##### Table of Contents





UNITED STATES SECURITIES AND
    EXCHANGE COMMISSIONWashington, D.C.
    20549
      Form 10-K
      ANNUAL REPORT PURSUANT TO
    SECTION 13 OR 15(d)
 OF THE SECURITIES EXCHANGE ACT
    OF 1934
  For the fiscal year ended December 27, 2008
 Commission File
    Number: 1-31312
 MEDCO HEALTH SOLUTIONS,
    INC.
 (Exact name of Registrant as
    specified in its charter)
  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
  Securities registered pursuant to Section 12(b) of the
    Act:
  Title of Each Class

Name of Each Exchange on Which RegisteredCommon Stock, par value $0.01

New York Stock Exchange7.25% Senior Notes Due 2013

New York Stock Exchange6.125% Senior Notes Due 2013

New York Stock Exchange7.125% Senior Notes Due 2018

New York Stock Exchange   Securities registered pursuant to Section 12(g) of the
    Act: None
  þ o
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. o
  Rule 12b-2
  Large accelerated
    filer þ

Accelerated
    filer o

Non-accelerated
    filer o
    (Do not check if a smaller reporting company)

Smaller reporting
    company o   Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE
  Form 10-K




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##### 





MEDCO
    HEALTH SOLUTIONS, INC.
  ANNUAL
    REPORT ON
    FORM 10-K
  TABLE OF CONTENTS
   
 Form 10-K Item Number:

Page No.PART IItem 1.


Business


1Item 1A.


Risk Factors


20Item 1B.


Unresolved Staff Comments


28Item 2.


Properties


28Item 3.


Legal Proceedings


29Item 4.


Submission of Matters to a Vote of Security
    Holders


29Executive Officers of the Company


30PART IIItem 5.


Market for Registrants Common Equity,
    Related Shareholder Matters and Issuer Purchases of Equity
    Securities


33Item 6.


Selected Financial Data


36Item 7.


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


39Item 7A.


Quantitative and Qualitative Disclosures About
    Market Risk


71Item 8.


Financial Statements and Supplementary Data


72Item 9.


Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure


119Item 9A.


Controls and Procedures


119Item 9B.


Other Information


120PART IIIItem 10.


Directors, Executive Officers and Corporate
    Governance


120Item 11.


Executive Compensation


120Item 12.


Security Ownership of Certain Beneficial Owners
    and Management and Related Shareholder Matters


120Item 13.


Certain Relationships and Related Transactions,
    and Director Independence


122Item 14.


Principal Accounting Fees and Services


122PART IVItem 15.


Exhibits, Financial Statement Schedules


122Signatures


127EX-10.3: SECOND AMENDED AND RESTATED RECEIVABLES PURCHASE AGREEMENTEX-12.1: STATEMENT OF CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGESEX-21.1: SUBSIDIARIESEX-23.1: CONSENT OF PRICEWATERHOUSECOOPERS LLPEX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONEX-32.2: CERTIFICATION




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##### Table of Contents



PART I  Item 1.
    Business.  Overview
  ®
  Form 10-K
      work-at-home
 1




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##### Table of Contents



in-network
  work-at-home
      
    Offering the cost-saving and clinical advantages of mail order
    to our clients. Our clients benefit in the form of lower drug
    costs as a result of operating efficiencies derived from our
    significant level of automation technology, the value from our
    scale in purchasing drugs at competitive discounts, and our
    ability to offer up to a
    90-day
    supply of drugs as compared to a
    30-day
    supply for most retail programs. Members benefit from the
    convenience of mail order, the greater days supply, and
    generally lower co-payment requirements.
    Actively identifying opportunities to increase the use of
    lower-cost generic drugs as alternatives to brand-name medicines.
    Offering a broad base of specialty medicines at competitive
    prices, and with a comprehensive service model designed to
    ensure patient safety, product integrity, and proper drug
    administration.
    Enhancing formulary compliance through physician, client and
    member communications and education programs, including
    therapeutic brand-to-brand interchange programs. The use of
    multi-tiered co-payment and other cost-sharing payment
    structures, and the increased use of mail order further enhance
    formulary compliance. In addition, our web-based tool called My
    Rx
    Choices®

    provides members with a simplified and personalized menu of
    medication choices, including generics and preferred brand-name
    medications, based upon their personal drug benefit coverage.
    Higher levels of formulary compliance, combined with our overall
    scale, allow us to generate higher rebates on a per-prescription
    basis from brand-name pharmaceutical manufacturers. The majority
    of these rebates are currently shared with our clients, which
    helps us manage drug trend for our clients.
    Providing high quality clinical care to members with chronic and
    complex conditions by providing access to specialized
    pharmacists who are experts in the treatment of specific
    conditions, through Medco Therapeutic Resource
    Centers®.

    This service benefits the members from an overall health care
    management perspective, and also assists them in making educated
    decisions regarding their prescription health care and
    associated costs.
    Providing customized plan design. We offer ongoing consulting
    services and model clinical and financial outcomes for clients
    based on a broad range of plan design and formulary choices. Our 2




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advanced information technologies allow our professionals to
    design with clients the plan structure that best meets the
    clients benefit cost objectives while providing an
    optimized benefit to members of the clients plans. These
    include EXPERxT
    Advisor®,

    an automated tool that provides real-time plan design modeling
    capability for our clients, as well as
    RationalMed®,

    through which medical data is integrated to affect better
    overall health outcomes for members. Recognizing the diverse
    plan design and administrative needs of different payors, we are
    organized into customer groups designed to collaborate with
    clients and ensure we provide solutions that satisfy the
    industry-specific needs of our clients and their respective
    membership.  
    Providing Medicare Part D Prescription Drug Program
    (Medicare Part D) products to our clients and to
    individual Medicare-eligible consumers nationwide by offering
    services in support of their Prescription Drug Program
    (PDP) or federal subsidy, as well as through our own
    PDP offerings.
    Effectively managing drug utilization, a key factor in
    controlling drug trend, through a wide range of trend management
    tools, including drug utilization review programs and rules
    governing the conditions under which drugs are covered,
    according to the requirements established by our clients. We
    also have clinically-based programs that identify particular
    categories of questionable drug claims based on rules that our
    clients use for coverage criteria. These rules are designed to
    reduce unnecessary prescription use and monitor for potential
    abuse.      Form 10-K.
    Industry
    Overview
   3




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Business
    Strategy
    Key
    Growth Drivers
  
    Generics:  Optimizing the value of generics in
    light of significant brand-name patent expirations expected over
    the next several years, and continued development of programs
    designed to further reduce the cost of prescription health care.
    Mail Order:  Maximizing the mail-order
    prescription opportunity through enhanced communication and plan
    design.
    Specialty Pharmacy:  Expanding our specialty
    pharmacy model by providing new and creative services that
    reduce drug cost, simplify the administrative process and
    further enhance patient safety and convenience. In November
    2007, we acquired Critical Care Systems, Inc. (Critical
    Care), one of the nations largest providers of
    home-based and ambulatory specialty infusion services, which
    expands Accredos capabilities and market presence related
    to infused agents, which are important today and are expected to
    become even more important in the future with infusion drugs
    representing approximately 25% of the specialty drug pipeline.
    New Business and Renewals:  Retaining existing
    clients and winning new clients by providing quality service,
    engaging members, leveraging technology and delivering new
    products and services, all of which provide value to our clients
    and members and are critical to our business strategy.
    Clinical Innovation:  Executing a
    next-generation clinical strategy that is designed to establish
    a new benchmark for pharmacy health care by engaging members and
    modeling behaviors to improve clinical outcomes and reduce
    costs. In 2007, we re-engineered our pharmacy model around Medco
    Therapeutic Resource
    Centers®

    that provide patients with chronic and complex conditions access
    to specialist pharmacists, who are trained in specific disease
    states and have access to integrated patient data to help
    achieve more positive clinical outcomes. We also view
    personalized medicine as an opportunity to enhance our clinical
    programs by identifying a patients genetic profile through
    laboratory testing to determine sensitivities to certain drugs
    and strengths, with the potential to improve health outcomes and
    reduce overall health care costs. We have established clinical
    collaborations with organizations such as the Mayo Clinic,
    Harvard University, Indiana University, and the University of
    North Carolina, which are intended to add precision to the
    prescribing, dosing and safety profile of prescription medicines.  Other
    Business Initiatives
  
    New Markets:  Making acquisitions, forming
    strategic alliances, and expanding into complementary adjacent
    markets. In March 2008, we launched a collaboration with
    Swedens government-operated retail pharmacy authority,
    Apoteket, to develop and test the first automated electronic
    prescription review system to improve clinical and financial
    outcomes for Swedish patients and the countrys health care
    system. In April 2008, we acquired a majority interest in Europa
    Apotheek, a privately held company based in the Netherlands that
    provides clinical health care and mail-order pharmacy services 4




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in Germany and the Netherlands. We believe these ventures
    leverage our proven proprietary technologies and ability to
    deliver customized solutions to meet the challenges of managing
    health care costs and improving clinical care abroad.  
    Financial Strategy:  Delivering earnings growth
    and managing selling, general and administrative expenses,
    accelerating cash flow generation, maintaining current debt
    levels, driving improvements in return on invested capital, and
    share repurchases.
    Solutions for Seniors/Medicare
    Part D:  Developing innovative and flexible
    approaches that assist our health plan and employer clients in
    successfully managing a range of opportunities available through
    the Medicare Part D program, and delivering high quality
    pharmaceutical benefits to members.        Products
    and Services
    Plan
    Design
    tm ®
   5




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®
  Clinical
    Management
          ® ® ® ®
    ® 10-year ® ® ®
  Clinical
    Services, Specialty Pharmacy
   6




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Pharmacy
    Management
    Mail-Order Service. 90-day 30-day
    and/or
  Medco Therapeutic Resource
    Centers ®
  Specialty Pharmacy Management. 90-day
 7




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Retail Pharmacy Networks.
  Call Center Pharmacies. work-at-home
  Reimbursement Services.
  Physician
    Services
  ®
 8




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Web-Based
    Services
  ®
  Member-Oriented Web Services.
  Medicare Part D Web Services.
  Client-Oriented Web Services.
  Pharmacist-Oriented Web Services. e-mail
  Contractual
    Relationships
  Clients.
 9




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CMS.
  Pharmaceutical Manufacturers. Form 10-K.
  Retail Pharmacies.
  Clients
   10




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##### Table of Contents



Mail-Order
    Inventory Suppliers
      Competition
    
    Ability to differentiate ourselves in the marketplace through
    our innovative member engagement model, which includes the
    specialized practice of pharmacy through Medco Therapeutic
    Resource
    Centers®

    and our initiatives in the field of personalized medicine;
    collectively these programs and innovations are designed to
    improve clinical outcomes and reduce the total cost of health
    care for plan sponsors;
    Ability to effectively provide innovative plan designs focused
    on the specific and changing needs of clients, patients and
    other payors, as well as effectively administer new programs,
    such as those associated with Medicare Part D;
    Capability and regional and national scale to provide a fully
    integrated prescription benefit model, including effective mail
    order, retail access, specialty pharmacy, and customer service;
    Quality and breadth of clinical services designed to provide a
    high level of care and compliance;
    Proven history in managing drug trend, including the ability to
    negotiate favorable discounts from pharmaceutical manufacturers
    and retail pharmacies, rebates from brand-name pharmaceutical
    manufacturers, and the ability to shift prescription volume to
    lower cost generics, all of which deliver value back to the plan
    sponsor;
    Use of technology to deliver information and services to clients
    and members; and
    Financial stability.   11




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Corporate
    Compliance and Government Regulation
  Corporate
    Compliance and Ethics Program
        
    Establishing and communicating compliance-related policies and
    procedures;
    Creating a high-level structure to oversee and implement
    compliance efforts;
    Educating and training employees and consultants;
    Internal reporting mechanisms;
    Regular monitoring and auditing;
    Effective performance and disciplinary standards; and
    Procedures for promptly responding to potential misconduct.     12




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Government
    Regulation
      Regulation of Our Pharmacy, Nursing, Home Health Agency, and
    Laboratory Operations.
     13




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Third-Party Administration and Other State Licensure
    Laws.
  Consumer Protection Laws.
  Network Access Legislation.
  Proposals for Direct Regulation of
    PBMs.
  ERISA Regulation.
       14




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Form 10-K.
  Fraudulent Billing, Anti-Kickback, Stark, Civil Monetary
    Penalties, and False Claims Laws and Regulations.
  Billing.
  Anti-Kickback Laws and
    Regulations.
    The Ethics in Patient Referrals Law (Stark
    Law).
  The False Claims Act.
    Regulation of Financial Risk Plans.
 15




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Regulation Relating to Data Transmission and
    Confidentiality of Patient Identifiable
    Information. 111-16),
    Regulation Applicable to Clients.
  
