UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
              For
      the quarterly period ended March 31, 2008.o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
              For
      the transition period from ____________ to _____________.








Commission
File Number:  0-20199








EXPRESS
SCRIPTS, INC.


(Exact
name of registrant as specified in its charter)








Delaware
              (State
      of Incorporation)
            43-1420563
              (I.R.S.
      employer identification no.)One
      Express Way, St. Louis, MO
              (Address
      of principal executive offices)
            63121
              (Zip
      Code)





Registrant’s
telephone number, including area code:  (314) 996-0900








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




Indicate by
check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.  (check one):


Large
accelerated filer
[X]                                                                                              Accelerated
filer [   ]
 
 Non-accelerated
filer [   ] (Do not check if a smaller reporting
company)              
 Smaller reporting company [   ]
  Indicate by
check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). Yes ___    No X





Common
      stock outstanding as of March 31, 2008:
            251,145,000
            
            Shares





1


EXPRESS
SCRIPTS, INC.





INDEX






Part
      I
              Financial
      Information
              3Item
      1.
              Financial
      Statements (unaudited)
              3a
              )
              Unaudited
      Consolidated Balance Sheet
              3b
              )
              Unaudited
      Consolidated Statement of Operations
              4c
              )
              Unaudited
      Consolidated Statement of Changes
              5in
      Stockholders’ Equityd
              )
              Unaudited
      Consolidated Statement of Cash Flows
              6e
              )
              Notes
      to Unaudited Consolidated Financial Statements
              7Item
      2.
              Management’s
      Discussion and Analysis of Financial
              13Condition
      and Results of OperationsItem
      3.
              Quantitative
      and Qualitative Disclosures About
              19Market
      RiskItem
      4.
              Controls
      and Procedures
              19Part
      II
              Other
      Information
              21Item
      1.
              Legal
      Proceedings
              21Item
      1A.
              Risk
      Factors – (Not Applicable)
              -Item
      2.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              22Item
      3.
              Defaults
      Upon Senior Securities – (Not Applicable)
              -Item
      4.
              Submission
      of Matters to a Vote of Security Holders – (Not
Applicable)
              -Item
      5.
              Other
      Information – (Not Applicable)
              -Item
      6.
              Exhibits
              22Signatures
              23Index
      to Exhibits
              24
  2




PART I. 
      FINANCIAL INFORMATION




Item
      1.
            Financial
      Statements


EXPRESS
      SCRIPTS, INC.Unaudited
      Consolidated Balance Sheet




March
      31,
            
            December
      31,(in
      millions, except share data)
            2008
            
            2007AssetsCurrent
      assets:Cash and cash
      equivalents
            $
            511.9
            
            
            $
            434.7Restricted cash and
      investments
            
            3.2
            
            
            
            2.2Receivables, net
            
            1,222.1
            
            
            
            1,184.6Inventories
            
            166.5
            
            
            
            166.1Deferred taxes
            
            121.3
            
            
            
            121.1Prepaid expenses and other current
      assets
            
            17.0
            
            
            
            18.7Current assets of discontinued
      operations
            
            32.7
            
            
            
            40.4Total current
      assets
            
            2,074.7
            
            
            
            1,967.8Property
      and equipment, net
            
            210.1
            
            
            
            215.5Goodwill
            
            2,694.2
            
            
            
            2,695.3Other
      intangible assets, net
            
            332.5
            
            
            
            342.0Other
      assets
            
            28.4
            
            
            
            30.2Non-current
      assets of discontinued operations
            
            7.6
            
            
            
            5.6Total assets
            $
            5,347.5
            
            
            $
            5,256.4Liabilities
      and Stockholders’ EquityCurrent
      liabilities:Claims and rebates
      payable
            $
            1,286.9
            
            
            $
            1,258.9Accounts payable
            
            532.0
            
            
            
            517.3Accrued expenses
            
            459.4
            
            
            
            432.5Current maturities of long-term
      debt
            
            280.1
            
            
            
            260.1Current liabilities of
      discontinued operations
            
            6.4
            
            
            
            6.2Total current
      liabilities
            
            2,564.8
            
            
            
            2,475.0Long-term
      debt
            
            1,680.3
            
            
            
            1,760.3Other
      liabilities
            
            325.2
            
            
            
            324.7Total
    liabilities
            
            4,570.3
            
            
            
            4,560.0Stockholders’
      Equity:Preferred stock, 5,000,000 shares
      authorized, $0.01 par value per share;and no shares issued and
      outstanding
            
            -
            
            
            
            -Common Stock, 650,000,000
      authorized, $0.01 par value;shares
      issued:  318,892,000 and 318,886,000,
    respectively;shares
      outstanding:  251,145,000 and 252,371,000,
      respectively
            
            3.2
            
            
            
            3.2Additional paid-in
      capital
            
            581.4
            
            
            
            564.5Accumulated other comprehensive
      income
            
            17.8
            
            
            
            20.9Retained earnings
            
            2,762.1
            
            
            
            2,584.93,364.5
            
            
            
            3,173.5Common stock in treasury at cost,
      67,747,000 and 66,515,000shares,
      respectively
            
            (2,587.3
            )
            
            
            (2,477.1
            )Total stockholders’
      equity
            
            777.2
            
            
            
            696.4Total liabilities and
      stockholders’ equity
            $
            5,347.5
            
            
            $
            5,256.4




See
accompanying Notes to Unaudited Consolidated Financial
Statements


3


EXPRESS SCRIPTS, INC.


Unaudited
Consolidated Statement of Operations





Three
      Months EndedMarch
      31,(in
      millions)
            2008
            
            2007Revenues
      1
            $
            4,604.2
            
            
            $
            4,508.9Cost
      of revenues 1
            
            4,135.5
            
            
            
            4,088.6Gross profit
            
            468.7
            
            
            
            420.3Selling,
      general and administrative
            
            174.1
            
            
            
            168.0Operating
      income
            
            294.6
            
            
            
            252.3Other
      (expense) income:Non-operating charges,
      net
            
            -
            
            
            
            (23.0
            )Undistributed loss from joint
      venture
            
            (0.2
            )
            
            
            (0.4
            )Interest income
            
            5.3
            
            
            
            2.8Interest expense
            
            (23.3
            )
            
            
            (22.2
            )(18.2
            )
            
            
            (42.8
            )Income
      before income taxes
            
            276.4
            
            
            
            209.5Provision
      for income taxes
            
            98.1
            
            
            
            76.6Net
      income from continuing operations
            
            178.3
            
            
            
            132.9Net
      (loss) income from discontinued operations, net of tax
            
            (1.1
            )
            
            
            0.8Net
      income
            $
            177.2
            
            
            $
            133.7Weighted
      average number of common sharesoutstanding during the
      period:Basic:
            
            252.3
            
            
            
            271.6Diluted:
            
            255.7
            
            
            
            275.4Basic earnings per
      share:Continuing
      operations
            $
            0.71
            
            
            $
            0.49Discontinued
      operations
            
            0.00
            
            
            
            0.00Net earnings
            
            0.70
            
            
            
            0.49Diluted earnings per
      share:Continuing
      operations
            $
            0.70
            
            
            $
            0.48Discontinued
      operations
            
            0.00
            
            
            
            0.00Net earnings
            
            0.69
            
            
            
            0.49




1 Excludes estimated retail
pharmacy co-payments of $945.1 million and $988.2 million for the three months
ended March 31, 2008 and 2007, respectively.  These are amounts we
instructed retail pharmacies to collect from members.  We have no
information regarding actual co-payments collected.




