**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 September 30, 2005.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.)**13900
                Riverport Dr., Maryland Heights, Missouri**
              (Address
                of principal executive offices)
            **63043**
              (Zip
                Code)





Registrant’s
      telephone number, including area code: (314) 770-1666










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 an accelerated filer (as defined
        in Rule
        12b-2 of the Exchange Act).
 Yes X No
        __




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 September 30, 2005:
            145,633,623
            Shares

















EXPRESS
      SCRIPTS, INC.





INDEX














Part
      I  Financial
      Information




Item
      1. Financial
      Statements (unaudited)





a)  Unaudited
      Consolidated Balance Sheet





b)  Unaudited
      Consolidated Statement of Operations





c)  Unaudited
      Consolidated Statement of Changes


in
      Stockholders’ Equity





d)  Unaudited
      Consolidated Statement of Cash Flows





e)  Notes
      to
      Unaudited Consolidated Financial Statements




Item
      2. Management’s
      Discussion and Analysis of Financial


Condition
      and Results of Operations





Item
      3. Quantitative
      and Qualitative Disclosures About


Market
      Risk





Item
      4. Controls
      and Procedures





Part
      II Other
      Information





Item
      1. Legal
      Proceedings




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




Item
      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





Signatures





Index
      to
      Exhibits











PART
      I. FINANCIAL INFORMATION


**Item
      1.** **Financial
      Statements**


**EXPRESS
                SCRIPTS, INC.****Unaudited
                Consolidated Balance Sheet****September
                30,**
            
            **December
                31,***(in
                thousands, except share data)*
            **2005**
            
            **2004**AssetsCurrent
                assets:Cash
                and cash equivalents
            $
            405,027
            
            $
            166,054Receivables,
                net
            
            1,002,422
            
            
            1,057,222Inventories
            
            144,027
            
            
            158,775Deferred
                taxes
            
            41,185
            
            
            33,074Prepaid
                expenses and other current assets
            
            23,870
            
            
            27,892Total
                current assets
            
            1,616,531
            
            
            1,443,017Property
                and equipment, net
            
            169,421
            
            
            181,166Goodwill,
                net
            
            1,708,332
            
            
            1,708,935Other
                intangible assets, net
            
            222,953
            
            
            245,270Other
                assets
            
            25,954
            
            
            21,698Total
                assets
            $
            3,743,191
            
            $
            3,600,086Liabilities
                and Stockholders’ EquityCurrent
                liabilities:Claims
                and rebates payable
            $
            1,246,891
            
            $
            1,236,775Accounts
                payable
            
            350,343
            
            
            322,885Accrued
                expenses
            
            255,417
            
            
            231,695Current
                maturities of long-term debt
            
            22,056
            
            
            22,056Total
                current liabilities
            
            1,874,707
            
            
            1,813,411Long-term
                debt
            
            345,451
            
            
            412,057Other
                liabilities
            
            189,889
            
            
            178,304Total
                liabilities
            
            2,410,047
            
            
            2,403,772Stockholders’
                equity:Preferred
                stock, $0.01 par value per share, 5,000,000 shares
                authorized,and
                no shares issued and outstanding
            
            -
            
            
            -Common
                Stock, 275,000,000 shares authorized, $0.01 par value;shares
                issued: 159,479,000 and 79,787,000, respectively;shares
                outstanding: 145,634,000 and 73,858,000, respectively
            
            1,595
            
            
            798Additional
                paid-in capital
            
            465,722
            
            
            467,353Unearned
                compensation under employee compensation plans
            
            (7,806
            )
            
            (18,177
            )Accumulated
                other comprehensive income
            
            9,785
            
            
            8,266Retained
                earnings
            
            1,431,727
            
            
            1,142,7571,901,023
            
            
            1,600,997Common
                Stock in treasury at cost, 13,845,000 and 5,929,000shares,
                respectively
            
            (567,879
            )
            
            (404,683
            )Total
                stockholders’ equity
            
            1,333,144
            
            
            1,196,314Total
                liabilities and stockholders’ equity
            $
            3,743,191
            
