              |         |  |   |      
|EBITDA per adjusted prescription, excluding the 2006 legal settlements charge |  | $              | 2.55  |                  | $ | 2.15          |  | $            | 2.77    |  | $ | 2.04 
|                                                                              |  |                |       |                  |   |               |  |              |         |  |   |      

---

|(1) | Represents a pre-tax legal settlements charge of $162.6 million
recorded in the first quarter of 2006. This charge reflected an agreement with the U.S. Attorneys Office for the Eastern District of Pennsylvania to settle three previously disclosed federal legal matters.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | 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 by 23.0% and EBITDA per adjusted prescription increased 18.6%, compared to
the net income increase of 25.7%, for the second quarter of 2007 over the second quarter of 2006. Excluding the first-quarter 2006 legal settlements charge, EBITDA increased by 40.7% and EBITDA per adjusted prescription increased 35.8%, compared to
a net income increase of 55.2%, for the six months of 2007 over the six months of 2006. For the second quarter and six months of 2007, the lower rates of increase for EBITDA and EBITDA per adjusted prescription compared with net income primarily
reflect the consistent level of depreciation and amortization expense. For all components, the lower rate of increase for the second quarter of 2007 compared to the six months of 2007 reflects the associated net income trending.



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Contractual Obligations

The following table presents our contractual obligations as of June 30, 2007, as well as our long-term debt obligations, including the current portion of long-term debt ($ in millions):

Payments Due By Period



|                                                         |  |       |         |                  |   |           |  |           |       |            |   |       |  |   |        
|-------------------------------------------------------- |  | ----- | ------- | ---------------- | - | --------- |  | --------- | ----- | ---------- | - | ----- |  | - | -------
|                                                         |  | Total |         | Remainderof 2007 |   | 2008-2009 |  | 2010-2011 |       | Thereafter
|Long-term debt obligations, including current portion(1) |  | $     | 1,500.0 |                  | $ |          |  | $         |      |            | $ |      |  | $ | 1,500.0
|Interest expense on long-term debt obligations(2)        |  |       | 510.8   |                  |   | 48.0      |  |           | 192.0 |            |   | 192.0 |  |   | 78.8   
|Operating lease obligations(3)                           |  |       | 99.8    |                  |   | 16.3      |  |           | 56.1  |            |   | 23.1  |  |   | 4.3    
|Purchase obligations(4)                                  |  |       | 44.3    |                  |   | 44.3      |  |           |      |            |   |      |  |   |       
|                                                         |  |       |         |                  |   |           |  |           |       |            |   |       |  |   |        
|Total                                                    |  | $     | 2,154.9 |                  | $ | 108.6     |  | $         | 248.1 |            | $ | 215.1 |  | $ | 1,583.1
|                                                         |  |       |         |                  |   |           |  |           |       |            |   |       |  |   |        

---

|(1) | Long-term debt obligations exclude the $2.8 million in
unamortized discount on the senior notes and a fair value adjustment of $15.2 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 2007 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.
|--- | ----------------------------------------------------------------------------------------------------

Note: We
also have outstanding debt associated with our 364-day renewable accounts receivable financing facility amounting to $600 million at June 30, 2007. This is classified as short-term debt on our balance sheet.

As of June 30, 2007, we had letters of credit outstanding of approximately $14.3 million, of which approximately $13.3 million were issued under our
senior unsecured revolving credit facility.

On April 30, 2007, we used part of the proceeds of the new $1 billion term loan to
satisfy in full our pre-existing term loan outstanding of $437.5 million. The new $1 billion senior unsecured term loan matures in April 2012, at which time the outstanding balance is required to be repaid.

Off-Balance Sheet Arrangements

We
have no off-balance sheet arrangements, other than purchase commitments and lease obligations. See Contractual Obligations above.

Recently Adopted Financial Accounting Standard (FIN 48)

On December 31, 2006, the first day of our fiscal quarter
ended March 31, 2007, we adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), 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 to 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. FIN 48 also
provides guidance on derecognition of recognized tax benefits, classification, interest and penalties, accounting in interim periods, disclosure and transition.