See
accompanying Notes to Unaudited Consolidated Financial
Statements


4





EXPRESS
      SCRIPTS, INC.Unaudited
      Consolidated Statement of Changes in Stockholders’
  Equity




Number
      of
              Shares
            
            Amount(in
      millions)
            Common
              Stock
            
            Common
              Stock
            
            Additional
              Paid-in
              Capital
            
            Accumulated
      Other Comprehensive Income
            
            Retained
              Earnings
            
            Treasury
              Stock
            
            TotalBalance
      at December 31, 2007
            318.9
            
            
            $
            3.2
            
            
            $
            564.5
            
            
            $
            20.9
            
            
            $
            2,584.9
            
            
            $
            (2,477.1
            )
            
            $
            696.4Comprehensive
      income:Net income
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            177.2
            
            
            
            -
            
            
            
            177.2Other comprehensive
      income:Foreign
currencytranslation
      adjustment
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (3.1
            )
            
            
            -
            
            
            
            -
            
            
            
            (3.1
            )Comprehensive
      income
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (3.1
            )
            
            
            177.2
            
            
            
            -
            
            
            
            174.1Treasury stock
      acquired
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (121.1
            )
            
            
            (121.1
            )Changes in stockholders’
      equityrelated
      to employee stock plans
            -
            
            
            
            -
            
            
            
            16.9
            
            
            
            -
            
            
            
            -
            
            
            
            10.9
            
            
            
            27.8Balance
      at March 31, 2008
            318.9
            
            
            $
            3.2
            
            
            $
            581.4
            
            
            $
            17.8
            
            
            $
            2,762.1
            
            
            $
            (2,587.3
            )
            
            $
            777.2




See
accompanying Notes to Unaudited Consolidated Financial Statements




5





EXPRESS
      SCRIPTS, INC.UnauditedConsolidated Statement of Cash Flows




Three
      Months EndedMarch
      31,(in
      millions)
            2008
            
            2007Cash
      flows from operating activities:Net income
            $
            177.2
            
            
            $
            133.7Net loss (income) from
      discontinued operations, net of tax
            
            1.1
            
            
            
            (0.8
            )Net income from continuing
      operations
            
            178.3
            
            
            
            132.9Adjustments to reconcile net
      income to net cashprovided by operating
      activities:Depreciation and
      amortization
            
            24.5
            
            
            
            25.6Non-cash adjustments to net
      income
            
            21.3
            
            
            
            3.4Changes in operating assets and
      liabilities:Claims and rebates
      payable
            
            28.0
            
            
            
            (36.8
            )Other net changes in operating
      assets and liabilities
            
            (3.8
            )
            
            
            33.8Net
      cash provided by operating activities—continuing
operations
            
            248.3
            
            
            
            158.9Net
      cash provided by (used in) operating activities—discontinued
      operations
            
            4.7
            
            
            
            (3.3
            )Net
      cash flows provided by operating activities
            
            253.0
            
            
            
            155.6Cash
      flows from investing activities:Purchases of property and
      equipment
            
            (11.7
            )
            
            
            (8.3
            )Other
            
            (0.4
            )
            
            
            (0.4
            )Net
      cash used in investing activities—continuing operations
            
            (12.1
            )
            
            
            (8.7
            )Net
      cash used in investing activities—discontinued operations
            
            -
            
            
            
            (0.4
            )Net
      cash used in investing activities
            
            (12.1
            )
            
            
            (9.1
            )Cash
      flows from financing activities:Repayment of long-term
      debt
            
            (60.0
            )
            
            
            (40.0
            )Repayment of revolving credit
      line, net
            
            -
            
            
            
            (50.0
            )Tax benefit relating to employee
      stock compensation
            
            12.0
            
            
            
            6.7Treasury stock
      acquired
            
            (121.1
            )
            
            
            -Net proceeds from employee stock
      plans
            
            6.7
            
            
            
            13.0Net
      cash used in financing activities
            
            (162.4
            )
            
            
            (70.3
            )Effect
      of foreign currency translation adjustment
            
            (1.3
            )
            
            
            -Net
      increase in cash and cash equivalents
            
            77.2
            
            
            
            76.2Cash
      and cash equivalents at beginning of period
            
            434.7
            
            
            
            131.0Cash
      and cash equivalents at end of period
            $
            511.9
            
            
            $
            207.2




See
accompanying Notes to Unaudited Consolidated Financial
Statements


6


EXPRESS
SCRIPTS, INC.





NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS








Note 1 – Summary of
significant accounting policies





Our
significant accounting policies normally included in financial statements
prepared in conformity with generally accepted accounting principles, have been
omitted from this Form 10-Q pursuant to the rules and regulations of the
Securities and Exchange Commission (“SEC”).  However, we believe the
disclosures contained in this Form 10-Q are adequate to make the information
presented not misleading when read in conjunction with the notes to the
consolidated financial statements included in our Annual Report on Form 10-K for
the year ended December 31, 2007 filed with the SEC on February 21,
2008.  For a full description of our accounting policies, please refer
to the Notes to Consolidated Financial Statements included in our Annual Report
on Form 10-K for the year ended December 31, 2007.





We
believe the accompanying unaudited consolidated financial statements reflect all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the Unaudited Consolidated Balance Sheet at March 31, 2008, the
Unaudited Consolidated Statements of Operations for the three months ended
March 31, 2008 and 2007, the Unaudited Consolidated Statement of Changes in
Stockholders’ Equity for the three months ended March 31, 2008, and the
Unaudited Consolidated Statements of Cash Flows for the three months ended March
31, 2008 and 2007.  Operating results for the three months ended March
31, 2008 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2008.





New Accounting
Guidance.  In September 2006, the Financial Accounting
Standards Board (“FASB”) issued FAS 157, “Fair Value Measurements,” (“FAS
157”).  FAS 157 defines fair value, establishes guidelines for
measuring fair value and expands disclosures regarding fair value
measurements.  FAS 157 will apply whenever another standard requires
(or permits) assets or liabilities to be measured at fair value.  This
standard does not expand the use of fair value to any new
circumstances.  FAS 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years.  On February 6, 2008 the FASB approved the
Financial Staff Position that will defer the effective date of FAS 157 by one
year for nonfinancial assets and liabilities that are recognized or disclosed at
fair value in the financial statements on a nonrecurring basis.  The
partial adoption of FAS 157 for financial assets and liabilities did not
have a material impact on our consolidated financial position, results of
operations or cash flows. See Note 2, “Fair Value Measurements.”





In
February 2007, the FASB issued FAS 159, “The Fair Value Option for Financial
Assets and Financial Liabilities—including an amendment of FASB Statement
No. 115,” (“FAS 159”).  Under FAS 159, a company may elect to
measure eligible financial assets and financial liabilities at fair
value.  Unrealized gains and losses on items for which the fair value
option has been elected are reported in earnings at each subsequent reporting
date.  Eligible items include, but are not limited to, accounts and
loans receivable, equity method investments, accounts payable, guarantees,
issued debt and firm commitments. If elected, FAS 159 is effective for fiscal
years beginning after November 15, 2007. Currently, we have not elected to
account for any of our eligible items using the fair value option under FAS
159.





In
December 2007, the FASB issued FAS 141R, “Business Combinations” and FAS
160, “Business Combinations and Noncontrolling Interests” (FAS 141R and FAS 160,
respectively).  FAS 141R and FAS 160 are effective for fiscal years
beginning after December 15, 2008.  FAS 141R changes the definitions
of a business and a business combination, and will result in more transactions
recorded as business combinations.  Certain acquired contingencies
will be recorded initially at fair value on the acquisition date, transaction
and restructuring costs generally will be expensed as incurred and in partial
acquisitions companies generally will record 100 percent of the assets and
liabilities at fair value, including goodwill.  We do not expect these
pronouncements to have an effect on our financial statements unless we enter a
business combination.