    Formulary Restrictions.  A number of states
    have enacted laws that regulate the establishment of formularies
    by insurers, HMOs and other third-party payors. These laws
    relate to the development, review and update of formularies; the
    role and composition of pharmacy and therapeutics committees;
    the availability of formulary listings; the disclosure of
    formulary information to health plan members; and a process for
    allowing members to obtain non-preferred drugs without
    additional cost-sharing where the non-preferred drugs are
    medically necessary and the formulary drugs are determined to be
    inappropriate. Increasing regulation of formularies by states
    could significantly affect our ability to develop and administer
    formularies on behalf of our insurer, HMO and other health plan
    clients.
    Industry Standards for PBM, Pharmacy, and Home Health
    Functions.The National Committee on Quality
    Assurance, the American Accreditation Health Care Commission,
    known as URAC, the Joint Commission on Accreditation of Health
    Care Organizations and other quasi-regulatory and accrediting
    bodies have developed standards relating to services performed
    by PBMs and specialty pharmacies, including mail order,
    formulary, drug utilization management, specialty pharmacy and
    nursing care. While the actions of these bodies do not have the
    force of law, PBMs and many clients for PBM services seek
    certification from them, as do other third parties with which
    our subsidiaries may contract 16




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for services. These bodies may influence the federal government
    or states to adopt requirements or model acts that they
    promulgate. The federal government and some states incorporate
    accreditation standards of these bodies, as well as the
    standards of the National Association of Insurance Commissioners
    and the National Association of Boards of Pharmacy, into their
    drug utilization review regulation. Future initiatives of these
    bodies are uncertain, and resulting standards or legislation
    could impose restrictions on us or our clients in a manner that
    could significantly impact our business.  Legislation and Regulation Affecting Drug Prices and
    Potentially Affecting the Market for Prescription Benefit Plans
    and Reimbursement for Durable Medical
    Equipment.
      108-173)
  Medicare Part D and Part B.
 17




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State Prescription Drug Assistance
    Programs. and/or
  Prompt Pay Regulations. and/or
  Drug Importation.
  Health Management Services Regulation. and/or
  Employees
   18




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Available
    Information
  1-800-SEC-0330. http://www.sec.gov.
    http://www.medcohealth.com. Form 10-K, Form 10-Q, Form 8-K www.medcohealth.com/investor
  Form 10-K. (201) 269-3400.
  Form 10-K.
  Stock
    Split
  Form 10-K.
 19




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Item 1A.
    Risk
    Factors.  This Annual Report on
    Form 10-K
    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 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, including those discussed in this Item 1A,
    Risk Factors, Item 7, Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations and other sections of this Annual Report on
    Form 10-K.
  Competition
    in the PBM, specialty pharmacy and the broader health care
    industry is intense and could impair our ability to attract and
    retain clients.
        Failure
    to retain key clients and their members, either as a result of
    economic conditions, increased competition or other factors,
    could result in significantly decreased revenues and could harm
    our profitability.
     20




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non-U.S. economic
  If we
    do not continue to earn and retain purchase discounts and
    rebates from manufacturers at current levels, our gross margins
    may decline.
        Our
    acquisition activity has increased recently and if we are unable
    to effectively integrate acquired businesses into ours, our
    operating results may be adversely affected. Even if we are
    successful, the integration of these businesses has required,
    and will likely continue to require, significant resources and
    management attention.
     21




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If we
    fail to comply with complex and evolving laws and regulations in
    the U.S. and internationally, we could suffer penalties, or be
    required to pay substantial damages or make significant changes
    to our operations.
    Government
    efforts to reduce health care costs and alter health care
    financing practices could lead to a decreased demand for our
    services or to reduced profitability.
      Failure
    in continued execution of our Medicare Part D prescription
    drug program, and the integration of that program into a more
    comprehensive retiree strategy, could adversely impact our
    business and financial results.
  and/or
   22




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PBMs
    could be subject to claims under ERISA if they are found to be a
    fiduciary of a health benefit plan governed by
    ERISA.
  Form 10-K. and/or
  Pending
    litigation could adversely impact our business practices and
    have a material adverse effect on our business, financial
    condition, liquidity and operating results.
  Form 10-K.
  We are
    subject to corporate integrity agreements and noncompliance may
    impede our ability to conduct business with the federal
    government.
    New
    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.
   23




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111-16),
  Our
    Specialty Pharmacy business is highly 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 improve our
    financial performance.
      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, certain revenues from diabetes
    testing supplies and our Medicare Part D offerings expose
    us to increased credit risk.
       24




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Changes
    in industry pricing benchmarks could adversely affect our
    financial performance.
    New England Carpenters
    Health Benefits Fund, et al. v. First DataBank, et al.
  Legislation and
    Regulation Affecting Drug Prices and Potentially Affecting
    the Market for Prescription Benefit Plans and Reimbursement for
    Durable Medical Equipment, 108-173)
  The
    terms and covenants relating to our existing indebtedness could
    adversely impact our financial performance and our
    liquidity.
  10-K.
   25




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Prescription
    volumes may decline, and our net revenues and profitability may
    be negatively impacted, if the safety risk profiles of drugs
    increase or if drugs are withdrawn from the market, including as
    a result of manufacturing issues, or if prescription drugs
    transition to over-the-counter products.
    We may
    be subject to liability claims for damages and other expenses
    that are not covered by insurance.
  Form 10-K
  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 or goodwill are impaired, or
    if we shorten intangible asset useful lives.
   26




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Changes
    in reimbursement rates, including competitive bidding for
    durable medical equipment suppliers, could negatively affect our
    Accredo and PolyMedica revenues and profits.
    and/or
   27




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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.
        Item 1B.
    Unresolved
    Staff Comments.    Item 2.
    Properties.       28




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Insurance
  Form 10-K
  Item 3.
    Legal
    Proceedings.  Form 10-K
  Item 4.
    Submission
    of Matters to a Vote of Security Holders.   29




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Executive
    Officers of the Company    Name

Age

PositionDavid B. Snow, Jr.


54


Chairman of the Board and Chief Executive OfficerGabriel R. Cappucci


46


Senior Vice President and Controller, Chief Accounting OfficerMary T. Daschner


50


Group President, Retiree SolutionsJohn P. Driscoll


49


President, New MarketsRobert S. Epstein


53


Senior Vice President, Medical and Analytical Affairs and Chief
    Medical OfficerBrian T. Griffin


49


Group President, Health PlansKenneth O. Klepper


55


President and Chief Operating OfficerLaizer D. Kornwasser


37


President, Liberty Medical and Senior Vice President, Channel
    and Generic StrategyThomas M. Moriarty


45


General Counsel, Secretary and Senior Vice President,
    Pharmaceutical Strategies and SolutionsKarin V. Princivalle


52


Senior Vice President, Human ResourcesRichard J. Rubino


51


Senior Vice President, Finance and Chief Financial OfficerJack A. Smith


61


Senior Vice President, Chief Marketing OfficerGlenn C. Taylor


57


Group President, Key AccountsTimothy C. Wentworth


48


Group President, Employer Accounts   David B. Snow, Jr.
  Gabriel R. Cappucci
  Mary T. Daschner tm
 30




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John P. Driscoll
  Robert S. Epstein, M.D., M.S.
  Brian T. Griffin
  Kenneth O. Klepper
  Laizer D. Kornwasser
  Thomas M. Moriarty
 31




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Karin V. Princivalle
  Richard J. Rubino
  Jack A. Smith ®
  Glenn C. Taylor
  Timothy C. Wentworth
 32




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PART II  Item 5.
    Market
    for Registrants Common Equity, Related Shareholder Matters
    and Issuer Purchases of Equity Securities.  Market
    Information
    Fourth Quarter


Third Quarter


Second Quarter


First Quarter2008High

$
47.85


$
51.15


$
52.00


$
54.63Low

$
29.80


$
43.89


$
42.85


$
40.502007High

$
51.67


$
45.83


$
40.82


$
36.33Low

$
43.52


$
38.45


$
35.12


$
26.26   Form 10-K
    Holders
    Dividend
    Policy
    Securities
    Authorized for Issuance under Equity Compensation
    Plans
  Form 10-K.
 33




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Comparative
    Stock Performance
    COMPARISON
    OF 5 YEAR CUMULATIVE TOTAL RETURN
    Among Medco Health Solutions, Inc., The S&P 500 Index
    And The S&P Health Care Index
  
    Comparison of 5 Year Cumulative Total Return12/03


12/04


12/05


12/06


12/07


12/08Medco Health Solutions, Inc.



100.00




122.39




164.17




157.22




298.32




246.60S&P 500



100.00




110.88




116.33




134.70




142.10




89.53S&P Health Care



100.00




101.68




108.24




116.40




124.72




96.27     Share
    Repurchase Program
   34




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Issuer
    Purchases of Equity
    Securities (1)
  Total Number of


ApproximateShares Purchased


Dollar Value ofas Part of a


SharesPublicly


That May Yet beTotal Number of


Average


Announced


Purchased UnderShares


Price Paid


Program Since


the
    Program(4)Fiscal Period

Purchased


per
    Share(2)


Inception(3)


(In thousands)Balances at September 27, 2008










153,181,160


$
29,731Fiscal October 2008


649,055


$
45.81



649,055


$
Fiscal November 2008


3,220,000


$
39.25



3,220,000


$
2,873,626Fiscal December 2008


1,932,000


$
38.11



1,932,000


$
2,800,004Fourth quarter 2008 totals


5,801,055


$
39.60



5,801,055     (1)

    
    All information set forth in the table above relates to the
    Companys 2005 Plan and 2008 Plan. The 2005 Plan was first
    announced in August 2005, and then subsequent announcements were
    made when the 2005 Plan was amended in December 2005, November
    2006 and February 2007. The 2005 Plan was scheduled to expire in
    December 2008. The Company completed the 2005 Plan in October
    2008 and no further purchases will be made pursuant to this
    plan. The 2008 Plan was announced in November 2008 and pursuant
    to the 2008 Plan, the Company is authorized to repurchase up to
    $3 billion of its common stock through November 2010.(2)

    
    Dollar amounts include transaction costs. The total average
    price paid per share in the table above represents the average
    price paid per share for repurchases initiated during the three
    months ended December 27, 2008. The average price paid per
    share for repurchases initiated since inception through
    December 27, 2008 under the 2005 Plan is $35.75. The
    average price paid per share for repurchases initiated since
    inception through December 27, 2008 under the 2008 Plan is
    $38.82.(3)

    
    The Company repurchased all of the above-referenced shares of
    its common stock through its publicly announced 2005 Plan and
    2008 Plan.(4)

    
    The balances at September 27, 2008 and at October 2008
    fiscal month-end reflect the remaining authorized repurchases
    under the 2005 Plan based on the increase in the authorized
    repurchases. The balances at November and December 2008 fiscal
    month-end reflect the remaining authorized repurchases under the
    2008 Plan.     35




---



##### Table of Contents



Item 6.
    Selected
    Financial Data.  Form 10-K
  December 27,


December 29,


December 30,


December 31,


December 25,As of and for Fiscal Years Ended

2008(1)


2007(2)


2006(3)


2005(4)(5)


2004Consolidated statement of income data:Total product net
    revenues(6)

$
50,576.2


$
43,961.9


$
42,022.6


$
37,455.0


$
35,024.4Total service net revenues


681.8



544.3



521.1



415.9



327.5Total net
    revenues(6)


51,258.0



44,506.2



42,543.7



37,870.9



35,351.9Cost of revenues:Cost of product net
    revenues(6)


47,308.2



41,402.6



40,012.5



35,827.8



33,496.6Cost of service revenues


221.4



158.3



125.8



100.2



132.8Total cost of
    revenues(6)


47,529.6



41,560.9



40,138.3



35,928.0



33,629.4Selling, general and administrative expenses


1,425.0



1,114.1



1,109.2



757.6



676.4Amortization of intangibles


285.1



228.1



218.5



192.5



179.9Interest expense


233.7



134.2



95.8



73.9



69.1Interest (income) and other (income) expense, net


(6.2
)


(34.4
)


(29.9
)


(34.0
)


(9.2
)Total costs and expenses


49,467.2



43,002.9



41,531.9



36,918.0



34,545.6Income before provision for income taxes


1,790.8



1,503.3



1,011.8



952.9



806.3Provision for income
    taxes(9)(f)


687.9



591.3



381.6



350.9



324.7Net income

$
1,102.9


$
912.0


$
630.2


$
602.0


$
481.6Earnings per share
    data(7):Basic earnings per share

$
2.17


$
1.66


$
1.06


$
1.04


$
0.89Shares used in computing basic earnings per share


508.6



550.2



594.5



576.1



543.8Diluted earnings per share

$
2.13


$
1.63


$
1.04


$
1.03


$
0.88Shares used in computing diluted earnings per share


518.6



560.9



603.3



587.1



549.4Consolidated balance sheet data:Working
    capital(8)

$
1,299.5


$
1,173.5


$
1,028.2


$
1,300.1


$
1,675.9Goodwill

$
6,331.4


$
6,230.2


$
5,108.7


$
5,152.3


$
3,310.2Intangible assets, net

$
2,666.4


$
2,905.0


$
2,523.1


$
2,741.6


$
2,140.6Total assets

$
17,010.9


$
16,217.9


$
14,388.1


$
14,447.7


$
11,113.2Total debt

$
4,602.9


$
3,494.4


$
1,266.7


$
1,469.4


$
1,192.9Deferred tax liabilities

$
1,065.3


$
1,167.0


$
1,161.3


$
1,213.8


$
1,030.2Total noncurrent liabilities

$
5,255.0


$
4,213.4


$
2,057.8


$
2,218.0


$
2,177.6Total stockholders equity

$
5,957.9


$
6,875.3


$
7,503.5


$
7,724.2


$
5,719.4 36




---



##### Table of Contents



December 27,


December 29,


December 30,


December 31,


December 25,As of and for Fiscal Years Ended

2008(1)


2007(2)


2006(3)


2005(4)(5)


2004Supplemental information:EBITDA(9)

$
2,461.1


$
2,000.1


$
1,469.8


$
1,350.3


$
1,243.7EBITDA per adjusted
    prescription(9)

$
3.09


$
2.67


$
2.01


$
1.89


$
1.83Net cash provided by operating activities

$
1,635.1


$
1,367.0


$
1,241.0


$
1,040.8


$
711.5Net cash used by investing activities

$
(416.2
)

$
(1,713.8
)

$
(155.5
)

$
(1,186.3
)

$
(101.9
)Net cash (used by) provided by financing activities

$
(1,054.6
)

$
302.4


$
(1,155.2
)

$
(111.8
)

$
(102.6
)Prescriptions administered


586.0



559.8



553.4



540.1



502.9Retail


480.2



465.0



464.4



452.8



415.2Mail-order


105.8



94.8



89.0



87.3



87.7Adjusted
    prescriptions(9)(i)


795.9



748.3



729.9



714.1



678.3Adjusted mail-order
    penetration(10)


39.7
%


37.9
%


36.4
%


36.6
%


38.8
%Other
    volume(11)


6.0















Overall generic dispensing rate


64.1
%


59.7
%


55.2
%


51.5
%


46.3
%Retail generic dispensing rate


66.0
%


61.7
%


57.2
%


53.3
%


48.1
%Mail-order generic dispensing rate


55.0
%


50.0
%


44.8
%


41.7
%


37.9
%     Notes to Selected Financial Data:
  (1)

    
    The consolidated statement of income data for 2008 includes
    the operating results of majority-owned Europa Apotheek Venlo
    B.V. (Europa Apotheek) commencing on the
    April 28, 2008 acquisition date.(2)