We have unrecognized tax benefits associated with previously accrued income taxes for periods before and after the spin-off from Merck & Co., Inc. (Merck) on
August 19, 2003. In connection with the spin-off from Merck, we entered into a tax responsibility allocation agreement with Merck. The tax responsibility allocation agreement includes, among other items, terms for the filing and payment of
income taxes through the spin-off date. Effective May 21, 2002, we converted from a limited liability company wholly-owned by Merck, to a corporation (the incorporation). Prior to May 21, 2002, we were structured as a single
member limited liability company, with Merck as the sole member. We are subject to examination in the U.S. federal jurisdiction from the date of incorporation. For state income taxes prior to our incorporation, Merck was taxed on our income. This is
also the case for the post incorporation period through the spin-off date in states where Merck filed a unitary or combined tax return. While we are subject to state and local examinations by tax authorities, we are indemnified by Merck for these
periods and tax filings. In states where Merck did not file a unitary or combined tax return, we are responsible since incorporation for filing and paying the associated taxes. For the period up to the spin-off date, Merck incurred federal taxes on
our income as part of Mercks consolidated tax return. Subsequent to the spin-off, we have filed our own federal and state tax returns and made the associated payments.

As a result of the implementation of FIN 48, we recognized a decrease of $43.4 million in the liability for income tax contingencies no longer required
under the more-likely-than-not accounting model of FIN 48, and a $29.2 million corresponding increase, net of federal income tax benefit, to the December 31, 2006 (the first day of fiscal year 2007) balance of retained earnings. Our total
liabilities for income tax contingencies as of December 31, 2006 amounted to $89.8 million, remain subject to audit, and may be released as a result of the expiration of statutes of limitations. The majority of these statutes of limitations are
expected to expire by the end of 2010, including certain amounts scheduled to expire over the next twelve months, and are not expected to have a significant impact on earnings.



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As of December 31, 2006, our liabilities for income tax contingencies that, if recognized, would
affect income tax expense amounted to $58.3 million, net of federal income tax benefit.

We recognize interest related to liabilities for
income tax contingencies in the provision for income taxes for which we had approximately $12.4 million accrued at December 31, 2006.

In the third quarter of 2006, the IRS commenced a routine examination of our U.S. income tax returns for the period subsequent to the spin-off, from August 20, 2003 through December 31, 2005, that is anticipated to be completed by
the end of 2008. We have agreed to extend the statute of limitations for the 2003 tax period from September 15, 2007 to September 15, 2008. We are also undergoing various routine examinations by state and local tax authorities for various
filing periods. We have income taxes receivable representing amounts due from the IRS and state and local taxing authorities associated with the approval of a favorable accounting method change received from the IRS in 2006 for the timing of the
deductibility of certain rebates passed back to clients.

Recent Accounting Pronouncement

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment of
FASB Statement No. 115, (SFAS 159) which is effective for fiscal years beginning after November 15, 2007. SFAS 159 permits entities to measure eligible financial assets, financial liabilities and firm commitments at fair
value, on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value under other U.S. generally accepted accounting principles. The fair value measurement election is irrevocable and subsequent changes in
fair value must be recorded in earnings. Our adoption of SFAS 159 in 2008 is not expected to have a material impact on our consolidated financial statements.



|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

We have floating rate debt with our credit facility and investments in marketable securities that are subject to interest rate volatility, which is our principal market risk. In addition, we have 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 facilitys balance outstanding and interest rate swap agreements as of June 30, 2007, 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 $4.5 million in annual interest expense. 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.



|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 (the Exchange Act)) are effective as of June 30, 2007. There have been no changes in internal control over financial reporting (as defined in paragraph (d) of Rules 13a-15 or 15d-15 under the
Exchange Act) for the period covered by this report that have 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 9, 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:

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 other counts for a total of $7.8 million. On July 2, 2007, the
Company settled this matter.