7





Note 2 – Fair Value
Measurements





We
adopted FAS 157 as of January 1, 2008, with the exception of the
application of the statement to nonrecurring nonfinancial assets and
nonfinancial liabilities. Nonrecurring nonfinancial assets and liabilities for
which we have not applied the provisions of FAS 157 include those measured at
fair value in goodwill impairment testing, indefinite lived intangible assets
measured at fair value for impairment testing, asset retirement obligations
initially measured at fair value, and those initially measured at fair value in
a business combination.





FAS 157 establishes a three-tier fair value hierarchy, which
prioritizes the inputs used in measuring fair value.  These tiers
include: Level 1, defined as observable inputs such as quoted prices in active
markets for identical assets or liabilities; Level 2, defined as inputs other
than quoted prices for similar assets or liabilities in active markets that
are either directly or indirectly observable; and Level 3, defined as
unobservable inputs in which little or no market data exists, therefore
requiring an entity to develop its own assumptions.





Financial
assets accounted for at fair value on a recurring basis at March 31, 2008
include cash equivalents of $457.3 million, restricted cash and investments of
$3.2 million and trading securities of $19.9 million (included in other
assets).  These assets are carried at fair value based on quoted
market prices for identical securities (Level 1
inputs).





Note 3 – Discontinued
operations





During
the fourth quarter of 2007, we identified the CuraScript Infusion Pharmacy, Inc.
line of business (“IP”) as available for sale as we considered it non-core to
our future operations.  As a result, IP is classified as a
discontinued operation.  IP is headquartered in Louisville, Kentucky
and operates twelve infusion pharmacies in six states.  IP offers a
broad range of infused therapies in the home to patients with acute or chronic
conditions.





Prior to being
classified as a discontinued operation, IP was included in our Specialty and
Ancillary Services (“SAAS”) segment.  The results of operations for IP
are reported as discontinued operations for all periods presented in the
accompanying Unaudited Consolidated Statements of
Operations.  Additionally, for all periods presented, assets and
liabilities of the discontinued operations are segregated in the accompanying
Unaudited Consolidated Balance Sheets, and cash flows of our discontinued
operations are segregated in our accompanying Unaudited Consolidated Statement
of Cash Flows.





Certain
information with respect to the discontinued operations for the quarters ended
March 31, 2008 and 2007 is summarized as follows (amounts in
millions):





Three
      Months Ended
              March
      31,(in
      millions)
            2008
            
            2007Revenues
            $
            24.7
            
            
            $
            30.6Net
      (loss) income from discontinued operations, net of tax
            
            (1.1
            )
            
            
            0.8Income
      tax benefit (expense) from discontinued operations
            
            0.4
            
            
            
            (0.3
            )






Note 4 – Non-operating
charges, net





On
December 18, 2006, we announced a proposal to acquire all of the outstanding
shares of Caremark Rx, Inc. (“Caremark”) common stock.  On March 16,
2007, Caremark shareholders approved a merger agreement with CVS Corporation
(“CVS”) and we subsequently withdrew our proposal to acquire
Caremark.  Legal and other professional fees (which do not include
expenses incurred internally) of $27.4 million were expensed in the first
quarter of 2007.   We received a $4.4 million special dividend
CVS/Caremark Corporation (“CVS/ Caremark”) paid on Caremark stock we owned prior
to the CVS/Caremark merger.  We recognized net non-operating charges
of $23.0 million in the first quarter of 2007.




8


Note 5 – Earnings per share
(reflecting the two-for-one stock split effective June 22,
2007)





Basic
earnings per share (“EPS”) is computed using the weighted average number of
common shares outstanding during the period.  Diluted earnings per
share is computed in the same manner as basic earnings per share but adds the
number of additional common shares that would have been outstanding for the
period if the dilutive potential common shares had been issued.  The
following is the reconciliation between the number of weighted average shares
used in the basic and diluted earnings per share calculation for all periods
(amounts are in millions):




Three
      Months Ended
              March
      31,2008
            2007Weighted
      average number of common sharesoutstanding
      during the period – Basic EPS(1)
            252.3
            
            271.6Dilutive
      common stock equivalents:Outstanding
      stock options, “stock-settled” stock appreciation rights (“SSRs”),
      restricted stock units, and executivedeferred
      compensation units(2)
            3.4
            
            3.8Weighted
      average number of common sharesoutstanding
      during the period – Diluted EPS(1)
            255.7
            
            275.4






(1)
            The
      decrease in weighted average number of common shares outstanding from the
      prior year for Basic and Diluted EPS resulted from 23.1 million treasury
      shares repurchased in 2007.


(2)
            Excludes
      SSRs of 0.3 million for the three months ended March 31,
      2007.  These were excluded because their effect was
      anti-dilutive.





The above
shares are all calculated under the “treasury stock” method in accordance with
FAS 128, “Earnings per Share.”





Note 6 – Stock-based
compensation plans





Under our
stock-based compensation plans, we have issued stock options, SSRs, restricted
stock and performance share awards.  Awards are typically settled
using treasury shares.  The maximum contractual term of stock options
and SSRs granted under the 2000 Long Term Incentive Plan (“LTIP”) is 10
years.  Due to the nature of the awards, we use the same valuation
methods and accounting treatments for SSRs and stock options.  During
the first quarter of 2008, we granted 1,633,000 stock options with a weighted
average fair market value of $17.59.  The SSRs and stock options have
three-year graded vesting.





During
the first quarter of 2008, we granted to certain officers and employees
approximately 172,000 restricted shares of common stock and performance shares
with a weighted average fair market value of $63.84.  The restricted
stock awards have three-year graded vesting, and the performance shares cliff
vest at the end of the three years.  The number of performance shares
that ultimately vest is dependent upon achieving specific performance
targets.  Prior to vesting, these shares are subject to forfeiture to
us without consideration upon termination of employment under certain
circumstances.  The total number of non-vested restricted stock and
performance share awards was 750,000 at March 31, 2008 and 677,000 at December
31, 2007.





We
recognized stock-based compensation expense of $9.0 million and $8.6 million in
the three months ended March 31, 2008 and 2007,
respectively.  Unamortized stock-based compensation as of March 31,
2008 was $47.4 million for stock options and SSRs, and $20.1 million for
restricted stock and performance shares.





The fair
value of options and SSRs granted is estimated on the date of grant using a
Black-Scholes multiple option-pricing model with the following weighted average
assumptions:


9





Three
      Months Ended March 31,2008
            
            2007Expected
      life of option
            3-5
      years
            
            3-5
      yearsRisk-free
      interest rate
            1.9%-2.9%
            
            4.5%-5.2%Expected
      volatility of stock
            30%
            
            31%Expected
      dividend yield
            None
            
            None






Note 7 –
Contingencies





We accrue
self-insurance reserves based upon estimates of the aggregate liability of claim
costs in excess of our insurance coverage.  Reserves are estimated
using certain actuarial assumptions followed in the insurance industry and our
historical experience.  The majority of these claims are legal claims
and our liability estimate is primarily related to the cost to defend these
claims.  We do not accrue for settlements, judgments, monetary fines
or penalties until such amounts are probable and estimable, in compliance with
FAS 5, “Accounting for Contingencies.”  Under FAS 5, if the range of
possible loss is broad, the liability accrual should be based on the lower end
of the range.