    
    The consolidated statement of income data for 2007 includes
    the operating results of PolyMedica Corporation
    (PolyMedica) and Critical Care Systems, Inc.
    (Critical Care) commencing on the October 31,
    2007 and November 14, 2007 acquisition dates, respectively,
    and for the subsequent period.(3)

    
    The consolidated statement of income data for 2006 includes a
    pre-tax legal settlements charge of $162.6 million recorded
    in the first quarter of 2006, with a $99.9 million
    after-tax effect, or $0.17 per diluted share on a split-adjusted
    basis (see note 7 below).(4)

    
    Fiscal 2005 represents a 53-week fiscal year. All other
    fiscal years presented are comprised of 52 weeks.(5)

    
    The consolidated statement of income data for 2005 includes
    the operating results of Accredo Health, Incorporated
    (Accredo) commencing on the August 18, 2005
    acquisition date, and for the subsequent periods.(6)

    
    Includes retail co-payments of $7,666 million for 2008,
    $7,553 million for 2007, $7,394 million for 2006,
    $7,436 million for 2005, and $6,773 million for
    2004.(7)

    
    Common share and per share amounts have been retrospectively
    adjusted for the two-for-one stock split, which became effective
    on January 24, 2008. See Note 1, Background and
    Basis of Presentation, to our consolidated financial
    statements included in Part II, Item 8 of this Annual
    Report on
    Form 10-K.(8)

    
    Calculated as current assets less current liabilities.(9)

    
    EBITDA consists of earnings before interest income/expense,
    taxes, depreciation and amortization. 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 reported net income, are
    significant components of the consolidated 37




---



##### Table of Contents



statements of income, and must be considered in performing a
    comprehensive assessment of 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 the
    charge is not considered an indicator of ongoing company
    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 EBITDA performance on a
    per-unit
    basis, providing insight into the cash-generating potential of
    each prescription. EBITDA, and as a result, 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 pharmacy drugs, as well as the
    level of efficiency in the business. Adjusted prescription
    volume equals the majority of mail-order prescriptions
    multiplied by three, plus retail prescriptions. These mail-order
    prescriptions are multiplied by three to adjust for the fact
    that they include approximately three times the amount of
    product days supplied compared with retail prescriptions.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):  December 27,


December 29,


December 30,


December 31,


December 25,For Fiscal Years Ended

2008(a)


2007(b)


2006


2005(c)(d)


2004Net income

$
1,102.9


$
912.0


$
630.2


$
602.0


$
481.6Add:Interest expense


233.7



134.2



95.8



73.9



69.1Interest (income) and other (income) expense, net


(6.2
)(e)


(34.4
)


(29.9
)


(34.0
)


(9.2
)Provision for income taxes


687.9
(f)


591.3



381.6
(f)


350.9
(f)


324.7Depreciation expense


157.7



168.9



173.6



165.0



197.6
(g)Amortization expense


285.1



228.1



218.5



192.5



179.9EBITDA

$
2,461.1


$
2,000.1


$
1,469.8


$
1,350.3


$
1,243.7Adjustment for the 2006 legal settlements charge










162.6
(h)






EBITDA, excluding the 2006 legal settlements charge

$
2,461.1


$
2,000.1


$
1,632.4


$
1,350.3


$
1,243.7Adjusted
    prescriptions(i)


795.9



748.3



729.9



714.1



678.3EBITDA per adjusted prescription

$
3.09


$
2.67


$
2.01


$
1.89


$
1.83EBITDA per adjusted prescription, excluding the 2006 legal
    settlements charge

$
3.09


$
2.67


$
2.24


$
1.89


$
1.83   (a)

    
    Includes majority-owned Europa Apotheeks operating
    results commencing on the April 28, 2008 acquisition
    date.(b)

    
    Includes PolyMedicas and Critical Cares operating
    results commencing on the October 31, 2007 and
    November 14, 2007 acquisition dates, respectively, and for
    the subsequent period.(c)

    
    Fiscal 2005 represents a 53-week fiscal year. All other
    fiscal years presented are comprised of 52 weeks.(d)

    
    Includes Accredos operating results commencing on the
    August 18, 2005 acquisition date, and for the subsequent
    periods. 38




---



##### Table of Contents



(e)

    
    Includes a $9.8 million charge for the ineffective
    portion of the forward-starting interest rate swap agreements
    associated with the March 2008 issuance of senior notes. See
    Note 7, Debt, to our consolidated financial
    statements included in Part II, Item 8 of this Annual
    Report on
    Form 10-K.(f)

    
    2008, 2006 and 2005 include nonrecurring tax benefits of
    $28 million, $20 million and $25.7 million,
    respectively. See Note 9, Taxes on Income, to
    our consolidated financial statements included in Part II,
    Item 8 of this Annual Report on
    Form 10-K.(g)

    
    2004 includes accelerated depreciation of $24.5 million
    associated with facility closures that occurred in 2004.(h)

    
    Represents a pre-tax legal settlements charge of
    $162.6 million recorded in the first quarter of 2006. See
    footnote (3) to Selected Financial Data above.(i)

    
    Adjusted prescription volume equals the majority of
    mail-order prescriptions multiplied by three, plus retail
    prescriptions. These mail-order prescriptions are multiplied by
    three to adjust for the fact that they include approximately
    three times the amount of product days supplied compared with
    retail prescriptions.  (10)

    
    The percentage of adjusted mail-order prescriptions to total
    adjusted prescriptions.(11)

    
    Represents over-the-counter drugs, as well as diabetes
    supplies primarily dispensed by PolyMedica.  Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations.  Overview
  ®
  Form 10-K
  Form 10-K.
   39




---



##### Table of Contents



Key
    Indicators Reviewed By Management
    2008
    Financial Performance Summary
  ®
    Part D-related
 40




---



##### Table of Contents



®
            Key
    Financial Statement Components
  Consolidated
    Statements of Income
     41




---



##### Table of Contents



No. 99-19, (EITF 99-19) Form 10-K.
  e-prescribing and/or
   42




---



##### Table of Contents



Form 10-K.
  Consolidated
    Balance Sheets
   43




---



##### Table of Contents



first-in,
      Consolidated
    Statements of Cash Flows
   44




---



##### Table of Contents



agreed-upon
    Client-Related
    Information
    Segment
    Discussion
     45




---



##### Table of Contents



46




---



##### Table of Contents



Consolidated
    Results of Operations
    December 27,


Increase


December 29,


Increase


December 30,For Fiscal Years Ended

2008(1)


(Decrease)


2007(2)


(Decrease)


2006Net RevenuesRetail
    product(3)

$
28,613.5


$
2,189.4



8.3
%

$
26,424.1


$
544.0



2.1
%

$
25,880.1Mail-order product


21,962.7



4,424.9



25.2
%


17,537.8



1,395.3



8.6
%


16,142.5Total
    product(3)

$
50,576.2


$
6,614.3



15.0
%

$
43,961.9


$
1,939.3



4.6
%

$
42,022.6Client and other service


502.2



111.2



28.4
%


391.0



46.9



13.6
%


344.1Manufacturer service


179.6



26.3



17.2
%


153.3



(23.7
)


(13.4
)%


177.0Total service

$
681.8


$
137.5



25.3
%

$
544.3


$
23.2



4.5
%

$
521.1Total net
    revenues(3)

$
51,258.0


$
6,751.8



15.2
%

$
44,506.2


$
1,962.5



4.6
%

$
42,543.7Cost of RevenuesProduct(3)

$
47,308.2


$
5,905.6



14.3
%

$
41,402.6


$
1,390.1



3.5
%

$
40,012.5Service


221.4



63.1



39.9
%


158.3



32.5



25.8
%


125.8Total cost of
    revenues(3)

$
47,529.6


$
5,968.7



14.4
%

$
41,560.9


$
1,422.6



3.5
%

$
40,138.3Gross
    Margin(4)Product

$
3,268.0


$
708.7



27.7
%

$
2,559.3


$
549.2



27.3
%

$
2,010.1Product gross margin percentage


6.5
%


0.7
%






5.8
%


1.0
%






4.8
%Service

$
460.4


$
74.4



19.3
%

$
386.0


$
(9.3
)


(2.4
)%

$
395.3Service gross margin percentage


67.5
%


(3.4
)%






70.9
%


(5.0
)%






75.9
%Total gross margin

$
3,728.4


$
783.1



26.6
%

$
2,945.3


$
539.9



22.4
%

$
2,405.4Gross margin percentage


7.3
%


0.7
%






6.6
%


0.9
%






5.7
%Volume InformationRetail prescriptions


480.2



15.2



3.3
%


465.0



0.6



0.1
%


464.4Mail-order prescriptions


105.8



11.0



11.6
%


94.8



5.8



6.5
%


89.0Total prescriptions


586.0



26.2



4.7
%


559.8



6.4



1.2
%


553.4Adjusted
    prescriptions(5)


795.9



47.6



6.4
%


748.3



18.4



2.5
%


729.9Adjusted mail-order
    penetration(6)


39.7
%


1.8
%






37.9
%


1.5
%






36.4
%Other
    volume(7)


6.0



6.0



N/M*















Generic Dispensing Rate InformationRetail generic dispensing rate


66.0
%


4.3
%






61.7
%


4.5
%






57.2
%Mail-order generic dispensing rate


55.0
%


5.0
%






50.0
%


5.2
%






44.8
%Overall generic dispensing rate


64.1
%


4.4
%






59.7
%


4.5
%






55.2
%     *
    
    Not meaningful.(1)

    
    Includes majority-owned Europa Apotheeks operating
    results commencing on the April 28, 2008 acquisition
    date.(2)

    
    Includes PolyMedicas and Critical Cares operating
    results commencing on the October 31, 2007 and
    November 14, 2007 acquisition dates, respectively, and for
    the subsequent period.(3)

    
    Includes retail co-payments of $7,666 million for 2008,
    $7,553 million for 2007, and $7,394 million for
    2006.(4)

    
    Defined as net revenues minus cost of revenues.(5)

    
    Adjusted prescription volume equals the majority of
    mail-order prescriptions multiplied by three, plus retail
    prescriptions. These mail-order prescriptions are multiplied by
    three to adjust for the fact that they include approximately
    three times the amount of product days supplied compared with
    retail prescriptions.(6)

    
    The percentage of adjusted mail-order prescriptions to total
    adjusted prescriptions.(7)

    
    Represents over-the-counter drugs, as well as diabetes
    supplies primarily dispensed by PolyMedica. 47




---



##### Table of Contents



Net
    Revenues
  Retail.
    Mail-Order.
        Part D-related
   48




---



##### Table of Contents



Gross
    Margin
  ®
  ®
          December 27,


Increase


December 29,


Increase


December 30,For Fiscal Years Ended

2008(1)


(Decrease)


2007(2)


(Decrease)


2006(3)Gross
    margin(4)

$
3,728.4


$
783.1



26.6
%

$
2,945.3


$
539.9



22.4
%

$
2,405.4Selling, general and administrative expenses


1,425.0



310.9



27.9
%


1,114.1



4.9



0.4
%


1,109.2Amortization of intangibles


285.1



57.0



25.0
%


228.1



9.6



4.4
%


218.5Interest expense


233.7



99.5



74.1
%


134.2



38.4



40.1
%


95.8Interest (income) and other (income) expense, net


(6.2
)


28.2



(82.0
)%


(34.4
)


(4.5
)


15.1
%


(29.9
)Income before provision for income taxes


1,790.8



287.5



19.1
%


1,503.3



491.5



48.6
%


1,011.8Provision for income taxes


687.9



96.6



16.3
%


591.3



209.7



55.0
%


381.6Net income

$
1,102.9


$
190.9



20.9
%

$
912.0


$
281.8



44.7
%

$
630.2  49




---



##### Table of Contents



(1)

    
    Includes majority-owned Europa Apotheeks operating
    results commencing on the April 28, 2008 acquisition
    date.(2)

    
    Includes PolyMedicas and Critical Cares operating
    results commencing on the October 31, 2007 and
    November 14, 2007 acquisition dates, respectively, and for
    the subsequent period.(3)

    
    Includes a first-quarter 2006 pre-tax legal settlements
    charge of $162.6 million recorded to SG&A, with a
    $99.9 million after-tax effect.(4)

    
    Defined as net revenues minus cost of revenues.  Selling,
    General and Administrative Expenses
      Amortization
    of Intangibles
    Interest
    Expense
      Interest
    (Income) and Other (Income) Expense, Net
     50




---



##### Table of Contents



Provision
    for Income Taxes
      Net
    Income and Earnings per Share
        Segment
    Results of Operations
  PBM
    Segment
    December 27,


Increase


December 29,


Increase


December 30,For Fiscal Years Ended

2008(1)


(Decrease)


2007(2)


(Decrease)


2006(3)Product net revenues

$
42,678.5


$
4,697.1



12.4
%

$
37,981.4


$
1,340.1



3.7
%

$
36,641.3Total service revenues


605.3



123.2



25.6
%


482.1



16.2



3.5
%


465.9Total net revenues


43,283.8



4,820.3



12.5
%


38,463.5



1,356.3



3.7
%


37,107.2Total cost of revenues


40,186.2



4,188.5



11.6
%


35,997.7



872.0



2.5
%


35,125.7Total gross
    margin(4)

$
3,097.6


$
631.8



25.6
%

$
2,465.8


$
484.3



24.4
%

$
1,981.5Gross margin percentage


7.2
%


0.8
%






6.4
%


1.1
%






5.3
%Selling, general and administrative expenses


1,120.0



235.7



26.7
%


884.3



(28.7
)


(3.1
)%


913.0Amortization of intangibles


240.5



51.9



27.5
%


188.6



8.7



4.8
%


179.9Operating income

$
1,737.1


$
344.2



24.7
%

$
1,392.9


$
504.3



56.8
%

$
888.6  51




---



##### Table of Contents



(1)

    
    Includes majority-owned Europa Apotheeks operating
    results commencing on the April 28, 2008 acquisition
    date.(2)

    
    Includes PolyMedicas operating results commencing on
    the October 31, 2007 acquisition date, and for the
    subsequent period.(3)

    
    Includes a first-quarter 2006 pre-tax legal settlements
    charge of $162.6 million recorded to SG&A.(4)