            $
            3,600,086


*See
      accompanying Notes to Unaudited Consolidated Financial Statements*








**EXPRESS
      SCRIPTS, INC.**


**Unaudited
      Consolidated Statement of Operations**





**Three
                Months Ended**
            
            **Nine
                Months Ended****September
                30,**
            
            **September
                30,***(in
                thousands, except per share data)*
            **2005**
            
            **2004**
            
            **2005**
            
            **2004**Revenues1
            $
            3,847,642
            
            $
            3,767,690
            
            $
            11,631,018
            
            $
            11,175,010Cost
                of revenues1
            
            3,554,442
            
            
            3,532,280
            
            
            10,796,107
            
            
            10,494,291Gross
                profit
            
            293,200
            
            
            235,410
            
            
            834,911
            
            
            680,719Selling,
                general and administrative
            
            132,067
            
            
            130,806
            
            
            387,051
            
            
            322,773Operating
                income
            
            161,133
            
            
            104,604
            
            
            447,860
            
            
            357,946Other
                (expense) income:Undistributed
                loss from joint venture
            
            (633
            )
            
            (954
            )
            
            (1,928
            )
            
            (3,754
            )Interest
                income
            
            3,506
            
            
            867
            
            
            7,558
            
            
            2,492Interest
                expense
            
            (5,102
            )
            
            (4,248
            )
            
            (14,532
            )
            
            (37,118
            )(2,229
            )
            
            (4,335
            )
            
            (8,902
            )
            
            (38,380
            )Income
                before income taxes
            
            158,904
            
            
            100,269
            
            
            438,958
            
            
            319,566Provision
                for income taxes
            
            57,210
            
            
            38,352
            
            
            149,988
            
            
            122,266Net
                income
            $
            101,694
            
            $
            61,917
            
            $
            288,970
            
            $
            197,300Basic
                earnings per share:
            $
            0.70
            
            $
            0.41
            
            $
            1.96
            
            $
            1.28Weighted
                average number of common sharesOutstanding
                during the period - Basic EPS
            
            146,312
            
            
            152,252
            
            
            147,285
            
            
            153,804Diluted
                earnings per share:
            $
            0.68
            
            $
            0.40
            
            $
            1.93
            
            $
            1.26Weighted
                average number of common sharesOutstanding
                during the period - Diluted EPS
            
            148,858
            
            
            154,354
            
            
            149,651
            
            
            156,142








*1* *Excludes
      estimated retail pharmacy co-payments of $1,413,332 and $1,363,991 for the
      three
      months ended September 30, 2005 and 2004, respectively, and $4,357,212 and
      $4,148,590 for the nine months ended September 30, 2005 and 2004,
      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***











**EXPRESS
                  SCRIPTS, INC.****Unaudited
                  Consolidated Statement of Changes in Stockholders’
                  Equity**Number
                  of Shares
              
              Amount*(in
                  thousands)*
              Common
                Stock
              
              Common
                  Stock
              
              Additional
                Paid-in
                Capital
              
              Unearned
                  Compensation Under Employee Compensation Plans
              Accumulated
                Other
                  Comprehensive Income
              Retained
                  Earnings
              
              Treasury
                Stock
              
              TotalBalance
                  at December 31, 2004
              
              79,787
              
              $
              798
              
              $
              467,353
              
              $
              (18,177
              )
              $
              8,266
              
              $
              1,142,757
              
              $
              (404,683
              )
              $
              1,196,314Comprehensive
                  income:Net
                  income
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              288,970
              
              
              -
              
              
              288,970Other
                  comprehensive
                  income:Foreign
                  currencytranslation
                  adjustment
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,255
              
              
              -
              
              
              -
              
              
              1,255Realized
                  and unrealized gainson
                  derivative financialinstruments,
                  net of taxes
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              264
              
              
              -
              
              
              -
              
              
              264Comprehensive
                  income
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,519
              
              
              288,970
              
              
              -
              
              
              290,489Stock
                  split in form of stock
                  dividend
              
              79,724
              
              
              797
              
              
              (797
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Treasury
                  stock
                  acquired
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (220,436
              )
              
              (220,436
              )Changes
                  in stockholders’ equity
                  relatedto
                  employee stock plans
              