While we
believe our services and business practices are in compliance with applicable
laws, rules and regulations in all material respects, we cannot predict the
outcome of these matters at this time.  An unfavorable outcome in one
or more of these matters could result in the imposition of judgments, monetary
fines or penalties, or injunctive or administrative remedies.  We can
give no assurance that such judgments, fines and remedies, and future costs
associated with legal matters, would not have a material adverse effect on our
financial condition, our consolidated results of operations or our consolidated
cash flows.





Note 8 – Segment
information





We report
segments on the basis of services offered and have determined we have two
reportable segments: Pharmacy Benefit Management (“PBM”) and Specialty Services
and Ancillary Services (“SAAS”).  Our domestic and Canadian PBM
operating segments have similar characteristics and as such have been aggregated
into a single PBM reporting segment.  As described in Note 2,
during the fourth quarter of 2007, we discontinued our IP line of
business.  Prior to being classified as discontinued, the IP line of
business was included in our SAAS segment.





Operating
income is the measure used by our chief operating decision maker to assess the
performance of each of our operating segments.  The following table
presents information about our reportable segments, including a reconciliation
of operating income from continuing operations to income before income taxes
from continuing operations for the months ended March 31:


10





(in
      millions)
            PBM
            
            SAAS
            
            TotalFor
      the three months ended March 31, 2008Product
      revenue:Network
      revenues
            $
            2,390.8
            
            
            $
            -
            
            
            $
            2,390.8Home
      delivery revenues
            
            1,235.4
            
            
            
            -
            
            
            
            1,235.4Other
      revenues
            
            -
            
            
            
            903.9
            
            
            
            903.9Service
      revenues
            
            44.6
            
            
            
            29.5
            
            
            
            74.1Total revenues
            
            3,670.8
            
            
            
            933.4
            
            
            
            4,604.2Depreciation
      and amortization expense
            
            15.1
            
            
            
            9.4
            
            
            
            24.5Operating
      income
            
            284.1
            
            
            
            10.5
            
            
            
            294.6Non-operating
      charges
            
            
            
            
            
            
            
            
            
            -Undistributed
      loss from joint venture
            
            
            
            
            
            
            
            
            
            (0.2
            )Interest
      income
            
            
            
            
            
            
            
            
            
            5.3Interest
      expense
            
            
            
            
            
            
            
            
            
            (23.3
            )Income
      before income taxes
            
            
            
            
            
            
            
            
            
            276.4Capital
      expenditures
            
            10.8
            
            
            
            0.9
            
            
            
            11.7For
      the three months ended March 31, 2007Product
      revenue:Network
      revenues
            $
            2,332.1
            
            
            $
            -
            
            
            $
            2,332.1Home
      delivery revenues
            
            1,235.9
            
            
            
            -
            
            
            
            1,235.9Other
      revenues
            
            -
            
            
            
            870.5
            
            
            
            870.5Service
      revenues
            
            40.9
            
            
            
            29.5
            
            
            
            70.4Total revenues
            
            3,608.9
            
            
            
            900.0
            
            
            
            4,508.9Depreciation
      and amortization expense
            
            16.5
            
            
            
            9.1
            
            
            
            25.6Operating
      income
            
            237.0
            
            
            
            15.3
            
            
            
            252.3Non-operating
      charges
            
            
            
            
            
            
            
            
            
            (23.0
            )Undistributed
      loss from joint venture
            
            
            
            
            
            
            
            
            
            (0.4
            )Interest
      income
            
            
            
            
            
            
            
            
            
            2.8Interest
      expense
            
            
            
            
            
            
            
            
            
            (22.2
            )Income
      before income taxes
            
            
            
            
            
            
            
            
            
            209.5Capital
      expenditures
            
            4.8
            
            
            
            3.5
            
            
            
            8.3





The
following table presents balance sheet information about our reportable
segments, including the discontinued operations of IP:





(in
      millions)
            PBM
            SAAS
            IP
            TotalAs
      of March 31, 2008Total
      assets
            $
            3,018.2
            
            $
            2,289.0
            
            $
            40.3
            
            $
            5,347.5Investment
      in equity method investees
            
            0.7
            
            
            3.4
            
            
            -
            
            
            4.1As
      of December 31, 2007Total
      assets
            $
            2,958.5
            
            $
            2,251.9
            
            $
            46.0
            
            $
            5,256.4Investment
      in equity method investees
            
            0.2
            
            
            3.4
            
            
            -
            
            
            3.6




11





PBM
product revenue consists of revenues from the dispensing of prescription drugs
from our home delivery pharmacies and revenues from the sale of prescription
drugs by retail pharmacies in our retail pharmacy networks.  SAAS
product revenues consist of distribution of certain specialty drugs and revenues
from specialty distribution activities.  PBM service revenue includes
administrative fees associated with the administration of retail pharmacy
networks contracted by certain clients, market research programs and informed
decision counseling services.  SAAS service revenue includes revenues
from certain specialty distribution services, and sample distribution and
accountability services.





Revenues
earned by our Canadian PBM totaled $12.0 million and $9.5 million for the three
months ended March 31, 2008 and 2007, respectively.  All other
revenues are earned in the United States.  Long-lived assets of our
Canadian PBM (consisting primarily of fixed assets) totaled $23.7 million and
$23.4 million as of March 31, 2008 and December 31, 2007,
respectively.  All other long-lived assets are domiciled in the United
States.


12


Item
2.                      Management’s Discussion And
Analysis Of Financial Condition And Results Of Operations





Information
we have included or incorporated by reference in this Quarterly Report on Form
10-Q, and information which may be contained in our other filings with the
Securities and Exchange Commission (the “SEC”) and our press releases or other
public statements, contain or may contain forward-looking
statements.  These forward-looking statements include, among others,
statements of our plans, objectives, expectations (financial or otherwise) or
intentions.





Our
forward-looking statements involve risks and uncertainties.  Our
actual results may differ significantly from those projected or suggested in any
forward-looking statements.  We do not undertake any obligation to
release publicly any revisions to such forward-looking statements to reflect
events or circumstances occurring after the date hereof or to reflect the
occurrence of unanticipated events.  Factors which might cause such a
difference to occur include, but are not limited to:





·
            results
      in regulatory matters, the adoption of new legislation or regulations
      (including increased costs associated with compliance with new laws and
      regulations), more aggressive enforcement of existing legislation or
      regulations, or a change in the interpretation of existing legislation or
      regulations


·
            costs
      and uncertainties of adverse results in litigation, including a number of
      pending class action cases that challenge certain of our business
      practices


·
            continued
      pressure on margins resulting from client demands for lower prices,
      enhanced service offerings and/or higher service
  levels


·
            the
      possible termination of, or unfavorable modification to, contracts with
      key clients or providers, some of which could have a material impact on
      our financial results


·
            investigations
      of certain PBM practices and pharmaceutical pricing, marketing and
      distribution practices currently being conducted by various regulatory
      agencies and state attorneys
general


·
            the
      possible loss, or adverse modification of the terms, of contracts with
      pharmacies in our retail pharmacy
network


·
            uncertainties
      associated with our acquisitions, which include integration risks and
      costs, uncertainties associated with client retention and repricing of
      client contracts, and uncertainties associated with the operations of
      acquired businesses


·
            changes
      in industry pricing benchmarks such as average wholesale price (“AWP”) and
      average manufacturer price (“AMP”), which could have the effect of
      reducing prices and margins


·
            competition
      in the PBM and specialty pharmacy industries, and our ability to
      consummate contract negotiations with prospective clients, as well as
      competition from new competitors offering services that may in whole or in
      part replace services that we now provide to our
  customers


·
            our
      ability to continue to develop new products, services and delivery
      channels


·
            increased
      compliance risk  relating to our contracts with the DoD TRICARE
      Management Activity and various state governments and
    agencies