    
    Defined as net revenues minus cost of revenues.    ®
        Form 10-K.
 52




---



##### Table of Contents



Specialty
    Pharmacy Segment
    December 27,


Increase


December 29,


Increase


December 30,For Fiscal Years Ended

2008


(Decrease)


2007(1)


(Decrease)


2006Product net revenues

$
7,897.7


$
1,917.2



32.1
%

$
5,980.5


$
599.2



11.1
%

$
5,381.3Total service revenues


76.5



14.3



23.0
%


62.2



7.0



12.7
%


55.2Total net revenues


7,974.2



1,931.5



32.0
%


6,042.7



606.2



11.2
%


5,436.5Total cost of revenues


7,343.4



1,780.2



32.0
%


5,563.2



550.6



11.0
%


5,012.6Total gross
    margin(2)

$
630.8


$
151.3



31.6
%

$
479.5


$
55.6



13.1
%

$
423.9Gross margin percentage


7.9
%










7.9
%


0.1
%






7.8
%Selling, general and administrative expenses


305.0



75.2



32.7
%


229.8



33.6



17.1
%


196.2Amortization of intangibles


44.6



5.1



12.9
%


39.5



0.9



2.3
%


38.6Operating income

$
281.2


$
71.0



33.8
%

$
210.2


$
21.1



11.2
%

$
189.1     (1)

    
    Includes Critical Cares operating results commencing on
    the November 14, 2007 acquisition date, and for the
    subsequent period.(2)

    
    Defined as net revenues minus cost of revenues.            Form 10-K
 53




---



##### Table of Contents



Liquidity
    and Capital Resources
  Cash
    Flows
    December 27,





December 29,





December 30,For Fiscal Years Ended

2008(1)


Variance


2007(2)


Variance


2006Net cash provided by operating activities

$
1,635.1


$
268.1


$
1,367.0


$
126.0


$
1,241.0Net cash used by investing activities


(416.2
)


1,297.6



(1,713.8
)


(1,558.3
)


(155.5
)Net cash provided by (used by) financing activities


(1,054.6
)


(1,357.0
)


302.4



1,457.6



(1,155.2
)Net increase (decrease) in cash and cash equivalents


164.3



208.7



(44.4
)


25.3



(69.7
)Cash and cash equivalents at beginning of year


774.1



(44.4
)


818.5



(69.7
)


888.2Cash and cash equivalents at end of year

$
938.4


$
164.3


$
774.1


$
(44.4
)

$
818.5     (1)

    
    Includes majority-owned Europa Apotheeks operating
    results commencing on the April 28, 2008 acquisition
    date.(2)

    
    Includes PolyMedicas and Critical Cares operating
    results commencing on the October 31, 2007 and
    November 14, 2007 acquisition dates, respectively, and for
    the subsequent period.  Operating Activities.
      Investing Activities.
 54




---



##### Table of Contents



Financing Activities.
    5-year 10-year 5-year 10-year Form 10-K.
   55




---



##### Table of Contents



Looking
    Forward
  364-day
          12-year
   56




---



##### Table of Contents



Financing
    Facilities
  Five-Year
    Credit Facilities
  5-year 5-year
    Form 10-K.
  2007
    Refinancing
    Accounts
    Receivable Financing Facility
  364-day
  Interest
    Rates
   57




---



##### Table of Contents



Swap
    Agreements
  10-year 30-year
  5-year 10-year 30-year
    Covenants
    Debt
    Ratings
  Form 10-K:
  EBITDA
   58




---



##### Table of Contents



per-unit
    December 27,


December 29,


December 30,For Fiscal Years Ended

2008(1)


2007(2)


2006Net income

$
1,102.9


$
912.0


$
630.2Add:Interest expense


233.7



134.2



95.8Interest (income) and other (income) expense, net


(6.2
)(3)


(34.4
)


(29.9
)Provision for income taxes


687.9
(4)


591.3



381.6
(4)Depreciation expense


157.7



168.9



173.6Amortization expense


285.1



228.1



218.5EBITDA

$
2,461.1


$
2,000.1


$
1,469.8Adjustment for the 2006 legal settlements charge










162.6
(5)EBITDA, excluding the 2006 legal settlements charge

$
2,461.1


$
2,000.1


$
1,632.4Adjusted
    prescriptions(6)


795.9



748.3



729.9EBITDA per adjusted prescription

$
3.09


$
2.67


$
2.01EBITDA per adjusted prescription, excluding the 2006 legal
    settlements charge

$
3.09


$
2.67


$
2.24     (1)

    
    Includes majority-owned Europa Apotheeks operating
    results commencing on the April 28, 2008 acquisition
    date.(2)
    
    Includes PolyMedicas and Critical Cares operating
    results commencing on the October 31, 2007 and
    November 14, 2007 acquisition dates, respectively, and for
    the subsequent period.(3)

    
    Includes a $9.8 million charge for the ineffective
    portion of the forward-starting interest rate swap agreements
    associated with the March 2008 issuance of senior notes. See
    Note 7,Debt, to our consolidated financial
    statements included in Part II, Item 8 of this Annual
    Report on
    Form 10-K.(4)

    
    2008 and 2006 include nonrecurring tax benefits of
    $28 million and $20 million, respectively. See
    Note 9, Taxes on Income, to our consolidated
    financial statements included in Part II, Item 8 of
    this Annual Report on
    Form 10-K.(5)
    
    Represents a pre-tax legal settlements charge of
    $162.6 million recorded in the first quarter of 2006.(6)
    
    Adjusted prescription volume equals the majority of
    mail-order prescriptions multiplied by three, plus retail
    prescriptions. These mail-order prescriptions are multiplied by
    three to adjust for the fact that they include approximately
    three times the amount of product days supplied compared with
    retail prescriptions. 59




---



##### Table of Contents



®
    Commitments
    and Contractual Obligations
    Payments
    Due By Period
  Total


2009


2010-2011


2012-2013


ThereafterLong-term debt
    obligations(1)

$
4,000.0


$



$



$
2,800.0


$
1,200.0Interest payments on long-term debt
    obligations(2)


1,097.4



159.7



319.3



258.6



359.8Operating lease
    obligations(3)


153.2



45.8



79.7



20.2



7.5Purchase
    commitments(4)


173.4



82.3



91.1







Other(5)


25.1











25.1



Total

$
5,449.1


$
287.8


$
490.1


$
3,103.9


$
1,567.3     (1)

    
    Long-term debt obligations exclude $15.5 million in
    total unamortized discounts on our 7.25%, 6.125% and
    7.125% senior notes and the fair value of interest rate
    swap agreements of $18.4 million on $200 million of
    the 7.25% senior notes.(2)

    
    The variable component of interest expense for the senior
    unsecured credit facility is based on the LIBOR at
    December 27, 2008. The LIBOR fluctuates and may result in
    differences in the presented interest expense on long-term debt
    obligations.(3)

    
    Primarily 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 and corporate headquarters.(4)

    
    Represents purchase commitments entered into by PolyMedica
    for diabetes supplies of $93.5 million through 2010, of
    which $46.4 million is committed for 2009 and
    technology-related agreements entered into by Medco of
    $60.7 million through 2011, of which $16.7 million is
    committed for 2009. It also includes contractual commitments to
    purchase inventory from certain biopharmaceutical manufacturers
    associated with Accredos Specialty Pharmacy business,
    consisting of a firm commitment for the first quarter of 2009 of
    $11.9 million, with an additional variable commitment
    through mid-2011 based on patient usage, and a firm commitment
    for 2009 of $7.3 million, with an additional commitment
    through 2011 with a variable price component.(5)

    
    As part of the acquisition of a majority interest in Europa
    Apotheek, we have a purchase obligation of $25.1 million
    anticipated to be settled in 2012, which is included in other
    noncurrent liabilities in the consolidated balance sheet as of
    December 27, 2008.   60




---



##### Table of Contents



364-day
      Form 10-K.
  Off-Balance
    Sheet Arrangements
    Interest
    Rate and Foreign Exchange Risk
      Share
    Repurchase Program
     61




---



##### Table of Contents



Form 10-K.
  Use of
    Estimates and Critical Accounting Policies and
    Estimates
  Use of
    Estimates
    Critical
    Accounting Policies and Estimates
  Form 10-K.)
  Revenue Recognition.
  EITF 99-19 EITF 99-19 EITF 99-19,
 62




---



##### Table of Contents



EITF 99-19 Form 10-K.
 63




---



##### Table of Contents



e-prescribing and/or
    Rebates Receivable and Payable.
  Allowance for Doubtful Accounts.
   64




---



##### Table of Contents



Income Taxes.
  Form 10-K,
  Goodwill and Intangible Assets.
    35-year
 65




---



##### Table of Contents



Pension and Other Postretirement Benefit
    Plans.
           66




---



##### Table of Contents



Form 10-K
  Contingencies. Form 10-K
  Stock-Based Compensation.
      Form 10-K
  Recently Adopted Financial Accounting
    Standards. FAS 157-2, FAS 157-2),
  FAS 157-2 FAS 157-2
 67




---



##### Table of Contents



FAS 157-3, FAS 157-3), FAS 157-3
  Fair Value Hierarchy
          Medco
    Fair Value Measurements at Reporting Date
  December 27,Description

2008


Level 1


Level 2


Level 3Money market mutual funds

$
906.0(1
)

$
906.0


$



$
Fair value of interest rate swap agreements


18.4(2
)






18.4



Available-for-sale investments


1.9(3
)


1.9







     (1)

    
    Reported in cash and cash equivalents on the consolidated
    balance sheet.(2)

    
    Reported in other noncurrent assets on the consolidated
    balance sheet.(3)

    
    Reported in short-term investments on the consolidated
    balance sheet.    Recent Accounting Pronouncements.
  No. 08-7, (EITF 08-7). EITF 08-7 EITF 08-7
 68




---



##### Table of Contents



EITF 08-7
  FAS 142-3, FAS 142-3). FAS 142-3 FAS 142-3 FAS 142-3
    No. 07-1, (EITF 07-1), EITF 07-1 EITF 07-1
     69




---



##### Table of Contents



CONDENSED
    INTERIM FINANCIAL DATA (UNAUDITED)
    (In millions, except for per share amounts)
  2008

4th

    Quarter


3rdQuarter


2nd

    Quarter(1)


1st

    QuarterProduct net
    revenues(2)

$
12,771.9


$
12,390.3


$
12,607.1


$
12,806.9Service revenues


189.4



168.8



167.5



156.0Total net
    revenues(2)


12,961.3



12,559.1



12,774.6



12,962.9Cost of operations:Cost of product net
    revenues(2)


11,916.5



11,580.7



11,794.0



12,016.8Cost of service revenues


74.7



53.6



47.1



45.9Total cost of
    revenues(2)


11,991.2



11,634.3



11,841.1



12,062.7Selling, general and administrative expenses


381.0



347.2



368.4



328.4Amortization of intangibles


73.9



71.1



70.6



69.5Interest expense


60.0



61.5



61.6



50.6Interest (income) and other (income) expense, net


(2.4
)


(3.3
)


(4.1
)


3.7Total costs and expenses


12,503.7



12,110.8



12,337.6



12,514.9Income before provision for income taxes


457.6



448.3



437.0



448.0Provision for income taxes


183.2



152.6



174.3



177.8Net income

$
274.4


$
295.7


$
262.7


$
270.2Basic earnings per
    share(3):Weighted average shares outstanding


496.3



503.3



507.7



526.9Earnings per share

$
0.55


$
0.59


$
0.52


$
0.51Diluted earnings per
    share(3):Weighted average shares outstanding


505.3



513.4



517.6



537.8Earnings per share

$
0.54


$
0.58


$
0.51


$
0.50   70




---



##### Table of Contents



2007

4thQuarter(4)


3rd

    Quarter


2nd

    Quarter


1st

    QuarterProduct net
    revenues(5)

$
11,240.2


$
10,783.1


$
10,912.3


$
11,026.3Service revenues


138.2



135.5



137.3



133.3Total net
    revenues(5)


11,378.4



10,918.6



11,049.6



11,159.6Cost of operations:Cost of product net
    revenues(5)


10,557.5



10,183.3



10,311.9



10,349.9Cost of service revenues


54.7



34.5



33.1



36.0Total cost of
    revenues(5)


10,612.2



10,217.8



10,345.0



10,385.9Selling, general and administrative expenses


328.6



263.2



274.0



248.4Amortization of intangibles


64.2



54.6



54.6



54.6Interest expense


45.5



34.6



31.3



22.8Interest (income) and other (income) expense, net


(8.1
)


(9.1
)


(9.4
)


(7.9
)Total cost of operations


11,042.4



10,561.1



10,695.5



10,703.8Income before provision for income taxes


336.0



357.5



354.1



455.8Provision for income taxes


128.4



142.8



139.2



181.0Net income

$
207.6


$
214.7


$
214.9


$
274.8Basic earnings per
    share(3):Weighted average shares outstanding


535.2



537.9



554.4



573.5Earnings per share

$
0.39


$
0.40


$
0.39


$
0.48Diluted earnings per
    share(3):Weighted average shares outstanding


546.3



547.9



564.2



582.3Earnings per share

$
0.38


$
0.39


$
0.38


$
0.47     (1)

    
    The second quarter of 2008, and all subsequent periods,
    includes the operating results of majority-owned Europa Apotheek
    commencing on the April 28, 2008 acquisition date.(2)

    
    Includes retail co-payments of $1,836 million for the
    fourth quarter, $1,828 million for the third quarter,
    $1,900 million for the second quarter and
    $2,102 million for the first quarter of 2008.(3)

    
    Common share and per share amounts have been retrospectively
    adjusted for the two-for-one stock split, which became effective
    on January 24, 2008. See Note 1, Background and
    Basis of Presentation, to our consolidated financial
    statements included in Part II, Item 8 of this Annual
    Report on
    Form 10-K.(4)

    
    The fourth quarter of 2007, and all subsequent periods,
    includes the operating results of PolyMedica and Critical Care
    commencing on the October 31, 2007 and November 14,
    2007 acquisition dates, respectively.(5)

    
    Includes retail co-payments of $1,849 million for the
    fourth quarter, $1,831 million for the third quarter,
    $1,887 million for the second quarter and
    $1,986 million for the first quarter of 2007.    ®
  Item 7A.
    Quantitative
    and Qualitative Disclosures about Market Risk.   71