              (32
              )
              
              
              
              
              (834
              )
              
              10,371
              
              
              -
              
              
              -
              
              
              57,240
              
              
              66,777Balance
                  at September 30, 2005
              
              159,479
              
              $
              1,595
              
              $
              465,722
              
              $
              (7,806
              )
              $
              9,785
              
              $
              1,431,727
              
              $
              (567,879
              )
              $
              1,333,144


*See
      accompanying Notes to Unaudited Consolidated Financial Statements*

















**EXPRESS
                SCRIPTS, INC.****Unaudited****Consolidated
                Statement of Cash Flows****Nine
                Months Ended****September
                30,***(in
                thousands)*
            **2005**
            
            **2004**Cash
                flows from operating activities:Net
                income
            $
            288,970
            
            $
            197,300Adjustments
                to reconcile net income to net cashprovided
                by operating activities, excludingthe
                effect of the acquisition:Depreciation
                and amortization
            
            59,625
            
            
            50,477Non-cash
                adjustments to net income
            
            55,902
            
            
            57,081Net
                changes in operating assets and liabilities
            
            126,565
            
            
            (1,582
            )Net
                cash provided by operating activities
            
            531,062
            
            
            303,276Cash
                flows from investing activities:Purchases
                of property and equipment
            
            (34,211
            )
            
            (33,387
            )Acquisition,
                net of cash acquired, and investment in joint venture
            
            (2,150
            )
            
            (331,136
            )Repayment
                from (loan to) Pharmacy Care Alliance
            
            2,188
            
            
            (14,050
            )Other
            
            (294
            )
            
            103Net
                cash used in investing activities
            
            (34,467
            )
            
            (378,470
            )Cash
                flows from financing activities:Proceeds
                from long-term debt
            
            -
            
            
            675,564Repayment
                of long-term debt
            
            (16,556
            )
            
            (740,455
            )(Repayment
                of) Proceeds from revolving credit line, net
            
            (50,000
            )
            
            50,000Treasury
                stock acquired
            
            (219,949
            )
            
            (160,286
            )Deferred
                financing fees
            
            -
            
            
            (6,036
            )Net
                proceeds from employee stock plans
            
            28,531
            
            
            21,256Net
                cash used in financing activities
            
            (257,974
            )
            
            (159,957
            )Effect
                of foreign currency translation adjustment
            
            352
            
            
            272Net
                increase (decrease) in cash and cash equivalents
            
            238,973
            
            
            (234,879
            )Cash
                and cash equivalents at beginning of period
            
            166,054
            
            
            396,040Cash
                and cash equivalents at end of period
            $
            405,027
            
            $
            161,161


*See
      accompanying Notes to Unaudited Consolidated Financial
      Statements***














**EXPRESS
      SCRIPTS, INC.**





**NOTES
      TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**








**Note
      1 - Summary of significant accounting policies**





Certain
      of our significant accounting policies are described below.  Other
      financial statement note disclosures, 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.  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, 2004 filed with the Securities and Exchange Commission on March
      3,
      2005.  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, 2004.





We
      believe the accompanying unaudited consolidated financial statements reflect
      all
      adjustments (consisting of only normal recurring adjustments except as otherwise
      disclosed) necessary to present fairly the Unaudited Consolidated Balance Sheet
      at September 30, 2005, the Unaudited Consolidated Statements of Operations
      for
      the three and nine months ended September 30, 2005 and 2004, the Unaudited
      Consolidated Statement of Changes in Stockholders’ Equity for the nine months
      ended September 30, 2005, and the Unaudited Consolidated Statements of Cash
      Flows for the nine months ended September 30, 2005 and 2004.  Operating
      results for the three and nine months ended September 30, 2005 are not
      necessarily indicative of the results that may be expected for the year ending
      December  31,  2005.





*REVENUE
      RECOGNITION*





Revenues
      from our pharmacy benefit management (“PBM”) segment are earned by dispensing
      prescriptions from our home delivery pharmacies, processing claims for
      prescriptions filled by retail pharmacies in our networks, and by providing
      services to drug manufacturers, including administration of discount programs
      (see also “—Rebate Accounting”).