·
            uncertainties
      regarding the Medicare Part D prescription drug benefit, including the
      financial impact  to us to the extent that we participate in the
      program on a risk-bearing basis, uncertainties of client or member losses
      to other providers under Medicare Part D, and increased regulatory
      risk


·
            our
      ability to maintain growth rates, or to control operating or capital
      costs


·
            the
      possible loss, or adverse modification of the terms, of relationships with
      pharmaceutical manufacturers, or changes in pricing, discount or other
      practices of pharmaceutical manufacturers or interruption of the supply of
      any pharmaceutical products


·
            uncertainties
      associated with U.S. Centers for Medicare & Medicaid’s (“CMS”)
      implementation of the Medicare Part B Competitive Acquisition Program
      (“CAP”), including the potential loss of clients/revenues to providers
      choosing to participate in the CAP


·
            the
      use and protection of the intellectual property we use in our
      business


·
            our
      leverage and debt service obligations, including the effect of certain
      covenants in our borrowing
agreements


·
            general
      developments in the health care industry, including the impact of
      increases in health care costs, changes in drug utilization and cost
      patterns and introductions of new
drugs


·
            increase
      in credit risk relative to our clients due to adverse economic trends or
      other factors


·
            our
      ability to attract and retain qualified
  employees


·
            other
      risks described from time to time in our filings with the
    SEC


13





See
the more comprehensive description of risk factors under the captions “Forward
Looking Statements and Associated Risks” contained in Item 1 – “Business” of our
Annual Report on Form 10-K for the year ended December 31, 2007, filed with the
SEC on February 21, 2008.








OVERVIEW




As one of
the largest full-service pharmacy benefit management (“PBM”) companies, we
provide health care management and administration services on behalf of our
clients, which include health maintenance organizations, health insurers,
third-party administrators, employers, union-sponsored benefit plans, workers
compensation plans, and government health programs.  Our integrated
PBM services include network claims processing, home delivery services, benefit
design consultation, drug utilization review, formulary management, and drug
data analysis services.





Through
our Specialty and Ancillary Services (“SAAS”) segment, we provide specialty
services, including: patient care and direct specialty home delivery to
patients; distribution of injectable drugs to patient homes and physician
offices; distribution of pharmaceuticals and medical supplies to providers and
clinics; third party logistics services for contracted pharmaceutical
manufacturer clients; fertility services to providers and patients; and
bio-pharmaceutical services including marketing, reimbursement and customized
logistics solutions.  SAAS does not include the fulfillment of
specialty prescriptions at retail pharmacies participating in our networks;
these prescriptions are reflected in PBM network revenues.  We also
provide services that include distribution of specialty pharmaceuticals
requiring special handling or packaging where we have been selected by the
pharmaceutical manufacturer as part of a limited distribution network,
distribution of pharmaceuticals to low-income patients through
manufacturer-sponsored patient assistance programs and company-sponsored generic
patient assistance programs, and distribution of sample units to physicians and
verification of practitioner licensure.





We report
two segments: PBM and SAAS (see “—Results of Operations”).  Revenue
generated by our segments can be classified as either tangible product revenue
or service revenue.  We earn tangible product revenue from the sale of
prescription drugs by retail pharmacies in our retail pharmacy networks and from
dispensing prescription drugs from our home delivery and specialty
pharmacies.  Service revenue includes administrative fees associated
with the administration of retail pharmacy networks contracted by certain
clients, market research programs, medication counseling services, certain
specialty distribution services, and sample fulfillment and accountability
services.  Tangible product revenue generated by our PBM and SAAS
segments represented 98.4% of revenues for both the three months ended March 31,
2008 and for the same period of 2007.








EXECUTIVE
SUMMARY AND TREND FACTORS AFFECTING THE BUSINESS





Our
results in the first three months of 2008 reflect the successful execution of
our business model, which emphasizes the alignment of our financial interests
with those of our clients through greater use of generics, home delivery and
specialty pharmacy.  In the first three months of 2008, we benefited
from a higher generic fill rate (65.1% compared to 60.3% in the same period of
2007) and better management of ingredient costs through renegotiation of
supplier contracts, increased competition among generic manufacturers and other
actions which helped to reduce ingredient costs.  We expect certain
activities within our SAAS segment, including specialty pharmacy fulfillment to
our PBM clients, to deliver solid results, which recently have been offset by
margin declines in various other lines of business within our SAAS
segment.  As previously noted, we classified IP as a discontinued
operation in the fourth quarter of 2007.





We
believe the positive trends we see in the first three months of 2008, including
increased generic usage and lower drug purchasing costs, should continue to
generate improvements in our results of operations in the
future.


14





CRITICAL
ACCOUNTING POLICIES





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions which affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Our estimates and assumptions are based
upon a combination of historical information and various other assumptions
believed to be reasonable under the particular circumstances. Actual results may
differ from our estimates.  For a full description of our accounting
policies, please refer to the notes to the consolidated financial statements
included in our Annual Report on Form 10-K for the year ended December 31, 2007,
filed with the SEC on February 21, 2008.








RESULTS
OF OPERATIONS





PBM
OPERATING INCOME








Three
      Months Ended
              March
      31,(in
      millions)
            2008
            
            2007Product
      revenuesNetwork
      revenues
            $
            2,390.8
            
            
            $
            2,332.1Home
      delivery revenues
            
            1,235.4
            
            
            
            1,235.9Service
      revenues
            
            44.6
            
            
            
            40.9Total
      PBM revenues
            
            3,670.8
            
            
            
            3,608.9Cost
      of PBM revenues
            
            3,256.7
            
            
            
            3,240.6PBM gross
profit
            
            414.1
            
            
            
            368.3PBM
      SG&A expenses
            
            130.0
            
            
            
            131.3PBM operating
      income
            $
            284.1
            
            
            $
            237.0Total
      adjusted PBM Claims(1)
            
            128.5
            
            
            
            126.8





(1)
            PBM
      adjusted claims represent network claims plus home delivery claims,
      which are multiplied by 3, as home delivery claims are typically 90 day
      claims and network claims are generally 30 day
  claims.




Network
claims increased by 1.5 million, or 1.5%, in the first quarter of 2008 from the
same period of 2007.  These increases are primarily due to the
addition of new clients.  Total unadjusted home delivery claims
increased by 0.1 million claims, or 0.7% in the first quarter of 2008 from the
same period of 2007.  On an adjusted basis, total PBM claims increased
1.3% in the first quarter of 2008 from the same period of 2007.
 
 Network
pharmacy revenues increased $58.7 million, or 2.5%, in the first quarter of 2008
from the first quarter of 2007.  There are two primary components to our
change in network revenues: changes in volume and changes in price. 
Approximately $34.8 million of the increase is due to higher claim volumes, as
described above.  In addition, approximately $23.9 million of the
increase in network pharmacy revenues is attributable to a 1.0% increase in
average revenue per network claim.  Two factors effected changes in
our revenue per network claim: inflation and the mix of the generic
prescriptions processed at network pharmacies.  Our generic fill rate
increased to 66.4% of total network claims in the first quarter of 2008 as
compared to 61.7% in the same period of 2007, offsetting the upward trend in
price caused by inflation as generic drugs are less expensive than brand
drugs.


Home delivery revenues slightly decreased by $0.5 million in the first quarter
of 2008 from the same period in 2007.  This reduction in home delivery
revenues is primarily due to the impact of the higher generic fill
 15
 rate on
average revenue per home delivery claim.  Our generic fill rate
increased to 53.9% of total home delivery claims in the first quarter of 2008 as
compared to 48.2% in the same period of 2007.  This decrease is
partially offset by increased claims volumes and ingredient cost inflation, as
described above.