In October 2002, the Company filed a declaratory judgment action, captioned Medco 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 counterclaim 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. On June 27, 2007, the Company settled these two matters.



|Item 1A. | Risk Factors
|-------- | ------------

Reference is made to the risk factors
set forth in Part I, Item 1A, Risk Factors, of our Annual Report on Form 10-K for the fiscal year ended December 30, 2006. There have been no material changes with regard to the risk factors disclosed in such
Form 10-K.



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##### Table of Contents

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

On February 21, 2007, the Company announced that its Board of Directors had authorized the expansion of the Companys share repurchase plan by an incremental $3 billion to be repurchased over the next two years, bringing the
amount authorized under such repurchase plan to a cumulative total of $5.5 billion. The original share repurchase plan, which was approved in August 2005, authorized share repurchases of $500 million. The plan was increased in $1 billion increments
in December 2005 and November 2006. The Companys Board of Directors periodically reviews the program and approves the associated trading parameters.

The following is a summary of the Companys share repurchase activity for the three months ended June 30, 2007:

Issuer Purchases of Equity Securities



|                           |  |                                |  |                               |       |                                                                                       |            |                                                                                             |   |          
|-------------------------- |  | ------------------------------ |  | ----------------------------- | ----- | ------------------------------------------------------------------------------------- | ---------- | ------------------------------------------------------------------------------------------- | - | ---------
|Fiscal Period              |  | Total number ofsharespurchased |  | Averageprice paidper share(1) |       | Total number ofshares purchasedas part of apubliclyannouncedprogram
sinceinception(2) |            | Approximatedollar value ofshares that may yet bepurchased underthe
program(3)(in thousands)
|Balances at March 31, 2007 |  |                                |  |                               |       |                                                                                       | 40,623,286 |                                                                                             | $ | 3,162,590
|                           |  |                                |  |                               |       |                                                                                       |            |                                                                                             |   |          
|Fiscal April 2007          |  | 462,320                        |  | $                             | 71.90 |                                                                                       | 462,320    |                                                                                             | $ | 3,129,350
|Fiscal May 2007            |  | 4,736,800                      |  | $                             | 75.22 |                                                                                       | 4,736,800  |                                                                                             | $ | 2,773,043
|Fiscal June 2007           |  | 3,508,654                      |  | $                             | 78.59 |                                                                                       | 3,508,654  |                                                                                             | $ | 2,497,304
|                           |  |                                |  |                               |       |                                                                                       |            |                                                                                             |   |          
|Second quarter 2007 totals |  | 8,707,774                      |  | $                             | 76.40 |                                                                                       | 8,707,774  |                                                                                             |   |          
|                           |  |                                |  |                               |       |                                                                                       |            |                                                                                             |   |          

---

|(1) | 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 June 30, 2007. The average price paid per share for repurchases initiated since inception is $60.87.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The Company repurchased all of the above-referenced shares of
its common stock through its publicly announced share repurchase program.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------

|(3) | These amounts reflect the remaining authorized repurchases
based on the increase in the authorized repurchases.
|--- | ---------------------------------------------------------------------------------------------------------------



|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, 2007. At the meeting, the Companys shareholders voted on the following four proposals and cast their votes as follows:

Proposal 1: To elect the following nominees as directors:



|                      |  |             |  |           
|--------------------- |  | ----------- |  | ----------
|Nominee               |  | For         |  | Withhold  
|Howard W. Barker, Jr. |  | 224,959,273 |  | 13,243,945
|David B. Snow, Jr.    |  | 223,282,353 |  | 14,920,865

The Companys Board of Directors consists of the following nine members: Howard W. Barker,
Jr., John L. Cassis, Michael Goldstein, Lawrence S. Lewin, Charles M. Lillis, Edward H. Shortliffe, David B. Snow, Jr., David D. Stevens and Blenda J. Wilson.