Revenues
      from dispensing prescriptions from our home delivery pharmacies, which include
      the co-payment received from members of the health plans we serve, are recorded
      when prescriptions are shipped.  At the time of shipment, our earnings
      process is complete: the obligation of our customer to pay for the drugs is
      fixed, and, due to the nature of the product, the member may not return the
      drugs nor receive a refund.





Revenues
      related to the sale of prescription drugs by retail pharmacies in our networks
      consist of the amount the client has contracted to pay us (which excludes the
      co-payment) for the dispensing of such drugs together with any associated
      administrative fees.  These revenues are recognized when the claim is
      processed.  When we independently have a contractual obligation to pay
      our
      network pharmacy providers for benefits provided to our clients’ members, we act
      as a principal in the arrangement and we include the total payments we have
      contracted to receive from these clients as revenue, and payments we make to
      the
      network pharmacy providers as cost of revenue in compliance with Emerging Issues
      Task Force (“EITF”) Issue No. 99-19, “Reporting Gross Revenue as a Principal vs.
      Net as an Agent.”  When a prescription is presented by a member to a retail
      pharmacy within our network, we are solely responsible for confirming member
      eligibility, performing drug utilization review, reviewing for drug-to-drug
      interactions, performing clinical intervention, which may involve a call to
      the
      member’s physician, communicating plan provisions to the pharmacy, directing
      payment to the pharmacy and billing the client for the amount they are
      contractually obligated to pay us for the prescription dispensed, as specified
      within our client contracts.  We also provide benefit design and formulary
      consultation services to clients.  We have separately negotiated
      contractual relationships with our clients and with network pharmacies, and
      under our contracts with pharmacies we assume the credit risk of our clients’
      ability to pay for drugs dispensed by these pharmacies to clients’
      members.  Our clients are not obligated to pay the pharmacies as we
      are
      primarily obligated to pay retail pharmacies in our network the contractually
      agreed upon amount for the prescription dispensed, as specified within our
      provider contracts.  In addition, under most of our client contracts,
      we
      realize a positive or negative margin represented by the difference between
      the
      negotiated ingredient costs we will receive from our clients and the separately
      negotiated ingredient costs we will pay to our network pharmacies.  These
      factors indicate we are a principal as defined by EITF 99-19 and, as such,
      we
      record ingredient cost billed to clients in revenue and the corresponding
      ingredient cost paid to network pharmacies in cost of revenues.





If
      we
      merely administer a client’s network pharmacy contracts to which we are not a
      party and under which we do not assume credit risk, we record only our
      administrative fees as revenue.  For these clients, we earn an
      administrative fee for collecting payments from the client and remitting the
      corresponding amount to the pharmacies in the client’s network.  In these
      transactions we act as a conduit for the client.  Because we are not
      the
      principal in these transactions, drug ingredient cost is not included in our
      revenues or in our cost of revenues.





In
      retail
      pharmacy transactions, amounts paid to pharmacies and amounts charged to clients
      are always exclusive of the applicable co-payment.  Under our pharmacy
      agreements, the pharmacy is solely obligated to collect the co-payment from
      the
      member based on the amount we advise them to collect.  We have no
      information regarding actual co-payments collected.  As such, we do
      not
      include member co-payments to retail pharmacies in our revenue or in our cost
      of
      revenue.  Retail pharmacy co-payments, which we instructed retail
      pharmacies to collect from members, of $1.4 billion for the three months ended
      September 30, 2005 and 2004, and $4.4 billion and $4.1 billion for the nine
      months ended September 30, 2005 and 2004, respectively, are excluded from
      revenues and cost of revenues.





We
      bill
      our clients based upon the billing schedules established in client
      contracts.  At the end of a period, any unbilled revenues related to
      the
      sale of prescription drugs that have been adjudicated with retail pharmacies
      are
      estimated based on the amount we will pay to the pharmacies and historical
      gross
      margin.  Those amounts due from our clients are recorded as revenue
      as they
      are contractually due to us for past transactions.  Adjustments are
      made to
      these estimated revenues to reflect actual billings at the time clients are
      billed; historically, these adjustments have not been material.