Cost of
PBM revenues increased $16.1 million, or 0.5%, in the first quarter of 2008 from
the same period of 2007.  This increase was primarily due to the 1.3%
increase in adjusted claims volume and ingredient cost inflation, as discussed
above.  This increase was mostly offset by an increase in the
aggregate generic fill rate, and better management of ingredient costs resulting
from renegotiation of certain supplier contracts.
 
 Our PBM
gross profit increased $45.8 million, or 12.4%, in the first quarter of 2008
over the same period of 2007.  Client cost savings from the increase
in the aggregate generic fill rate and better management of ingredient costs
were only partially offset by margin pressures arising from the current
competitive environment.
 
 Selling,
general and administrative expense (“SG&A”) for our PBM segment for the
first quarter of 2008 was consistent with the first quarter of 2007 with a
slight decrease of $1.3 million, or 1.0%.
 
 PBM
operating income increased $47.1 million, or 19.9%, in the first quarter of 2008
over the same period of 2007, based on the various factors described
above.







SAAS
OPERATING INCOME





Three
      Months Ended
              March
      31,(in
      millions)
            2008
            
            2007Product
      revenues
            $
            903.9
            
            
            $
            870.5Service
      revenues
            
            29.5
            
            
            
            29.5Total SAAS
    revenues
            
            933.4
            
            
            
            900.0Cost
      of SAAS revenues
            
            878.8
            
            
            
            848.0SAAS gross
    profit
            
            54.6
            
            
            
            52.0SAAS
      SG&A expense
            
            44.1
            
            
            
            36.7SAAS operating income from
      continuing operations(1)
            $
            10.5
            
            
            $
            15.3





As
previously noted, our SAAS results for 2008 and 2007 have been adjusted for the
discontinued operations of IP, which was formerly part of our SAAS
segment.





SAAS Continuing
Operations.SAAS revenues increased $33.4 million, or
3.7%, in the first quarter of 2008 over the same period of 2007. This is
partially due to increased cross-selling of specialty services to our PBM
clients.  The increase in revenues was partially offset by a reduction
in sales of higher margin drugs through our Specialty Distribution line of
business.





Consistent with the increase in
revenues, SAAS cost of revenues increased $30.8 million, or 3.6%, in the first
quarter of 2008 over the same period of 2007.  This increase resulted
in an increase in gross profit of $2.6 million, or 5.0%.





SG&A
for our SAAS segment increased $7.4 million, or 20.2%, in the first quarter of
2008 from the same period of 2007.  The increase is primarily due to
an increase in bad debt expense, severance charges and site closure costs
incurred by our Specialty Distribution line of business.  A majority
of the increase in bad debt expense over the first quarter of 2007 is
attributable to flu-related receivables.




SAAS
income from continuing operations decreased $4.8 million, or 31.4%, in the first
quarter of 2008 from the same period of 2007 based on the factors described
above.





16





OTHER
(EXPENSE) INCOME




Net
interest expense decreased $1.4 million, or 7.2%, in the first quarter of 2008
as compared to the same period in 2007 as increases in debt were more than
offset by decreases in interest rates and increases in interest income from
higher average cash balances (see “—Liquidity and Capital Resources—Bank Credit
Facility”).





On
December 18, 2006, we announced a proposal to acquire all of the outstanding
shares of Caremark Rx, Inc. (“Caremark”) common stock.  On March 16,
2007, Caremark shareholders approved a merger agreement with CVS Corporation
(“CVS”) and we subsequently withdrew our proposal to acquire
Caremark.  We incurred legal and other professional fees (which do not
include internal costs) of $27.4 million as a result of the proposed
acquisition.   These expenses were partially offset by a $4.4
million special dividend paid by CVS/Caremark Corporation (“CVS/ Caremark”) on
Caremark stock we owned prior to the CVS/Caremark merger.  We recognized
net non-operating charges of $23.0 million in the first quarter of
2007.








PROVISION
FOR INCOME TAXES





Our effective tax rate from continuing
operations decreased to 35.5% for the first quarter of 2008 from 36.6% for the
same period of 2007.  First quarter 2008 includes discrete tax
adjustments resulting in a tax benefit of $2.6 million.  These
adjustments reflect changes in our unrecognized tax benefits, primarily
attributable to a lapse in the applicable statute of limitations.








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





Net loss
from discontinued operations, net of tax, increased $1.9 million from the first
quarter of 2007 to the first quarter of 2008.





NET
INCOME AND EARNINGS PER SHARE





Net
income increased $43.5 million, or 32.5%, for the first quarter of 2008 over the
same period of 2007.





On May
23, 2007, we announced a two-for-one stock split for stockholders of record on
June 8, 2007, effective June 22, 2007.  The split was effected in the
form of a dividend by issuance of one additional share of common stock for each
share of common stock outstanding.  The earnings per share and the
weighted average number of shares outstanding for basic and diluted earnings per
share for each respective period have been adjusted for the stock
split.





Basic and
diluted earnings per share increased 42.9% and 40.8%, respectively in the first
quarter of 2008 over the same period of 2007.  This increase is
primarily due to improved operating results, as well as the decrease in the
basic and diluted weighted average number of common shares, relating to the
repurchase of 2.0 million shares in the first quarter of 2008 and 23.1 million
shares during 2007 (see “—Stock Repurchase Program”).





LIQUIDITY
AND CAPITAL RESOURCES





OPERATING
CASH FLOW AND CAPITAL EXPENDITURES





For the
three months ended March 31, 2008, net cash provided by continuing operations
increased $89.4 million to $248.3 million. Changes in operating cash flows
from continuing operations for the three months ended March 31, 2008 were
impacted by the following factors:


·
            Net
      income from continuing operations increased $45.4 million in the first
      quarter of 2008 as compared to the first quarter of
  2007.


·
            Changes
      in working capital resulted in a cash inflow of $24.2 million in the first
      quarter of 2008 as compared to a cash outflow of $3.0 million in the first
      quarter of 2007.




17




·
            Net
      non-cash adjustments to net income increased from $3.4 million in the
      first quarter of 2007 to $21.3 million in the first quarter of 2008,
      reflecting changes in the deferred tax provision caused by the first
      quarter 2007 implementation of Financial Accounting Standards Board
      ("FASB") Interpretation Number 48, “Accounting for Uncertainty in
      Income Taxes – an interpretation of FASB Statement No. 109.”  In
      addition, bad debt expense increased by approximately $6.6 million,
      primarily driven by our Specialty Distribution line of business, as
      described above.





Our
capital expenditures for the three months ended March 31, 2008 increased $3.4
million as compared to the same period of 2007.  We intend to continue
to invest in infrastructure and technology that we believe will provide
efficiencies in operations and facilitate growth and enhance the service we
provide to our clients.  We expect future anticipated capital
expenditures will be funded primarily from operating cash flow or, to the extent
necessary, with borrowings under our revolving credit facility, discussed
below.








CHANGES
IN BUSINESS





On
October 10, 2007, we purchased Connect Your Care, LLC (“CYC”), a leading
provider of consumer directed healthcare technology solutions to the employer,
health plan and financial services markets.  The purchase price was
funded through internally generated cash.  The purchase agreement
includes an earnout provision, payable after three years based on the
performance of the business.  This acquisition is reported as part of
our PBM segment, and will not have a material impact on earnings.





We
regularly review potential acquisitions and affiliation
opportunities.  We believe available cash resources, bank financing or
the issuance of additional common stock could be used to finance future
acquisitions or affiliations.  There can be no assurance we will make
new acquisitions or establish new affiliations in 2008 or
thereafter.