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##### Table of Contents

Proposal 2: To amend the Companys Second Amended and Restated Certificate of
Incorporation to provide for the phase-in of the annual election of directors:



|            |  |           |  |           |  |                 
|----------- |  | --------- |  | --------- |  | ----------------
|For         |  | Against   |  | Abstain   |  | Broker Non-votes
|234,825,339 |  | 1,565,906 |  | 1,812,046 |  | 0               

Proposal 3: To approve the 2007 Employee Stock Purchase Plan:



|            |  |           |  |           |  |                 
|----------- |  | --------- |  | --------- |  | ----------------
|For         |  | Against   |  | Abstain   |  | Broker Non-votes
|196,641,549 |  | 5,210,585 |  | 2,171,464 |  | 34,179,693      

Proposal 4: To ratify the appointment of PricewaterhouseCoopers LLP as the
Companys independent registered public accounting firm for the fiscal year ending December 29, 2007:



|            |  |         |  |           |  |                 
|----------- |  | ------- |  | --------- |  | ----------------
|For         |  | Against |  | Abstain   |  | Broker Non-votes
|235,482,254 |  | 535,877 |  | 2,185,160 |  | 0               



|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. The ownership targets are based on a multiple of salary
(5, 3 or 1.5 times salary), but are expressed as a number of shares. The targets are determined using base salary and the closing price of our stock on the date of our Annual Meeting of Shareholders. In 2007, the number of shares required to be held
was calculated using a $77.73 stock price.

To facilitate compliance with the ownership guidelines and retention requirements, Medcos
Board of Directors authorized the use of prearranged trading plans under Rule 10b5-1 of the Securities and Exchange Act of 1934, as amended. 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
instructions made pursuant to a written trading plan may be executed 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 mandatory
waiting period designed to safeguard the plans from manipulation or market timing.



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##### Table of Contents

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 in effect as of July 27, 2007(1):



|                                                                                                |  |                                            |  |                                                                                                                                                                   |  |                                      |  |                                  
|----------------------------------------------------------------------------------------------- |  | ------------------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------ |  | ---------------------------------
|Name and Position                                                                               |  | Number ofShares to beSold Underthe Plan(2) |  | Timing of Sales Under the Plan                                                                                                                                    |  | Number ofShares SoldUnder thePlan(3) |  | Projected Beneficial Ownership(4)
|John P. Driscoll President, Insured and Emerging
Markets                                        |  | 23,334                                     |  | Sales related to option exercises shall trigger if stock reaches specified price.                                                                                 |  | 0                                    |  | 44,370                           
|                                                                                                |  |                                            |  |                                                                                                                                                                  
|Robert S. Epstein Senior Vice President,
Medical and Analytical Affairs & Chief Medical Officer |  | 25,000                                     |  | Sales related to option exercises shall trigger if stock reaches specified price.                                                                                 |  | 0                                    |  | 59,122                           
|                                                                                                |  |                                            |  |                                                                                                                                                                  
|Kenneth O. Klepper President & Chief
Operating Officer                                          |  | 26,667                                     |  | Sale of 5,500 previously acquired shares if stock reaches a specified price and sales related to option exercises shall trigger if stock reaches specified price. |  | 0                                    |  | 115,522                          
|                                                                                                |  |                                            |  |                                                                                                                                                                  
|Arthur H. Nardin Senior Vice President, Pharmaceutical Contracting                              |  | 21,400                                     |  | Sales related to option exercises in tranches of 14,200 and 7,200 shall trigger if stock reaches specified price.                                                 |  | 0                                    |  | 16,175                           
|                                                                                                |  |                                            |  |                                                                                                                                                                  
|Karin Princivalle, Senior Vice President, Human
Resources                                       |  | 6,000                                      |  | Sale of 4,000 previously acquired shares if stock reaches a specified price and sales related to option exercises shall trigger if stock reaches specified price. |  | 0                                    |  | 18,242                           
|                                                                                                |  |                                            |  |                                                                                                                                                                  
|David B. Snow, Jr. Chairman and Chief Executive
Officer                                         |  | 205,700                                    |  | Sales related to option exercise of 205,700 shall trigger if stock reaches specified price.                                                                       |  | 0                                    |  | 589,406                          