Certain
      implementation and other fees paid to clients upon the initiation of a
      contractual agreement are considered an integral part of overall contract
      pricing and are recorded as a reduction of revenue.  Where they are
      refundable upon early termination of the contract, these payments are
      capitalized and amortized as a reduction of revenue on a straight-line basis
      over the life of the contract.





Revenues
      from our non-PBM segment, Pharma Business Solutions (“PBS”), are derived from
      the distribution of pharmaceuticals requiring special handling or packaging
      where we have been selected by the pharmaceutical manufacturer as part of a
      limited distribution network, the distribution of pharmaceuticals through
      Patient Assistance Programs where we receive a fee from the pharmaceutical
      manufacturer for administrative and pharmacy services for the delivery of
      certain drugs free of charge to doctors for their indigent patients, sample
      fulfillment and sample accountability services.  Revenues earned by
      PBS
      include administrative fees received from pharmaceutical manufacturers for
      dispensing or distributing consigned pharmaceuticals requiring special handling
      or packaging and administrative fees for verification of practitioner licensure
      and distribution of consigned drug samples to doctors based on orders received
      from pharmaceutical sales representatives. We also administer sample card
      programs for certain manufacturers and include the ingredient costs of those
      drug samples dispensed from retail pharmacies in PBS revenues, and the
      associated costs for these sample card programs in cost of revenues. 
      Because manufacturers are independently obligated to pay us and we have an
      independent contractual obligation to pay our network pharmacy providers for
      free samples dispensed to patients under sample card programs, we include the
      total payments from these manufacturers (including ingredient costs) as revenue,
      and payments to the network pharmacy provider as cost of revenue.  These
      transactions require us to assume credit risk.





*REBATE
      ACCOUNTING*





We
      administer two rebate programs through which we receive rebates and
      administrative fees from pharmaceutical manufacturers.  Rebates earned
      for
      the administration of these programs, performed in conjunction with claim
      processing and home delivery services provided to clients, are recorded as
      a
      reduction of cost of revenue and the portion of the rebate payable to customers
      is treated as a reduction of revenue.  When we earn rebates and
      administrative fees in conjunction with formulary management services, but
      do
      not process the underlying claims, we record rebates received from
      manufacturers, net of the portion payable to customers, in revenue. 
      We
      record rebates and administrative fees receivable from the manufacturer and
      payable to clients when the prescriptions covered under contractual agreements
      with the manufacturers are dispensed; these amounts are not dependent upon
      future pharmaceutical sales.





With
      respect to rebates based on actual market share performance, we estimate rebates
      and the associated receivable from pharmaceutical manufacturers quarterly based
      on our estimate of the number of rebatable prescriptions and the rebate per
      prescription.  The portion of rebates payable to clients is estimated
      quarterly based on historical and/or anticipated sharing percentages and our
      estimate of rebates receivable from pharmaceutical manufacturers.  These
      estimates are adjusted to actual when amounts are received from manufacturers
      and the portion payable to clients is paid.





With
      respect to rebates that are not based on market share performance, no estimation
      is required for the manufacturer billing amounts which are determinable when
      the
      drug is dispensed.  We pay all or a contractually agreed upon portion
      of
      such rebates to our clients.  The portion of rebates payable to clients
      is
      estimated based on historical and/or anticipated sharing percentages. 
      These estimates are adjusted to actual when amounts are paid to
      clients.





*COST
      OF REVENUES*





Cost
      of
      revenues includes product costs, network pharmacy claims payments and other
      direct costs associated with dispensing prescriptions, including shipping and
      handling (see also “—Revenue Recognition” and “—Rebate
      Accounting”).





*CASH
      AND CASH EQUIVALENTS*





Cash
      and
      cash equivalents include cash on hand and investments with original maturities
      of three months or less.  We have banking relationships resulting in
      certain cash disbursement accounts being maintained by banks not holding our
      cash concentration accounts.  As a result, cash disbursement accounts
      carrying negative book balances of $164.0 million and $160.3 million
      (representing outstanding checks not yet presented for payment) have been
      reclassified to claims and rebates payable, accounts payable and accrued
      expenses at September 30, 2005 and December 31, 2004, respectively. 
      This
      reclassification restores balances to cash and current liabilities for
      liabilities to our vendors which have not been defeased.  No overdraft
      or
      unsecured short-term loan exists in relation to these negative balances.