STOCK
REPURCHASE PROGRAM





We have a
stock repurchase program, originally announced on October 25,
1996.  Treasury shares are carried at first in, first out
cost.  There is no limit on the duration of the
program.  During the first quarter of 2008, we repurchased
2.0 million shares for $121.1 million, leaving 11.2 million shares
remaining under the program.  Current year repurchases were funded
through borrowings under an amendment to our credit facility and through
internally generated cash.  Additional share repurchases, if any, will
be made in such amounts and at such times as we deem appropriate based upon
prevailing market and business conditions.








BANK
CREDIT FACILITY





At March
31, 2008, our credit facility includes $1.6 billion of Term A loans, $800.0
million of Term-1 loans and a $600.0 million revolving credit
facility.  The revolving credit facility (none of which was
outstanding as of March 31, 2008) is available for general corporate
purposes.  During the first quarter of 2008, we made scheduled
payments of $60.0 million on our Term A loan.  The maturity date of
our credit facility is October 14, 2010.





Our
credit facility requires us to pay interest periodically on the London Interbank
Offered Rates (“LIBOR”) or base rate options, plus a margin.  The
margin over LIBOR will range from 0.50% to 1.125%, depending on our consolidated
leverage ratio or our credit rating.  Under our credit facility, we
are required to pay commitment fees on the unused portion of the
$600.0 million revolving credit facility.  The commitment fee
will range from 0.10% to 0.25% depending on our consolidated leverage ratio or
our credit rating.


At March
31, 2008, the weighted average interest rate on the facility was
3.3%.  Our credit facility contains covenants that limit the
indebtedness we may incur, the common shares we may repurchase, and dividends we
may pay.  The repurchase and dividend covenant applies if certain
leverage thresholds are exceeded.  The covenants also include a
minimum interest coverage ratio and a maximum leverage ratio.  At
March 31, 2008, we believe we are in compliance with all covenants associated
with our credit facility.





18





OTHER
MATTERS




In
September 2006, the FASB issued FAS 157, “Fair Value Measurements,” (“FAS
157”).  FAS 157 defines fair value, establishes guidelines for
measuring fair value and expands disclosures regarding fair value
measurements.  FAS 157 will apply whenever another standard requires
(or permits) assets or liabilities to be measured at fair value.  This
standard does not expand the use of fair value to any new
circumstances.  FAS 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years.  On February 6, 2008 the FASB approved the
Financial Staff Position that will defer the effective date of FAS 157 by one
year for nonfinancial assets and liabilities that are recognized or disclosed at
fair value in the financial statements on a nonrecurring basis.  The
partial adoption of FAS 157 for financial assets and liabilities did not
have a material impact on our consolidated financial position, results of
operations or cash flows.
 
 In
February 2007, the FASB issued FAS 159, “The Fair Value Option for Financial
Assets and Financial Liabilities—including an amendment of FASB Statement
No. 115,” (“FAS 159”).  Under FAS 159, a company may elect to
measure eligible financial assets and financial liabilities at fair
value.  Unrealized gains and losses on items for which the fair value
option has been elected are reported in earnings at each subsequent reporting
date.  Eligible items include, but are not limited to, accounts and
loans receivable, equity method investments, accounts payable, guarantees,
issued debt and firm commitments. If elected, FAS 159 is effective for fiscal
years beginning after November 15, 2007. Currently, we have not elected to
account for any of our eligible items using the fair value option under FAS
159.
 
 In
December 2007, the FASB issued FAS 141R, “Business Combinations” and FAS
160, “Business Combinations and Noncontrolling Interests” (FAS 141R and FAS 160,
respectively).  FAS 141R and FAS 160 are effective for fiscal years
beginning after December 15, 2008.  FAS 141R changes the definitions
of a business and a business combination, and will result in more transactions
recorded as business combinations.  Certain acquired contingencies
will be recorded initially at fair value on the acquisition date, transaction
and restructuring costs generally will be expensed as incurred and in partial
acquisitions companies generally will record 100 percent of the assets and
liabilities at fair value, including goodwill.  We do not expect these
pronouncements to have an effect on our financial statements unless we enter a
business combination.





IMPACT
OF INFLATION





Changes
in prices charged by manufacturers and wholesalers for pharmaceuticals affect
our revenues and cost of revenues.  Most of our contracts provide that
we bill clients based on a generally recognized price index for
pharmaceuticals.





Item
      3.
            Quantitative and
      Qualitative Disclosures About Market
Risk





We are
exposed to market risk from changes in interest rates related to debt
outstanding under our credit facility.  Our earnings are subject to
change as a result of movements in market interest rates.  At March
31, 2008, we had $1,448.5 million of obligations, net of cash, which were
subject to variable rates of interest under our credit facility.  A
hypothetical increase in interest rates of 1% would result in an increase in
annual interest expense of approximately $14.5 million (pre-tax), presuming that
obligations subject to variable interest rates remained constant.





Item
      4.
            Controls and
      Procedures





We
maintain a comprehensive set of disclosure controls and procedures (as defined
in Rules 13a-15(e) and under the Securities Exchange Act of 1934 (“Exchange
Act”)) designed to provide reasonable assurance that information required to be
disclosed in our filings under the Exchange Act is recorded, processed,
summarized and reported accurately and within the time periods specified in the
SEC’s rules and forms.  Under the supervision and with the
participation of our management, including our Chairman, President and Chief
Executive Officer and our Executive Vice President and Chief Financial Officer,
we have evaluated the effectiveness of the design and




19
 operation
of our disclosure controls and procedures as of the end of the period covered by
this report.  Based upon this evaluation, the Chairman, President and
Chief Executive Officer and the Executive Vice President and Chief Financial
Officer concluded that the design and operation of these disclosure controls and
procedures are effective in providing reasonable assurance of the achievement of
the objectives described above.




During
the first quarter ended March 31, 2008, there was no change in our internal
control over financial reporting that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.


20




PART II. 
      OTHER INFORMATION







Item
      1.
            Legal
      Proceedings








We and/or
our subsidiaries are defendants in a number of lawsuits that purport to be class
actions.  Each case seeks damages in an unspecified
amount.  We cannot ascertain with any certainty at this time the
monetary damages or injunctive relief that any of the plaintiffs may seek to
recover.  In addition, we are the subject of several governmental
investigations including those described in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2007.  Such investigations
could result in civil damages or other sanctions, the nature and amount of which
we cannot currently estimate.  We cannot, however, provide any
assurance that the outcome of any of these matters, or some number of them in
the aggregate, will not be materially adverse to our financial condition,
consolidated results of operations, cash flows or business
prospects.  In addition, the expense of defending these cases may have
a material effect on our financial results. The following developments have
occurred since the filing of our last Form 10-K.








·
            Brynien, et
      al.  v. Express Scripts, Inc. and ESI Mail Services, Inc.
      (Case No. 1258/2008, Supreme Court of the State of New York, Albany
      County).  On February 19, 2008, Plaintiffs filed a class action
      against us on behalf of all employees who receive benefits through the New
      York State Health Insurance Program.  The allegations in the
      case are substantially the same as the Wagner and
      Scheuerman
      cases previously disclosed.  We have removed the case to federal
      court.








In
addition, in the ordinary course of our business there have arisen various legal
proceedings, investigations or claims now pending against our subsidiaries and
us.  The effect of these actions on future financial results is not
subject to reasonable estimation because considerable uncertainty exists about
the outcomes.  Where insurance coverage is not available for such
claims, or in our judgment, is not cost-effective, we maintain self-insurance
reserves to reduce our exposure to future legal costs, settlements and judgments
related to uninsured claims.  Our self-insured reserves are based upon
estimates of the aggregate liability for the costs of uninsured claims incurred
and the retained portion of insured claims using certain actuarial assumptions
followed in the insurance industry and our historical experience.  It
is not possible to predict with certainty the outcome of these claims, and we
can give no assurance that any losses in excess of our insurance and any
self-insurance reserves will not be material.