---



##### Table of Contents



Item 8.
    Financial
    Statements and Supplementary Data.  INDEX TO
    CONSOLIDATED FINANCIAL STATEMENTS*
  Report of Independent Registered Public
    Accounting Firm


73Consolidated Balance Sheets as of
    December 27, 2008 and December 29, 2007


74Consolidated Statements of Income for the Years
    Ended December 27, 2008, December 29, 2007 and
    December 30, 2006


75Consolidated Statements of Stockholders
    Equity for the Years Ended December 30, 2006,
    December 29, 2007 and December 27, 2008


76Consolidated Statements of Cash Flows for the
    Years Ended December 27, 2008, December 29, 2007 and
    December 30, 2006


77Notes to Consolidated Financial Statements


78     *
    
    Selected quarterly financial data for the fiscal years ended
    December 27, 2008 and December 29, 2007 is included
    herein under Part II, Item 7, Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  Condensed Interim Financial Data
    (Unaudited).     72




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm    Internal Control 
    Integrated Framework
           73




---



##### Table of Contents



MEDCO
    HEALTH SOLUTIONS, INC.
  CONSOLIDATED
    BALANCE SHEETS
 (In
    millions, except for share data)
  December 27,


December 29,2008


2007ASSETSCurrent assets:Cash and cash equivalents

$
938.4


$
774.1Short-term investments


64.0



70.3Manufacturer accounts receivable, net


1,858.9



1,516.2Client accounts receivable, net


1,680.5



1,340.3Income taxes receivable


213.4



216.0Inventories, net


1,856.5



1,946.0Prepaid expenses and other current assets


326.6



285.4Deferred tax assets


159.2



154.4Total current assets


7,097.5



6,302.7Property and equipment, net


854.1



725.5Goodwill


6,331.4



6,230.2Intangible assets, net


2,666.4



2,905.0Other noncurrent assets


61.5



54.5Total assets

$
17,010.9


$
16,217.9LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Claims and other accounts payable

$
2,878.9


$
2,812.9Client rebates and guarantees payable


1,658.7



1,092.2Accrued expenses and other current liabilities


660.4



624.1Short-term debt


600.0



600.0Total current liabilities


5,798.0



5,129.2Long-term debt, net


4,002.9



2,894.4Deferred tax liabilities


1,065.3



1,167.0Other noncurrent liabilities


186.8



152.0Total liabilities


11,053.0



9,342.6Commitments and contingencies (See Note 14)Stockholders equity:Preferred stock, par value $0.01  authorized:
    10,000,000 shares; issued and outstanding: 0






Common stock, par value $0.01  authorized:
    2,000,000,000 shares at December 27, 2008 and
    1,000,000,000 shares at December 29, 2007; issued:
    652,386,763 shares at December 27, 2008 and
    647,384,634 shares at December 29,
    2007(1)


6.5



6.4Accumulated other comprehensive income (loss)


(63.8
)


6.4Additional paid-in
    capital(1)


7,788.9



7,553.0Retained earnings


3,929.3



2,826.411,660.9



10,392.2Treasury stock, at cost: 159,061,394 shares at
    December 27, 2008 and 111,445,348 shares at
    December 27,
    2007(1)


(5,703.0
)


(3,516.9
)Total stockholders equity


5,957.9



6,875.3Total liabilities and stockholders equity

$
17,010.9


$
16,217.9     (1)

    
    Balances and share amounts have been retrospectively adjusted
    to reflect the January 24, 2008
    two-for-one
    stock split. See Note 1, Background and Basis of
    Presentation, for more information.  The accompanying notes are an integral part of these
    consolidated financial statements.
 74




---



##### Table of Contents



MEDCO
    HEALTH SOLUTIONS, INC.
  CONSOLIDATED
    STATEMENTS OF INCOME
 (In
    millions, except for per share data)
  December 27,


December 29,


December 30,For Fiscal Years Ended

2008


2007


2006Product net revenues (Includes retail co-payments of $7,666 for
    2008, $7,553 for 2007, and $7,394 for 2006)

$
50,576.2


$
43,961.9


$
42,022.6Service revenues


681.8



544.3



521.1Total net revenues


51,258.0



44,506.2



42,543.7Cost of operations:Cost of product net revenues (Includes retail co-payments of
    $7,666 for 2008, $7,553 for 2007, and $7,394 for 2006)


47,308.2



41,402.6



40,012.5Cost of service revenues


221.4



158.3



125.8Total cost of revenues


47,529.6



41,560.9



40,138.3Selling, general and administrative expenses


1,425.0



1,114.1



1,109.2Amortization of intangibles


285.1



228.1



218.5Interest expense


233.7



134.2



95.8Interest (income) and other (income) expense, net


(6.2
)


(34.4
)


(29.9
)Total costs and expenses


49,467.2



43,002.9



41,531.9Income before provision for income taxes


1,790.8



1,503.3



1,011.8Provision for income taxes


687.9



591.3



381.6Net income

$
1,102.9


$
912.0


$
630.2Basic earnings per
    share(1):Weighted average shares outstanding


508.6



550.2



594.5Earnings per share

$
2.17


$
1.66


$
1.06Diluted earnings per
    share(1):Weighted average shares outstanding


518.6



560.9



603.3Earnings per share

$
2.13


$
1.63


$
1.04     (1)

    
    Common share and per share amounts have been retrospectively
    adjusted to reflect the January 24, 2008
    two-for-one
    stock split. See Note 1, Background and Basis of
    Presentation for additional information.  The accompanying notes are an integral part of these
    consolidated financial statements.
 75




---



##### Table of Contents



MEDCO
    HEALTH SOLUTIONS, INC.
  CONSOLIDATED
    STATEMENTS OF STOCKHOLDERS EQUITY
 (Shares
    in thousands; $ in millions, except for per share
    data)
  Shares of





$0.01 Par


AccumulatedCommon


Shares of


Value


Other


AdditionalStock


Treasury


Common


Comprehensive


Paid-in


Unearned


Retained


TreasuryIssued(1)


Stock(1)


Stock(1)


Income


Capital(1)


Compensation


Earnings


Stock


TotalBalances at December 25, 2005


624,002



15,486


$
6.2


$



$
6,910.2


$
(39.8
)

$
1,254.9


$
(407.3
)

$
7,724.2Net income


























630.2







630.2Total comprehensive income


























630.2







630.2Adjustment to initially apply FASB Statement
    No. 158(2),

    net of tax














15.3



















15.3Issuance of common stock for options exercised, including tax
    benefit


10,475







0.1







181.4















181.5Issuance of common stock under employee stock purchase plans


358















10.0















10.0Restricted stock and restricted stock unit activity, including
    tax benefit


184















29.5















29.5Reversal of unearned compensation


















(39.8
)


39.8











Stock-based compensation related to options


















61.8















61.8Treasury stock acquired






42,636























(1,149.0
)


(1,149.0
)Balances at December 30, 2006


635,019



58,122



6.3



15.3



7,153.1







1,885.1



(1,556.3
)


7,503.5Comprehensive income:Net income


























912.0







912.0Other comprehensive income, net of
    tax(3):Defined benefit plans:Net prior service cost














(4.5
)


















(4.5
)Net gain














0.4



















0.4Unrealized loss on cash flow hedge














(4.8
)


















(4.8
)Other comprehensive income














(8.9
)


















(8.9
)Total comprehensive income














(8.9
)










912.0







903.1Adoption of FASB Interpretation
    No. 48(4)


























29.3







29.3Issuance of common stock for options exercised, including tax
    benefit


11,876







0.1







286.6















286.7Issuance of common stock under employee stock purchase plans


365















13.0















13.0Restricted stock and restricted stock unit activity, including
    tax benefit


125















52.2















52.2Stock-based compensation related to options


















48.1















48.1Treasury stock acquired






53,323























(1,960.6
)


(1,960.6
)Balances at December 29, 2007


647,385



111,445



6.4



6.4



7,553.0







2,826.4



(3,516.9
)


6,875.3Comprehensive income:Net income


























1,102.9







1,102.9Other comprehensive
    income(3):Unrealized loss on investments, net of tax














(0.2
)


















(0.2
)Foreign currency translation loss














(15.5
)


















(15.5
)Unrealized loss on cash flow hedge, net of amortization, net of
    tax














(15.2
)


















(15.2
)Defined benefit plans, net of tax:Net prior service cost














(3.0
)


















(3.0
)Net loss














(36.3
)


















(36.3
)Other comprehensive income














(70.2
)


















(70.2
)Total comprehensive income














(70.2
)










1,102.9







1,032.7Issuance of common stock for options exercised, including tax
    benefit


3,444







0.1







101.9















102.0Issuance of common stock under employee stock purchase plans


400















18.7















18.7Restricted stock and restricted stock unit activity, including
    tax benefit


1,158















49.6















49.6Stock-based compensation related to options


















65.7















65.7Treasury stock acquired






47,616























(2,186.1
)


(2,186.1
)Balances at December 27, 2008


652,387



159,061


$
6.5


$
(63.8
)

$
7,788.9


$



$
3,929.3


$
(5,703.0
)

$
5,957.9     (1)

    
    Share data, common stock and additional
    paid-in-capital
    have been retrospectively adjusted to reflect the
    January 24, 2008
    two-for-one
    stock split. See Note 1, Background and Basis of
    Presentation, for more information.(2)

    
    See Note 2, Summary of Significant Accounting
    Policies  Pension and Other Postretirement Benefit
    Plans, for more information.(3)

    
    See Note 2, Summary of Significant Accounting
    Policies  Other Comprehensive Income and Accumulated
    Other Comprehensive Income, for more information.(4)

    
    See Note 2, Summary of Significant Accounting
    Policies  Income Taxes, for more
    information.  The accompanying notes are an integral part of these
    consolidated financial statements.
 76




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##### Table of Contents



MEDCO
    HEALTH SOLUTIONS, INC.
  CONSOLIDATED
    STATEMENTS OF CASH FLOWS
 (In
    millions)
  December 27,


December 29,


December 30,For Fiscal Years Ended

2008


2007


2006Cash flows from operating activities:Net income

$
1,102.9


$
912.0


$
630.2Adjustments to reconcile net income to net cash provided by
    operating activities:Depreciation


157.7



168.9



173.6Amortization of intangibles


285.1



228.1



218.5Deferred income taxes


(99.6
)


(134.1
)


(99.8
)Stock-based compensation on employee stock plans


131.7



102.5



95.6Tax benefit on employee stock plans


67.9



102.2



60.6Excess tax benefits from stock-based compensation arrangements


(41.8
)


(69.9
)


(33.1
)Other


110.7



65.0



51.0Net changes in assets and liabilities (net of acquisition
    effects, 2008 and 2007 only):Manufacturer accounts receivable, net


(341.2
)


25.9



25.5Client accounts receivable, net


(418.5
)


65.0



(146.9
)Inventories, net


93.0



(218.1
)


(149.7
)Prepaid expenses and other current assets


(39.7
)


(4.9
)


(18.5
)Deferred income taxes










162.9Income taxes receivable


2.6



(3.1
)


(212.9
)Other noncurrent assets


17.2



2.1



25.9Claims and other accounts payable


54.3



(119.2
)


248.3Client rebates and guarantees payable


566.5



206.1



98.7Accrued expenses and other current and noncurrent liabilities


(13.7
)


38.5



111.1Net cash provided by operating activities


1,635.1



1,367.0



1,241.0Cash flows from investing activities:Acquisitions of businesses, net of cash acquired


(126.5
)


(1,530.6
)


Capital expenditures


(286.9
)


(177.7
)


(151.0
)Purchases of securities and other investments


(124.8
)


(181.7
)


(121.9
)Proceeds from sale of securities and other investments


122.0



176.2



117.4Net cash used by investing activities


(416.2
)


(1,713.8
)


(155.5
)Cash flows from financing activities:Proceeds from long-term debt


3,295.7



2,400.0



Repayments on long-term debt


(2,210.0
)


(688.4
)


(75.5
)Proceeds under accounts receivable financing facility






275.0



150.0Repayments under accounts receivable financing facility










(275.0
)Debt issuance costs


(11.2
)


(1.8
)


(0.5
)Settlement of cash flow hedge


(45.4
)






Purchase of treasury stock


(2,186.1
)


(1,960.6
)


(1,149.0
)Excess tax benefits from stock-based compensation arrangements


41.8



69.9



33.1Proceeds from employee stock plans


60.6



208.3



161.7Net cash (used by) provided by financing activities


(1,054.6
)


302.4



(1,155.2
)Net increase (decrease) in cash and cash equivalents


164.3



(44.4
)


(69.7
)Cash and cash equivalents at beginning of year


774.1



818.5



888.2Cash and cash equivalents at end of year

$
938.4


$
774.1


$
818.5Supplemental disclosures of cash flow information:Cash paid during the year for interest

$
207.1


$
123.4


$
89.9Cash paid during the year for income taxes

$
748.9


$
668.5


$
401.4   The accompanying notes are an integral part of these
    consolidated financial statements.
 77




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##### Table of Contents



MEDCO
    HEALTH SOLUTIONS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
  1.
    BACKGROUND
    AND BASIS OF PRESENTATION  ®
      two-for-one
  Reclassifications.
  2.
    SUMMARY
    OF SIGNIFICANT ACCOUNTING POLICIES  Recently Adopted Financial Accounting
    Standards.
 78




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##### Table of Contents



MEDCO
    HEALTH SOLUTIONS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  FAS 157-2, FAS 157-2),
  FAS 157-2 FAS 157-2
  FAS 157-3, FAS 157-3), FAS 157-3
  Fair Value Hierarchy
          Medco
    Fair Value Measurements at Reporting Date
  December 27,Description

2008


Level 1


Level 2


Level 3Money market mutual funds

$
906.0(1
)

$
906.0


$



$
Fair value of interest rate swap agreements


18.4(2
)






18.4



Available-for-sale
    investments


1.9(3
)


1.9







     (1)

    
    Reported in cash and cash equivalents on the consolidated
    balance sheet.(2)

    
    Reported in other noncurrent assets on the consolidated
    balance sheet.(3)

    
    Reported in short-term investments on the consolidated
    balance sheet.  Available-for-sale
  Fiscal Years.
 79