*RECEIVABLES*





Based
      on
      our revenue recognition policies discussed above, certain claims at the end
      of a
      period are unbilled.  Revenue and unbilled receivables for those claims
      are
      estimated each period based on the amount to be paid to network pharmacies
      and
      historical gross margin.  Estimates are adjusted to actual at the time
      of
      billing.  In addition, revenue and unbilled receivables for rebates
      based
      on market share performance are calculated quarterly based on an estimate of
      rebatable prescriptions and the rebate per prescription.  These estimates
      are adjusted to actual when the number of rebatable prescriptions and the rebate
      per prescription have been determined and the billing to the manufacturers
      has
      been completed.  Historically, adjustments to our estimates have been
      immaterial.





Included
      in receivables, net, as of September 30, 2005 and December 31, 2004, is an
      allowance for doubtful accounts of $38.7 million and $31.4 million,
      respectively.  This increase is primarily due to additional reserves
      for
      receivables from our clients’ members.





As
      of
      September 30, 2005 and December 31, 2004, unbilled receivables were $655.9
      million and $664.5 million, respectively.  Unbilled receivables are
      billed
      to clients typically within 30 days of the transaction date based on the
      contractual billing schedule agreed upon with the client.





*IMPAIRMENT
      OF LONG-LIVED ASSETS*





We
      evaluate whether events and circumstances have occurred that indicate the
      remaining estimated useful life of long-lived assets, including intangible
      assets, may warrant revision or that the remaining balance of an asset may
      not
      be recoverable.  The measurement of possible impairment is based on
      the
      ability to recover the balance of assets from expected future operating cash
      flows on an undiscounted basis.  Impairment losses, if any, would be
      determined based on the present value of the cash flows using discount rates
      that reflect the inherent risk of the underlying business.  Absent events
      or circumstances indicating an impairment of goodwill, we perform an annual
      goodwill impairment test during the fourth quarter.  No impairments
      existed
      as of September 30, 2005 and December 31, 2004.





*SELF-INSURANCE
      RESERVES*





We
      maintain insurance coverage for claims that arise in the normal course of
      business.  Where insurance coverage is not available, or, in our judgment,
      is not cost-effective, we maintain self-insurance reserves to reduce our
      exposure to future legal costs, settlements and judgments.  Self-insured
      losses are accrued based upon estimates of the aggregate liability for the
      costs
      of uninsured claims incurred using certain actuarial assumptions followed in
      the
      insurance industry and our historical experience (see Note 8).  It is
      not
      possible to predict with certainty the outcome of these claims, and we can
      give
      no assurances that any losses, in excess of our insurance and any self-insurance
      reserves, will not be material.





*EMPLOYEE
      BASED COMPENSATION*





We
      account for employee stock options in accordance with Accounting Principles
      Board No. (“APB”) 25, “Accounting for Stock Issued to Employees.”  Under
      APB 25, we apply the intrinsic value method of accounting and, therefore, have
      not recognized compensation expense for options granted, because we grant
      options at a price equal to market value at the time of grant.  During
      1996, Financial Accounting Standard (“FAS”) No. 123, “Accounting for Stock-Based
      Compensation”, became effective for us.  FAS 123 prescribes the recognition
      of compensation expense based on the fair value of options determined on the
      grant date.  However, FAS 123 grants an exception that allows companies
      currently applying APB 25 to continue using that method.  We have,
      therefore, elected to continue applying the intrinsic value method under APB
      25.  In December 2004, the Financial Accounting Standards Board (“FASB”)
      revised FAS 123 (“FAS 123R”), “Share-Based Payment”, which replaces FAS 123,
“Accounting for Stock-Based Compensation”, and supersedes APB 25. FAS 123R will
      require compensation cost related to share-based payment transactions to be
      recognized in the financial statements.  We will adopt FAS 123R using
      the
      modified prospective method beginning January 1, 2006 (see “New Accounting
      Guidance”).