---

|(1) | This table does not include any trading plans entered into by any executive officer that has expired by
its terms as of July 27, 2007 or has been fully executed through July 27, 2007. No plans entered into by executive officers have been voluntarily terminated.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | This column reflects the number of shares remaining to be sold as of July 27, 2007.
|--- | -----------------------------------------------------------------------------------

|(3) | This column reflects the number of shares sold under the plan through July 27, 2007.
|--- | ------------------------------------------------------------------------------------

|(4) | 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 July 27, 2007, and includes shares of our common stock subject
to options or restricted stock units that were then vested or exercisable and unvested options and restricted stock units that are included in a current trading plan for sales periods that begin after the applicable vesting date. Options cannot be
exercised and restricted stock units cannot be converted prior to vesting. The estimates reflect option exercises and sales under the plan, but do not reflect any changes to beneficial ownership that may have occurred since July 27, 2007
outside of the plan.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

David B. Snow, Jr., Chairman and Chief Executive Officer, entered into a 10b5-1 trading plan on
May 4, 2007 to exercise his initial option grant. The transaction is sell to cover with Mr. Snow holding 100 percent of the profit shares from the exercise. The transaction can occur on or after August 6, 2007, subject to
Medco stock reaching a specified price. The plan is expected to result in the exercise of 317,100 options and the sale of only 205,700 of the shares received on exercise. After this transaction, Mr. Snow will have satisfied his target share
ownership of at least five (5) times his base salary.



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##### Table of Contents

|Item 6. | Exhibits
|------- | --------



|       |  |                                                                                                                                                                                                                                       |  |                           
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------
|Number |  | Description                                                                                                                                                                                                                           |  | Method of Filing          
|       |  |                                                                                                                                                                                                                                      
|10.1   |  | Amendment to the Second Amended and Restated Articles of Incorporation of Medco Health Solutions, Inc. as of May 24, 2007 (incorporated by reference to Item 9.01 of the Registrants Current
Report on Form 8-K filed May 30, 2007). |  | Incorporated by reference.
|       |  |                                                                                                                                                                                                                                      
|10.2   |  | Second Amended and Restated Bylaws of Medco Health Solutions, Inc. as of May 24, 2007 (incorporated by reference to Item 9.01 of the Registrants Current Report on Form 8-K filed May 30,
2007).                                     |  | Incorporated by reference.
|       |  |                                                                                                                                                                                                                                      
|31.1   |  | Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                |  | Filed with this document. 
|       |  |                                                                                                                                                                                                                                      
|31.2   |  | Certification of Chief Financial Officer pursuant Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted 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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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 hereunto duly authorized.



|                    |  |  |  |                              |  |                                                           
|------------------- |  |  |  | ---------------------------- |  | ----------------------------------------------------------
|                    |  |  |  | MEDCO HEALTH SOLUTIONS, INC.
|                    |  |  |  | (Registrant)                
|                    |  |  | 
|Date: July 27, 2007 |  |  |  | By:                          |  | /s/ David B. Snow, Jr.                                    
|                    |  |  |  | Name:                        |  | David B. Snow, Jr.                                        
|                    |  |  |  | Title:                       |  | Chairman and Chief Executive Officer                      
|                    |  |  | 
|Date: July 27, 2007 |  |  |  | By:                          |  | /s/ JoAnn A. Reed                                         
|                    |  |  |  | Name:                        |  | JoAnn A. Reed                                             
|                    |  |  |  | Title:                       |  | Senior Vice President, Finance and Chief Financial
Officer



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##### Table of Contents

Index to Exhibits



|       |  |                                                                                                                                                                                                                                      
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |  | Description                                                                                                                                                                                                                          
|10.1   |  | Amendment to the Second Amended and Restated Articles of Incorporation of Medco Health Solutions, Inc. as of May 24, 2007 (incorporated by reference to Item 9.01 of the Registrants Current
Report on Form 8-K filed May 30, 2007).
|       | 
|10.2   |  | Second Amended and Restated Bylaws of Medco Health Solutions, Inc. as of May 24, 2007 (incorporated by reference to Item 9.01 of the Registrants Current Report on Form 8-K filed May 30,
2007).                                    
|       | 
|31.1   |  | Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                               
|       | 
|31.2   |  | Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted 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.