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##### Table of Contents



MEDCO
    HEALTH SOLUTIONS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Principles of Consolidation.
  Cash and Cash Equivalents.
  Short-Term Investments. held-to-maturity sub-prime
  Fair Value of Financial
    Instruments.
    Accounts Receivable.
   80




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##### Table of Contents



MEDCO
    HEALTH SOLUTIONS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Concentrations of Risks.
     81




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##### Table of Contents



MEDCO
    HEALTH SOLUTIONS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Inventories, Net. first-in,
  Property and Equipment, Net. 98-1,
  Net Revenues. fee-for-service No. 99-19, (EITF 99-19),
 82




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##### Table of Contents



MEDCO
    HEALTH SOLUTIONS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        EITF 99-19
  e-prescribing out-of-network
 83




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##### Table of Contents



MEDCO
    HEALTH SOLUTIONS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  and/or
      Cost of Revenues.
    out-of-pocket
 84




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##### Table of Contents



MEDCO
    HEALTH SOLUTIONS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Goodwill.
  Intangible Assets, Net.
  35-year
 85




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##### Table of Contents



MEDCO
    HEALTH SOLUTIONS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Income Taxes. FIN 48-1, Settlement FIN 48-1), FIN 48-1
  Use of Estimates.
  Operating Segments.
  Earnings per Share
    (EPS).
 86




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##### Table of Contents



MEDCO
    HEALTH SOLUTIONS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Fiscal Years

2008


2007


2006Weighted average shares outstanding


508.6



550.2



594.5Dilutive common stock equivalents:Outstanding stock options, restricted stock units and restricted
    stock


10.0



10.7



8.8Diluted weighted average shares outstanding


518.6



560.9



603.3   inception-to-date
  two-for-one
  Pension and Other Postretirement Benefit
    Plans.
    Other Comprehensive Income and Accumulated Other
    Comprehensive Income.
   87




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##### Table of Contents



MEDCO
    HEALTH SOLUTIONS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Foreign


Net UnrealizedCurrency


Losses on


Net PriorUnrealized


Translation


Effective


Service


NetLosses on


Gain


Cash Flow


Benefit


Actuarial


TotalInvestments


(Loss)


Hedges


(Cost)


Losses


AOCIBalances at December 29, 2007, net of tax

$



$



$
(4.8
)

$
25.5


$
(14.3
)

$
6.4Fiscal 2008 activity:Before tax amount


(0.3
)


(15.5
)


(25.0
)


(5.0
)


(59.8
)


(105.5
)Tax benefit


0.1







9.8



2.0



23.5



35.3Net-of-tax
    change


(0.2
)


(15.5
)(1)


(15.2
)(3)


(3.0
)


(36.3
)(2)


(70.2
)Balances at December 27, 2008, net of tax

$
(0.2
)

$
(15.5
)

$
(20.0
)

$
22.5


$
(50.6
)

$
(63.8
)     (1)

    
    This primarily represents the unrealized net foreign currency
    translation loss resulting from the translation of
    majority-owned Europa Apotheeks net assets acquired from
    the April 28, 2008 acquisition date to December 27,
    2008.(2)

    
    Net actuarial losses reflect an increase in the unfunded
    status of the Companys pension plans due to reductions in
    pension plan assets from investment losses in 2008, and
    increased benefit obligations related to increased plan
    participants.(3)

    
    The net unrealized losses on cash flow hedges consist of the
    unrealized loss on effective cash flow hedges of
    $(16.9) million, net of taxes, which settled in 2008,
    offset by the associated amortization of $1.7 million, net
    of taxes.    Contingencies.
  Stock-Based Compensation.
 88




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##### Table of Contents



MEDCO
    HEALTH SOLUTIONS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Foreign Currency Translation.
  Recent Accounting Pronouncements.
  No. 08-7, (EITF 08-7). EITF 08-7 EITF 08-7 EITF 08-7
  FAS 142-3, FAS 142-3). FAS 142-3
 89




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##### Table of Contents



MEDCO
    HEALTH SOLUTIONS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  FAS 142-3 FAS 142-3
    No. 07-1, (EITF 07-1), EITF 07-1 EITF 07-1
     90




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##### Table of Contents



MEDCO
    HEALTH SOLUTIONS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  3.
    ACQUISITIONS
    OF BUSINESSES  Europa Apotheek Venlo B.V.
  PolyMedica Corporation.
  35-year 8-year 3-year 4-year
 91




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##### Table of Contents



MEDCO
    HEALTH SOLUTIONS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    FinalAllocationCurrent assets

$
220.2Property and equipment, net


59.6Goodwill


1,003.2Identifiable intangible assets


541.5Other noncurrent assets


16.9Total assets acquired


1,841.4Current liabilities


87.4Long-term debt


231.3Deferred tax liabilities


189.6Other noncurrent liabilities


13.8Total liabilities assumed


522.1Net assets acquired

$
1,319.3     2007


2006Fiscal Years

(Unaudited)


(Unaudited)Pro forma total net revenues

$
44,982.5


$
43,161.3Pro forma net income

$
887.4


$
594.3Pro forma basic earnings per common share

$
1.61


$
1.00Pro forma diluted earnings per common share

$
1.58


$
0.99   two-for-one
  Critical Care.
 92




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##### Table of Contents



MEDCO
    HEALTH SOLUTIONS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    4.
    PROPERTY
    AND EQUIPMENT    December 27,


December 29,2008


2007Land and buildings

$
240
.8


$
235
.4Machinery, equipment and office furnishings


686
.8



642
.6Computer software


1,042
.5



938
.1Leasehold improvements


126
.4



114
.1Construction in progress


120
.6(1)



21
.82,217
.1



1,952
.0Less accumulated depreciation


(1,363
.0)



(1,226
.5)Property and equipment, net

$
854
.1


$
725
.5     (1)

    
    Primarily represents construction in progress on a third
    automated dispensing pharmacy in Whitestown, Indiana.    5.
    LEASES    Fiscal Years Ending December2009

$
45.82010


40.32011


39.42012


13.22013


7.0Thereafter


7.5Total

$
153.2    93




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##### Table of Contents



MEDCO
    HEALTH SOLUTIONS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  6.
    GOODWILL
    AND INTANGIBLE ASSETS    December 27, 2008


December 29, 2007Gross








GrossCarrying


Accumulated





Carrying


AccumulatedValue


Amortization


Net


Value


Amortization


NetGoodwill:PBM(1)

$
5,228.1


$
813.4


$
4,414.7


$
5,131.6


$
813.4


$
4,318.2Specialty
    Pharmacy(2)


1,916.7







1,916.7



1,912.0







1,912.0Total(3)

$
7,144.8


$
813.4


$
6,331.4


$
7,043.6


$
813.4


$
6,230.2Intangible assets:PBM(1)

$
3,757.1


$
1,820.4


$
1,936.7


$
3,714.2


$
1,580.0


$
2,134.2Specialty
    Pharmacy(2)


865.1



135.4



729.7



861.5



90.7



770.8Total(4)

$
4,622.2


$
1,955.8


$
2,666.4


$
4,575.7


$
1,670.7


$
2,905.0     (1)

    
    Principally comprised of the push-down of the excess of
    acquisition costs over the fair value of the Companys net
    assets from the acquisition of the Company by Merck in 1993, and
    the recorded value of Medcos client relationships at the
    time of acquisition and, to a lesser extent, the Companys
    acquisition of majority interest in Europa Apotheek in 2008, and
    the Companys acquisitions of PolyMedica in 2007 and
    ProVantage in 2000. See Note 3, Acquisitions of
    Businesses, for more additional information on the
    acquisition of a majority interest in Europa Apotheek and the
    PolyMedica acquisition.(2)

    
    Represents the Specialty Pharmacy segment, primarily
    reflecting the portion of the excess of the purchase price paid
    by the Company to acquire Accredo in 2005 over the fair value of
    tangible net assets acquired, and to a significantly lesser
    extent, a portion of the excess of the purchase price paid by
    the Company to acquire Critical Care in 2007, and Pediatric
    Services in 2005. See Note 3, Acquisitions of
    Businesses, for additional information on the Critical
    Care acquisition.(3)

    
    The increase in goodwill primarily represents a portion of
    the excess of the Europa Apotheek purchase price over the fair
    value of tangible net assets acquired and an adjustment
    resulting from a final purchase price cash settlement associated
    with Critical Care. See Note 3, Acquisitions,
    for additional information on the acquisition of a majority
    interest in Europa Apotheek and the Critical Care
    acquisition.(4)

    
    The increase in the gross carrying value of intangible assets
    primarily represents a portion of the excess of the Europa
    Apotheek purchase price over the fair value of tangible net
    assets acquired. See Note 3, Acquisitions, for
    additional information on the acquisition of a majority interest
    in Europa Apotheek. 94




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##### Table of Contents



MEDCO
    HEALTH SOLUTIONS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     SpecialtyPBM


Pharmacy


TotalBalances as of December 30, 2006

$
4,123
.6


$
1,798
.5


$
5,922
.1Goodwill acquired


1,008
.0(1)



116
.2(2)



1,124
.2Converted option activity associated with the acquisition of
    Accredo







(2
.7)



(2
.7)Balances as of December 29, 2007

$
5,131
.6


$
1,912
.0


$
7,043
.6Goodwill acquired


108
.0(3)



5
.2(2)



113
.2Translation adjustment


(11
.5)








(11
.5)Converted option activity associated with the acquisition of
    Accredo







(0
.5)



(0
.5)Balances as of December 27, 2008

$
5,228
.1


$
1,916
.7


$
7,144
.8     (1)

    
    Represents the portion of the excess of the purchase price
    paid by the Company to acquire PolyMedica. See Note 3,
    Acquisitions of Businesses.(2)

    
    Represents the portion of the excess of the purchase price
    paid by the Company to acquire Critical Care. See Note 3,
    Acquisitions of Businesses.(3)

    
    Primarily represents the portion of the excess of the
    purchase price paid by the Company to acquire a majority
    interest in Europa Apotheek. See Note 3, Acquisitions
    of Businesses.    Fiscal Years Ending December2009

$
281.52010


261.92011


250.52012


244.82013


242.7Total

$
1,281.4    95




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##### Table of Contents



MEDCO
    HEALTH SOLUTIONS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  7.
    DEBT    December 27,


December 29,2008


2007Short-term debt:Accounts receivable financing facility

$
600.0


$
600.0Total short-term debt


600.0



600.0Long-term debt:Senior unsecured revolving credit facility


1,000.0



1,400.0Senior unsecured term loan


1,000.0



1,000.07.25% senior notes due 2013, net of unamortized discount


497.8



497.46.125% senior notes due 2013, net of unamortized discount


298.5



7.125% senior notes due 2018, net of unamortized discount


1,188.2



Fair value of interest rate swap agreements


18.4



(3.0
)Total long-term debt


4,002.9



2,894.4Total debt

$
4,602.9


$
3,494.4   6.125% and 7.125% Senior Notes. 5-year 10-year 5-year 10-year
  10-year 30-year
 96




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##### Table of Contents



MEDCO
    HEALTH SOLUTIONS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  5-year 10-year 30-year
  7.25% Senior Notes. 10-year
    Five-Year Credit Facilities. 5-year 5-year
   97




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##### Table of Contents



MEDCO
    HEALTH SOLUTIONS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      2007 Refinancing.
  Accounts Receivable Financing
    Facility. 364-day
    Covenants.
 98




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##### Table of Contents



MEDCO
    HEALTH SOLUTIONS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Aggregate Maturities and Interest
    expense.
  Fiscal Years Ending December2009 to 2011

$
2012


2,000.02013


800.02014 to 2017


2018


1,200.0Total

$
4,000.0     8.
    PENSION
    AND OTHER POSTRETIREMENT BENEFITS  Net Pension and Postretirement Benefit
    Cost
  Fiscal Years

2008


2007


2006Service cost

$
24.6


$
18.0


$
17.2Interest cost


9.6



7.9



6.6Expected return on plan assets


(13.0
)


(11.0
)


(9.3
)Amortization of prior service cost


0.3







0.4Net pension cost

$
21.5


$
14.9


$
14.9       Fiscal Years

2008


2007


2006Service cost

$
1.0


$
0.9


$
0.8Interest cost


0.8



0.7



0.7Amortization of prior service credit


(4.2
)


(4.3
)


(4.3
)Net amortization of actuarial losses


0.5



0.6



0.7Net postretirement benefit credit

$
(1.9
)

$
(2.1
)

$
(2.1
)    99




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##### Table of Contents



MEDCO
    HEALTH SOLUTIONS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Pension Plan Assets.
  Percentage of Plan Assets atTarget

December 27,

December 29,Asset Category

Allocation 2009

2008

2007U.S. equity securities

50-60%

54%

54%International equity securities

12-18%

11%

15%Fixed income*

27-33%

35%

31%Total



100%

100%     *
    
    Includes cash.      Changes in Plan Assets, Benefit Obligation and Funded
    Status.
 100




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##### Table of Contents



MEDCO
    HEALTH SOLUTIONS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Pension Benefits


Other Postretirement BenefitsFiscal Years

2008


2007


2008


2007Fair value of plan assets at beginning of year

$
152.0


$
132.3


$



$
Actual return on plan assets


(44.9
)


10.6







Company contributions


17.2



16.8



1.0



0.7Employee contributions










0.8



1.0Benefits paid


(5.1
)


(7.7
)


(1.8
)


(1.7
)Fair value of plan assets at end of year

$
119.2


$
152.0


$



$
Benefit obligation at beginning of
    year(1)

$
161.0


$
138.8


$
12.7


$
13.2Service cost


24.6



18.0



1.1



0.8Interest cost


9.6



7.9



0.7



0.7Employee contributions










0.8



1.0Amendments






3.0
(2)


1.0



Actuarial (gains) losses


2.8



1.0



(0.4
)(3)


(1.3
)(3)Benefits paid


(5.1
)


(7.7
)


(1.8
)


(1.7
)Benefit obligation at end of
    year(1)

$
192.9


$
161.0


$
14.1
(3)

$
12.7
(3)Funded status at end of year

$
(73.7
)

$
(9.0
)

$
(14.1
)

$
(12.7
)     (1)

    
    Represents the projected benefit obligation for pension
    benefits and the accumulated postretirement benefit obligation
    for other postretirement benefits.(2)