21




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





The
following is a summary of our stock repurchasing activity during the three
months ended March 31, 2008 (share data in millions):





Period
            Total
      number
              of
              shares
              purchased
            
            Average
              price
      paid
              per
      share
            
            Total
      number ofshares
              purchased
              as
      part of a
              publicly
              announced
              program
            
            Maximum
      number of
              shares
              that
      may yet be
              purchased
      under
              the
      program1/1/2008
      – 1/31/2008
            
            -
            
            
            $
            -
            
            
            
            -
            
            
            13.22/1/2008
      – 2/28/2008
            
            -
            
            
            
            -
            
            
            
            -
            
            
            13.23/1/2008
      – 3/31/2008
            
            2.0
            
            
            
            62.10
            
            
            
            2.0
            
            
            11.22008
      Total
            
            2.0
            
            
            $
            62.10
            
            
            
            2.0








We have a
stock repurchase program, originally announced on October 25,
1996.  Treasury shares are carried at first in, first out
cost.  There is no limit on the duration of the
program.  During the first quarter of 2008, we repurchased
2.0 million shares for $121.1 million, leaving 11.2 million shares
remaining under the program.  Current year repurchases were funded
through borrowings under an amendment to our credit facility and through
internally generated cash.  Additional share repurchases, if any, will
be made in such amounts and at such times as we deem appropriate based upon
prevailing market and business conditions.








Item
      6.
            Exhibits





(a)
            See
      Index to Exhibits below.





22


SIGNATURES





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





EXPRESS SCRIPTS,
      INC.(Registrant)Date:  
      April 29, 2008
              By:
              /s/ George
      PazGeorge
      PazChairman,
      President and Chief Executive OfficerDate:  
      April 29, 2008
              By:
              /s/
      Jeffrey HallJeffrey
      HallExecutive
      Vice President and Chief Financial Officer





23


INDEX TO
EXHIBITS


(Express
Scripts, Inc. – Commission File Number 0-20199)


Exhibit
              Number
            Exhibit3.1
            Amended
      and Restated Certificate of Incorporation of the Company, incorporated by
      reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for
      the year ending December 31, 2001.3.2
            Certificate
      of Amendment to the Certificate of Incorporation of the Company dated June
      2, 2004, incorporated by reference to Exhibit No. 3.2 to the Company’s
      Quarterly Report on Form 10-Q for the quarter ending June 30,
      2004.3.3
            Certificate
      of Amendment to the Certificate of Incorporation of the Company dated May
      24, 2006, incorporated by reference to Exhibit No. 3.3 to the Company’s
      Quarterly Report on Form 10-Q for the quarter ending June 30,
      2006.3.4
            Third
      Amended and Restated Bylaws, incorporated by reference to Exhibit No. 3.3
      to the Company’s Quarterly Report on Form 10-Q for the quarter ending June
      30, 2004.4.1
            Form
      of Certificate for Common Stock, incorporated by reference to Exhibit No.
      4.1 to the Company’s Registration Statement on Form S-1 filed June 9, 1992
      (No. 33-46974) (the “Registration Statement”).4.2
            Stockholder
      and Registration Rights Agreement dated as of October 6, 2000 between the
      Company and New York Life Insurance Company, incorporated by reference to
      Exhibit No. 4.2 to the Company's Amendment No. 1 to Registration Statement
      on Form S-3 filed October 17, 2000 (Registration Number
      333-47572).4.3
            Asset
      Acquisition Agreement dated October 17, 2000, between NYLIFE Healthcare
      Management, Inc., the Company, NYLIFE LLC and New York Life Insurance
      Company, incorporated by reference to Exhibit No. 4.3 to the Company's
      amendment No. 1 to the Registration Statement on Form S-3 filed October
      17, 2000 (Registration Number 333-47572).4.4
            Rights
      Agreement, dated as of July 25, 2001, between the Corporation and American
      Stock Transfer & Trust Company, as Rights Agent, which includes the
      Certificate of Designations for the Series A Junior Participating
      Preferred Stock as Exhibit A, the Form of Right Certificate as Exhibit B
      and the Summary of Rights to Purchase Preferred Shares as Exhibit C,
      incorporated by reference to Exhibit No. 4.1 to the Company's Current
      Report on Form 8-K filed July 31, 2001.4.5
            Amendment
      dated April 25, 2003 to the Stockholder and Registration Rights Agreement
      dated as of October 6, 2000 between the Company and New York Life
      Insurance Company, incorporated by reference to Exhibit No. 4.8 to the
      Company’s Quarterly Report on Form 10-Q for the period ending March 31,
      2003.4.6
            Amendment
      No. 1 to the Rights Agreement between the Corporation and American Stock
      Transfer & Trust Company, as Rights Agent, dated May 25, 2005,
      incorporated by reference to Exhibit No. 10.1 to the Company’s Current
      Report on Form 8-K filed May 31, 2005.10.11
            Summary
      of Named Executive Officer 2008 Salaries, 2007 Bonus Awards, 2008 Maximum
      Bonus Potential and 2008 Equity and Performance Awards, incorporated by
      reference to Exhibit No. 10.1 to the Company’s Current Report on Form 8-K
      filed February 26, 2008.10.21
            Form
      of Performance Share Award Agreement used with respect to grants of
      performance shares by the Company under the Express Scripts, Inc. 2000
      Long-Term Incentive Plan incorporated by reference to Exhibit No. 10.2 to
      the Company’s Current Report on Form 8-K filed February 26,
      2008.10.31
            Form
      of Stock Option Agreement used with respect to grants of stock options by
      the Company under the Express Scripts, Inc. 2000 Long-Term Incentive Plan
      incorporated by reference to Exhibit No. 10.3 to the Company’s Current
      Report on Form 8-K filed February 26, 2008.




24


10.41
            Executive
      Employment Agreement between the Company and George Paz, dated March 31,
      2008 and effective as of April 1, 2008, incorporated by reference to
      Exhibit No. 10.1. to the Company’s Current Report on Form 8-K filed April
      4, 2008.10.51
            Executive
      Employment Agreement between the Company and Jeffrey L. Hall, dated and
      effective as of April 1, 2008, incorporated by reference to Exhibit No.
      10.2. to the Company’s Current Report on Form 8-K filed April 4,
      2008.10.61
            Amended
      and Restated Express Scripts, Inc. Employee Stock Purchase Plan,
      incorporated by reference to Exhibit A to the Company’s Proxy Statement
      filed April 14, 2008.31.12
            Certification
      by George Paz, as Chairman, President and Chief Executive Officer of
      Express Scripts, Inc., pursuant to Exchange Act Rule
      13a-14(a).31.22
            Certification
      by Jeffrey Hall, as Executive Vice President and Chief Financial Officer
      of Express Scripts, Inc., pursuant to Exchange Act Rule
      13a-14(a).32.12
            Certification
      by George Paz, as Chairman, President and Chief Executive Officer of
      Express Scripts, Inc., pursuant to 18 U.S.C. § 1350 and Exchange Act Rule
      13a-14(b).32.22
            Certification
      by Jeffrey Hall, as Executive Vice President and Chief Financial Officer
      of Express Scripts, Inc., pursuant to 18 U.S.C. § 1350 and Exchange Act
      Rule 13a-14(b).





1
            Management
      contract or compensatory plan or
arrangement.


2
            Filed
      herein.




25