    
    The Company amended the cash balance retirement plan to
    reflect a change from graduated seven-year vesting to three-year
    cliff vesting, as mandated by the Pension Protection Act of
    2006.(3)

    
    The Company amended the postretirement health care benefit
    plan in 2003, which reduced and capped benefit obligations, the
    effect of which is reflected in the actuarial (gains) losses.    Pension Benefits


Other Postretirement Benefits2008


2007


2008


2007Accrued expenses and other current liabilities

$



$



$
(0.9
)

$
(1.1
)Other noncurrent liabilities


(73.7
)


(9.0
)


(13.2
)


(11.6
)Total pension and other postretirement liabilities

$
(73.7
)

$
(9.0
)

$
(14.1
)

$
(12.7
)    101




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##### Table of Contents



MEDCO
    HEALTH SOLUTIONS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  12-year
    OtherPension


PostretirementBenefits


BenefitsBalances at December 30, 2006

$
6.7


$
(22.0
)Loss (gain) arising during period


0.8



(0.8
)Amortization of actuarial loss included in net periodic benefit
    cost






(0.4
)Prior service cost (credit)


1.8



Amortization of prior service credit






2.7Balances at December 29, 2007

$
9.3


$
(20.5
)Loss (gain) arising during period


36.8



(0.2
)Amortization of actuarial loss included in net periodic benefit
    cost






(0.3
)Prior service cost (credit)






0.6Amortization of prior service (cost) credit


(0.1
)


2.5Balances at December 27, 2008

$
46.0


$
(17.9
)   12-year
   102




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##### Table of Contents



MEDCO
    HEALTH SOLUTIONS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Actuarial Assumptions and Funding
    Requirement.
  Pension Benefits


Other Postretirement Benefits2008


2007


2006


2008


2007


2006Weighted average assumptions used to determine benefit
    obligations at fiscal year-end:Discount rate


6.00
%


6.00
%


5.75
%


6.00
%


6.00
%


5.75
%Salary growth rate


4.50
%


4.50
%


4.50
%










Weighted average assumptions used to determine net cost for the
    fiscal year ended:Discount rate


6.00
%


5.75
%


5.50
%


6.00
%


5.75
%


5.50
%Expected long-term rate of return on plan assets


8.25
%


8.00
%


8.00
%










Salary growth rate


4.50
%


4.50
%


4.50
%










     Cash
    Flows
  Employer Contributions.
    Estimated Future Benefit Payments.
  OtherPension


PostretirementFiscal Years

Benefits(1)


Benefits2009

$
13.9


$
1.02010

$
15.9


$
0.82011

$
17.4


$
0.72012

$
18.6


$
0.72013

$
20.0


$
0.72014-2018

$
126.4


$
5.2     (1)

    
    The estimated future benefit payments increased from the
    amounts disclosed in the Companys Annual Report on
    Form 10-K
    for the fiscal year ended December 29, 2007 primarily due
    to additional employees participating in the cash balance
    retirement plan.  Other Plans.
   103




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##### Table of Contents



MEDCO
    HEALTH SOLUTIONS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    9.
    TAXES ON
    INCOME  Provision for Income Taxes.
  Fiscal Years

2008


2007


2006Current provision:Federal

$
664.1


$
594.7


$
278.9State


102.3



122.6



38.1Foreign


(1.2
)






Total


765.2



717.3



317.0Deferred provision (benefit):Federal


(63.8
)


(114.0
)


46.0State


(13.5
)


(12.0
)


18.6Total


(77.3
)


(126.0
)


64.6Total provision for income taxes

$
687.9


$
591.3


$
381.6     Fiscal Years

2008


2007


2006U.S. statutory rate applied to pretax income


35.0
%


35.0
%


35.0
%Differential arising from:State taxes


3.2



4.8



3.6Other


0.2



(0.5
)


(0.9
)Effective tax rate


38.4
%


39.3
%


37.7
%      104




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##### Table of Contents



MEDCO
    HEALTH SOLUTIONS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Deferred Income Taxes.
  December 27, 2008


December 29, 2007Assets


Liabilities


Assets


LiabilitiesIntangible assets

$



$
991.6


$



$
1,078.1Accelerated depreciation






173.9







153.8Accrued expenses


63.7







52.2



Accrued rebates


57.9







43.6



Stock-based compensation


99.1







71.1



Other


85.3



46.6



113.7



61.3Total deferred taxes

$
306.0


$
1,212.1


$
280.6


$
1,293.2Net deferred income taxes





$
906.1






$
1,012.6Recognized as:Current deferred tax asset

$
159.2






$
154.4Noncurrent deferred tax liability





$
1,065.3






$
1,167.0   Other.
  Liabilities for Income Tax
    Contingencies.
   105




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##### Table of Contents



MEDCO
    HEALTH SOLUTIONS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Fiscal Years

2008


2007Liabilities, beginning of year

$
104.5


$
89.8Gross increases, prior period tax positions


17.2



11.5Gross increases, current period tax positions


0.9



16.5Gross increases, acquisition effects






3.0Gross decreases, prior period tax positions


(7.1
)


(5.6
)Settlements


(0.1
)


(3.2
)Lapse of statutes of limitations


(37.1
)


(7.5
)Liabilities, end of year

$
78.3


$
104.5          106




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##### Table of Contents



MEDCO
    HEALTH SOLUTIONS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  10.
    STOCK-BASED
    COMPENSATION  Overview.
    Fiscal Years

2008


2007


2006Medco stock options Black-Scholes assumptions (weighted average):Expected dividend yield










Risk-free interest rate


2.8
%


4.7
%


4.6
%Expected volatility


27.0
%


29.0
%


32.0
%Expected life (years)


5.0



5.0



4.8  107




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##### Table of Contents



MEDCO
    HEALTH SOLUTIONS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Stock Option Plans.
  Weighted AverageNumber of


Weighted


Remaining


Aggregate IntrinsicShares


Average


Contractual


Value(In thousands)


Exercise Price


Term


(In millions)Outstanding at December 29, 2007


26,314.2


$
24.64Granted


5,091.4



49.97Exercised


(3,445.3
)


21.17Forfeited


(573.0
)


36.13Outstanding at December 27, 2008


27,387.3


$
29.55



6.73


$
348.8Exercisable at December 27, 2008


15,566.8


$
21.91



5.74


$
317.0       WeightedNumber of


AverageShares


Grant-Date(In thousands)


Fair ValueNonvested at December 29, 2007


13,542.9


$
10.89Granted


5,091.4



14.60Vested


(6,190.1
)


10.62Forfeited


(623.7
)


11.93Nonvested at December 27, 2008


11,820.5


$
12.55   Restricted Stock Units and Restricted Stock
    Plans.
   108




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##### Table of Contents



MEDCO
    HEALTH SOLUTIONS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    AggregateNumber of


IntrinsicShares


ValueRestricted Stock Units

(In thousands)


(In millions)Outstanding at December 29, 2007


6,334.1Granted


1,418.7Converted


(1,716.0
)Forfeited


(187.8
)Outstanding at December 27, 2008


5,849.0


$
247.3Vested and deferred at December 27, 2008


658.5


$
27.8   AggregateNumber of


IntrinsicShares


ValueRestricted Stock

(In thousands)


(In millions)Outstanding at December 29, 2007


79.8Granted


Converted


(79.8
)Forfeited


Outstanding at December 27, 2008





$
       WeightedNumber of


AverageShares


Grant-DateNonvested Restricted Stock Units

(In thousands)


Fair ValueNonvested at December 29, 2007


6,045.5


$
29.36Granted


1,418.7



50.15Vested


(2,085.9
)


23.10Forfeited


(187.8
)


37.07Nonvested at December 27, 2008


5,190.5


$
37.32   109




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##### Table of Contents



MEDCO
    HEALTH SOLUTIONS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  WeightedNumber of


AverageShares


Grant-DateNonvested Restricted Stock

(In thousands)


Fair ValueNonvested at December 29, 2007


79.8


$
24.89Granted






Vested


(79.8
)


24.89Forfeited






Nonvested at December 27, 2008





$
     Employee Stock Purchase Plan.
      two-for-one
  11.
    SHARE
    REPURCHASE PROGRAM   110




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##### Table of Contents



MEDCO
    HEALTH SOLUTIONS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      two-for-one
  12.
    SEGMENT
    REPORTING  Reportable Segments.
    Factors Used to Identify Reportable
    Segments.
  Selected Segment Income and Asset
    Information.
 111




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##### Table of Contents



MEDCO
    HEALTH SOLUTIONS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    December 27, 2008


December 29, 2007


December 30, 2006Specialty








Specialty








SpecialtyFor Fiscal Years Ended:

PBM(1)


Pharmacy


Total(1)


PBM(2)


Pharmacy(3)


Total(2)(3)


PBM(4)


Pharmacy


Total(4)Product net revenues

$
42,678.5


$
7,897.7


$
50,576.2


$
37,981.4


$
5,980.5


$
43,961.9


$
36,641.3


$
5,381.3


$
42,022.6Total service revenues


605.3



76.5



681.8



482.1



62.2



544.3



465.9



55.2



521.1Total net revenues


43,283.8



7,974.2



51,258.0



38,463.5



6,042.7



44,506.2



37,107.2



5,436.5



42,543.7Total cost of revenues


40,186.2



7,343.4



47,529.6



35,997.7



5,563.2



41,560.9



35,125.7



5,012.6



40,138.3Selling, general and administrative expenses


1,120.0



305.0



1,425.0



884.3



229.8



1,114.1



913.0



196.2



1,109.2Amortization of intangibles


240.5



44.6



285.1



188.6



39.5



228.1



179.9



38.6



218.5Operating income

$
1,737.1


$
281.2


$
2,018.3


$
1,392.9


$
210.2


$
1,603.1


$
888.6


$
189.1


$
1,077.7Reconciling items to income before provision for income taxes:Interest expense










233.7











134.2











95.8Interest (income) and other (income) expense, net










(6.2
)










(34.4
)










(29.9
)Income before provision for income taxes









$
1,790.8










$
1,503.3










$
1,011.8Capital expenditures

$
258.5


$
28.4


$
286.9


$
142.4


$
35.3


$
177.7


$
122.7


$
28.3


$
151.0     (1)

    
    Includes majority-owned Europa Apotheeks operating
    results commencing on the April 28, 2008 acquisition
    date.(2)

    
    Includes PolyMedicas operating results commencing on
    the October 31, 2007 acquisition date, and for the
    subsequent period.(3)

    
    Includes Critical Cares operating results commencing on
    the November 14, 2007 acquisition date, and for the
    subsequent period.(4)

    
    Includes a first-quarter 2006 pre-tax legal settlements
    charge of $162.6 million recorded to SG&A expenses.  As of December 27, 2008


As of December 29, 2007Specialty








SpecialtyIdentifiable Assets:

PBM


Pharmacy


Total


PBM


Pharmacy


TotalTotal identifiable assets

$
13,267.2


$
3,743.7


$
17,010.9


$
12,597.7


$
3,620.2


$
16,217.9   13.
    LEGAL
    SETTLEMENTS CHARGE    complaint-in-intervention qui tam complaint-in-intervention
  qui tam
 112




---



##### Table of Contents



MEDCO
    HEALTH SOLUTIONS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
            14.
    COMMITMENTS
    AND CONTINGENCIES  Legal
    Proceedings
       113




---



##### Table of Contents



MEDCO
    HEALTH SOLUTIONS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Government Proceedings and Requests for
    Information. qui tam out-of-date qui tam qui tam Form 10-K.
  qui tam qui tam qui tam qui tam qui tam qui tam
  ERISA and Similar Litigation. Gruer v. Merck-Medco
    Managed Care, L.L.C. Gruer Gruer
  Gruer Blumenthal v.
    Merck-Medco Managed Care, L.L.C., et al.,
 114




---



##### Table of Contents



MEDCO
    HEALTH SOLUTIONS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Gruer Betty Jo Jones v.
    Merck-Medco Managed Care, L.L.C., et al., Gruer Jones Gruer 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.
  Miles v.  Merck-Medco
    Managed Care, L.L.C., Miles
    Antitrust and Related Litigation. Brady Enterprises, Inc., et
    al. v. Medco Health Solutions, Inc., et
    al.
  North Jackson Pharmacy,
    Inc., et al. v. Medco Health Solutions, Inc., et al.
 115




---



##### Table of Contents



MEDCO
    HEALTH SOLUTIONS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Mikes Medical
    Center Pharmacy, et al. v. Medco Health Solutions, Inc., et
    al Alameda Drug Company
  Brady North Jackson, Brady, Mikes
    Medical Center In re Pharmacy Benefit Managers Antitrust
    Litigation.
  Alameda Drug Company,
    Inc., et al. v. Medco Health Solutions, Inc., et al. complaint-in-intervention
  Chelsea Family
    Pharmacy, PLLC v. Medco Health Solutions, Inc.,
  Contract Litigation.
 116




---



##### Table of Contents



MEDCO
    HEALTH SOLUTIONS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Tomeldon Company, Inc. et
    al. v. Medco Health Solutions, Inc
  Accredo. Rule 10b-5 and/or
  PolyMedica Shareholder Litigation. Groen v. PolyMedica Corp.
    et al., and/or
  Other
    Matters
   117




---



##### Table of Contents



MEDCO
    HEALTH SOLUTIONS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Purchase
    Commitments
   118




---



##### Table of Contents



Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure.    Item 9A.
    Controls
    and Procedures.  Managements
    Responsibility for Financial Statements
  Form 10-K.
    Conclusion
    Regarding the Effectiveness of Disclosure Controls and
    Procedures
  Form 10-K, Rules 13a-15(e) 15d-15(e)
  Managements
    Report on Internal Control over Financial Reporting
  Rules 13a-15(f) 15d-15(f)
    Internal Control 
    Integrated Framework
    Form 10-K.
 119




---



##### Table of Contents



Changes
    in Internal Control
    Item 9B.
    Other
    Information.   PART III  Item 10.
    Directors,
    Executive Officers and Corporate Governance.  Form 10-K.
  http://www.medcohealth.com Form 8-K http://www.medcohealth.com.
  Item 11.
    Executive
    Compensation.    Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Shareholder Matters.    Rule 10b5-1
    Sales Plans.
 120




---



##### Table of Contents



Rule 10b5-1 Rule 10b5-1
    Rule 10b5-1 (1)
  Number ofShares to






Number ofbe Sold






Shares



Projected



ProjectedUnder the



Timing of Sales


Sold Under



Beneficial



AggregateName and Position


Plan(2)



Under the Plan


the
    Plan(3)



Ownership(4)



Holdings(5)Robert S. Epstein
    Senior Vice President, Medical and Analytical Affairs and Chief
    Medical Officer



37,766



Option exercise of 26,000 shall trigger if stock reaches
    specific price; sale of previously acquired shares shall trigger
    in tranches of 19,752 and 11,766 if stock reaches specified
    price.



19,752




117,340




395,140Kenneth O. Klepper
    President and Chief Operating Officer



192,733



Option exercise in tranches of 53,333 and 99,400 shall trigger
    if stock reaches specific prices; sale of previously acquired
    shares in two tranches of 20,000 shares each shall trigger
    if stock reaches specific prices.



0




216,523




606,231Karin V. Princivalle
    Senior Vice President, Human Resources



25,218



Option exercise of 14,200 shall trigger if stock reaches
    specific price; sale of 11,018 previously acquired shares shall
    trigger if stock reaches specified price.



0




65,444




192,778Jack A. Smith
    Senior Vice President, Marketing



78,600



Option exercise in tranches of 15,000, 15,000 and
    12,600 shares shall trigger if stock reaches specific
    prices; sale of previously acquired shares shall trigger in
    three tranches of 12,000 each if stock reaches specific prices.



0




87,064




222,412  121




---



##### Table of Contents



(1)

    
    This table does not include any trading plans entered into by
    any executive officer that have been terminated or expired by
    their terms or have been fully executed through
    February 18, 2009.(2)

    
    This column reflects the number of shares remaining to be
    sold as of February 18, 2009.(3)

    
    This column reflects the number of shares sold under the plan
    through February 18, 2009.(4)

    
    This column reflects an estimate of the number of whole
    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 February 18,
    2009, 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 February 18, 2009 outside of the
    plan.(5)

    
    This column reflects an estimate of the total aggregate
    number of whole shares each identified executive officer will
    have an interest in 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 February 18,
    2009, and includes shares of our common stock subject to options
    (whether or not currently exercisable) or restricted stock units
    (whether or not vested). 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 February 18, 2009 outside of the plan.  Item 13.
    Certain
    Relationships and Related Transactions, and Director
    Independence.    Item 14.
    Principal
    Accounting Fees and Services.   PART IV  Item 15.
    Exhibits,
    Financial Statement Schedules.    Financial Statements.
       122




---



##### Table of Contents



Financial Statement Schedule:
      Exhibits:
  ExhibitNumber

Exhibit Description3
.1

Third Amended and Restated Certificate of Incorporation of Medco
    Health Solutions, Inc. as of May 22, 2008. Incorporated by
    reference to Exhibit 3.1 to the Registrants Current
    Report on
    Form 8-K
    filed May 23, 2008.3
.2

Amended and Restated Bylaws of Medco Health Solutions, Inc. as
    of December 10, 2008. Incorporated by reference to
    Exhibit 3.1 to the Registrants Current Report on
    Form 8-K
    filed December 11, 2008.4
.1

Form of Medco Health Solutions, Inc. common stock certificate.
    Incorporated by reference to Exhibit 4.1 to the
    Registrants Amendment No. 3 to Form 10, File
    No. 1-31312,
    filed July 25, 2003.4
.2

Indenture between the Registrant and U.S. Bank
    Trust National Association, as Trustee, relating to the
    Registrants senior notes due 2013. Incorporated by
    reference to Exhibit 4.2 to the Registrants Annual
    Report on
    Form 10-K
    for the fiscal year ended December 27, 2003.4
.3

Indenture between the Registrant and U.S. Bank
    Trust National Association, as Trustee, relating to the
    Registrants senior notes due 2018. Incorporated by
    reference to Exhibit 4.3 to the Registrants Current
    Report on
    Form 8-K
    filed March 18, 2008.10
.1

Credit Agreement, dated as of April 30, 2007, among the
    Registrant, the lenders party thereto and Bank of America, N.A.,
    as administrative agent and Citicorp North America, Inc. and
    JPMorgan Chase Bank, N.A., as Co-Syndication Agents.
    Incorporated by reference to Exhibit 10.1 to the
    Registrants Quarterly Report on
    Form 10-Q
    filed May 2, 2007.10
.2

364-Day
    Revolving Credit Agreement, dated as of November 30, 2007,
    among the Registrant, the lenders party thereto, Citibank, N.A.,
    as administrative agent and JPMorgan Chase Bank, N.A., as
    Syndication Agent. Incorporated by reference to
    Exhibit 10.1 to the Registrants Current Report on
    Form 8-K
    filed December 3, 2007.10
.3

Second Amended and Restated Receivables Purchase Agreement dated
    July 28, 2008, among Medco Health Receivables, LLC, the
    financial institutions and commercial paper conduits party
    thereto and Citicorp North America, Inc., as administrative
    agent.10
.4

Medco Health Solutions, Inc. 2002 Stock Incentive Plan, as
    amended. Incorporated by reference to Exhibit 10.1 to the
    Registrants Quarterly Report on
    Form 10-Q
    filed July 29, 2005.10
.5

Medco Health Solutions, Inc. 2006 Executive Severance Plan.
    Incorporated by reference to Exhibit 10.1 to the
    Registrants Current Report on
    Form 8-K
    filed February 7, 2006.10
.6

Medco Health Solutions, Inc. 2006 Change in Control Executive
    Severance Plan. Incorporated by reference to Exhibit 10.2
    to the Registrants Current Report on
    Form 8-K
    filed February 7, 2006.10
.7

Indemnification and Insurance Matters Agreement between
    Merck & Co., Inc. and the Registrant. Incorporated by
    reference to Exhibit 10.4 to the Registrants Annual
    Report on
    Form 10-K
    for the fiscal year ended December 27, 2003.10
.8

Tax Responsibility Allocation Agreement, dated as of
    August 12, 2003, between Merck & Co., Inc. and
    the Registrant. Incorporated by reference to Exhibit 10.5
    to the Registrants Annual Report on
    Form 10-K
    for the fiscal year ended December 27, 2003. 123




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##### Table of Contents



ExhibitNumber

Exhibit Description10
.9

Employee Matters Agreement between Merck & Co., Inc.
    and the Registrant. Incorporated by reference to
    Exhibit 10.12 to the Registrants Amendment No. 2
    to Form 10, File
    no. 1-31312,
    filed July 8, 2003.10
.10

Employment Agreement with David B. Snow, Jr., dated as of
    February 10, 2009. Incorporated by reference to
    Exhibit 10.1 to the Registrants Current Report on
    Form 8-K
    filed February 13, 2009.10
.11

Medco Health Solutions, Inc. Executive Annual Incentive Plan.
    Incorporated by reference to Exhibit 10.1 to the
    Registrants Current Report on
    Form 8-K,
    filed February 8, 2005.10
.12

Performance Goals for 2009 under the Registrants Executive
    Annual Incentive Plan. Incorporated by reference to the
    Registrants Current Report on
    Form 8-K
    filed January 30, 2009.10
.13

Form of terms and conditions for director stock option and
    restricted stock unit awards. Incorporated by reference to
    Exhibit 10.2 to the Registrants Current Report on
    Form 8-K,
    filed February 8, 2005.10
.14

Accredo Health, Incorporated 2002 Long-Term Incentive Plan.
    Incorporated by reference to Exhibit 10.3 of the
    Registrants Current Report on
    Form 8-K
    filed August 24, 2005.10
.15

Terms for Accredo Health, Incorporated Restricted Stock Grants
    (3-year
    vesting). Incorporated by reference to Exhibit 10.6 of the
    Registrants Current Report on
    Form 8-K
    filed August 24, 2005.10
.16

Form of terms and conditions of Restricted Stock Unit Grants
    under the Medco Health Solutions, Inc. 2002 Stock Incentive
    Plan. Incorporated by reference to Exhibit 10.20 to the
    Registrants Annual Report on
    Form 10-K
    filed March 3, 2006.10
.17

Form of terms and conditions of Non-Qualified Stock Option
    Grants under the Medco Health Solutions, Inc. 2002 Stock
    Incentive Plan. Incorporated by reference to Exhibit 10.21
    to the Registrants Annual Report on
    Form 10-K
    filed March 3, 2006.10
.18

Form of terms and conditions of the 2008 Restricted Stock Unit
    Grants under the Medco Health Solutions, Inc. 2002 Stock
    Incentive Plan. Incorporated by reference to Exhibit 10.22
    to the Registrants Annual Report on
    Form 10-K
    filed February 19, 2008.10
.19

Form of terms and conditions of 2008 Non-Qualified Stock Option
    Grants under the Medco Health Solutions, Inc. 2002 Stock
    Incentive Plan. Incorporated by reference to Exhibit 10.23
    to the Registrants Annual Report on
    Form 10-K
    filed February 19, 2008.10
.20

Medco Health Solutions, Inc. Deferred Compensation Plan for
    Directors. Incorporated by reference to Exhibit 10.24 to
    the Registrants Annual Report on
    Form 10-K
    filed February 19, 2008.10
.21

Settlement Agreement and Mutual Releases, dated as of
    October 23, 2006, entered into by and among the United
    States of America, acting through the United States Department
    of Justice, on behalf of the Office of the Inspector General of
    the Department of Health and Human Services, the Office of
    Personnel Management, and the Department of Defense TRICARE
    Management Activity; Medco Health Solutions, Inc.; Diane M.
    Collins; and relators George Bradford Hunt, Walter William
    Gauger and Joseph Piacentile. Incorporated by reference to
    Exhibit 10.1 to the Registrants Current Report on
    Form 8-K
    filed October 27, 2006.10
.22

Settlement Agreement and Mutual Releases, dated as of
    October 23, 2006, entered into by and among the United
    States of America, acting through the United States Department
    of Justice, on behalf of the Office of the Inspector General of
    the Department of Health and Human Services and the Office of
    Personnel Management; Medco Health Solutions, Inc.; and relator
    Karl S. Schumann. Incorporated by reference to Exhibit 10.2
    to the Registrants Current Report on
    Form 8-K
    filed October 27, 2006.10
.23

Settlement Agreement and Mutual Releases, dated as of
    October 23, 2006, entered into by and among the United
    States of America, acting through the United States Department
    of Justice, on behalf of the Office of the Inspector General of
    the Department of Health and Human Services and Medco Health
    Solutions, Inc. Incorporated by reference to Exhibit 10.3
    to the Registrants Current Report on
    Form 8-K
    filed October 27, 2006.10
.24

Corporate Integrity Agreement, dated as of October 23,
    2006, between the Office of the Inspector General of the
    Department of Health and Human Services and the Office of the
    Inspector General of the Office of Personnel Management and
    Medco Health Solutions, Inc. Incorporated by reference to
    Exhibit 10.4 to the Registrants Current Report on
    Form 8-K
    filed October 27, 2006. 124




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##### Table of Contents



ExhibitNumber

Exhibit Description12
.1

Statement of Consolidated Ratios of Earnings to Fixed Charges.21
.1

List of Subsidiaries.23
.1

Consent of PricewaterhouseCoopers LLP, dated February 24,
    2009.31
.1

Certification of Chief Executive Officer pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.31
.2

Certification of Chief Financial Officer pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.32
.1

Certification of Chief Executive Officer pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.32
.2

Certification of Chief Financial Officer pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.  125




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##### Table of Contents



MEDCO
    HEALTH SOLUTIONS, INC.
  SCHEDULE II
  VALUATION
    AND QUALIFYING ACCOUNTS
 ($ In
    millions)
  Allowance for Doubtful Accounts Receivable:
  Balance at











BalanceBeginning











at End ofof Period


Other


Provision


Write-Offs(1)


PeriodFiscal Year Ended December 27, 2008

$
130.0


$
1.0


$
91.8


$
(102.8
)

$
120.0Fiscal Year Ended December 29, 2007

$
81.8


$
41.2
(2)

$
61.9


$
(54.9
)

$
130.0Fiscal Year Ended December 30, 2006

$
67.3






$
46.5


$
(32.0
)

$
81.8     (1)

    
    Uncollectible accounts, net of recoveries.(2)

    
    Primarily represents balances acquired as a result of the
    PolyMedica and Critical Care acquisitions. 126




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##### Table of Contents



Signatures    Medco Health Solutions, Inc.
  Dated: February 24, 2009

/s/  David
    B. Snow, Jr.Name: David B. Snow, Jr.Title:  Chairman and Chief Executive OfficerDated: February 24, 2009

/s/  Richard
    J. Rubino, C.P.A.Name: Richard J. Rubino, C.P.A.Title:  Senior Vice President, Finance and Chief
    Financial OfficerDated: February 24, 2009

/s/  Gabriel
    R. Cappucci, C.P.A.Name: Gabriel R. Cappucci, C.P.A.Title:  Senior Vice President and Controller, Chief
    Accounting OfficerDated: February 24, 2009

/s/  Howard
    W. Barker, Jr., C.P.AName: Howard W. Barker, Jr., C.P.A.Title:  DirectorDated: February 24, 2009

/s/  John
    L. CassisName: John L. CassisTitle:  DirectorDated: February 24, 2009

/s/  Nancy-Ann
    DeParleName: Nancy-Ann DeParleTitle:  DirectorDated: February 24, 2009

/s/  Michael
    Goldstein, C.P.A.Name: Michael Goldstein, C.P.A.Title:  DirectorDated: February 24, 2009

/s/  Charles
    M. Lillis, Ph.D.Name: Charles M. Lillis, Ph.D.Title:  DirectorDated: February 24, 2009

/s/  Myrtle
    S. PotterName: Myrtle S. PotterTitle:  DirectorDated: February 24, 2009

/s/  William
    L. Roper, M.D., M.P.H.Name: William L. Roper, M.D., M.P.H.Title:  DirectorDated: February 24, 2009

/s/  David
    D. StevensName: David D. StevensTitle:  DirectorDated: February 24, 2009

/s/  Blenda
    J. Wilson, Ph.D.Name: Blenda J. Wilson, Ph.D.Title:  Director  127