The
      following table shows stock-based compensation expense included in net income
      and pro forma stock-based compensation expense, net income and earnings per
      share had we elected to record compensation expense based on the estimated
      fair
      value of options at the grant date for the three and nine months ended September
      30, 2005 and 2004 (see also Note 7):


**Three
                  Months Ended**
                **September
                  30,**
              
              **Nine
                  Months Ended**
                **September
                  30,*****(in
                  thousands, except per share data)***
              **2005**
              
              **2004**
              
              **2005**
              
              **2004**Net
                  income, as reported(1)
              $
              101,694
              
              $
              61,917
              
              $
              288,970
              
              $
              197,300Less: 
                  Employee stock-based
                compensation expense determined
                using fair-value based method for
                stock-based awards, net of tax(2)
              
              (2,340
              )
              
              1,035
              
              
              (8,155
              )
              
              2,387Pro
                  forma net income
              $
              99,354
              
              $
              60,882
              
              $
              280,815
              
              $
              194,913Basic
                  earnings per shareAs
                  reported
              $
              0.70
              
              $
              0.41
              
              $
              1.96
              
              $
              1.28Pro
                  forma
              
              0.67
              
              
              0.40
              
              
              1.91
              
              
              1.27Diluted
                  earnings per shareAs
                  reported
              $
              0.68
              
              $
              0.40
              
              $
              1.93
              
              $
              1.26Pro
                  forma
              
              0.66
              
              
              0.39
              
              
              1.87
              
              
              1.25








(1) Net
      income, as reported, includes stock-based compensation expense for the three
      months ended September 30, 2005 and 2004 of $1,159  ($1,760 pre-tax)
      and
      $1,122 ($1,818 pre-tax), respectively, and for the nine months ended September
      30, 2005 and 2004 of $5,748 ($9,022 pre-tax) and $3,860 ($6,252 pre-tax),
      respectively, related to restricted shares of Common Stock awarded to certain
      of
      our officers and employees.





(2)
      The increase in pro forma compensation expense is due to the forfeiture of
      options during 2004 which resulted in expense reductions of $283 and $3,473
      during the three and nine months ended September 30, 2004,
      respectively.








*NEW
      ACCOUNTING GUIDANCE*





In
      June
      2005, the FASB issued FAS 154, “Accounting Changes and Error Corrections”, which
      superceded APB No. 20, “Accounting Changes.”  APB No. 20 previously
      required that most voluntary changes in accounting principle be recognized
      by
      including in the current period’s net income the cumulative effect of changing
      to the new accounting principle.  In contrast, FAS 154 requires entities
      that voluntarily make a change in accounting principle to apply that change
      retrospectively to prior periods’ financial statements, unless this would be
      impracticable.  In addition, FAS 154 makes a distinction between
      retrospective application of an accounting principle and the restatement of
      financial statements to reflect the correction of an error.  FAS 154
      is
      effective for accounting changes and corrections of errors made in fiscal years
      beginning after December 15, 2005.  We do not expect the implementation
      of
      FAS 154 to have an impact on our consolidated results of operations.





In
      December 2004, the FASB revised FAS 123. FAS 123R will require compensation
      cost
      related to share-based payment transactions to be recognized in the financial
      statements.  As permitted by FAS 123, we currently follow the guidance
      of
      APB 25, which allows the use of the intrinsic value method of accounting to
      value share-based payment transactions with employees.  FAS 123R requires
      measurement of the cost of share-based payment transactions to employees at
      the
      fair value of the award on the grant date and recognition of expense over the
      requisite service or vesting period.  FAS 123R allows implementation
      using
      a modified version of prospective application, under which compensation expense
      for the unvested portion of previously granted awards and all new awards will
      be
      recognized on or after the date of adoption.  FAS 123R also allows
      companies to implement by restating previously issued financial statements,
      basing the amounts on the expense previously calculated and reported in their
      pro forma footnote disclosures required under FAS 123.  We will adopt
      FAS
      123R using the modified prospective method beginning January 1, 2006. 
      The
      impact of adopting FAS 123R on our consolidated results of operations is not
      expected to differ materially from the pro forma disclosures currently required
      by FAS 123 (see “Employee stock-based compensation”).





**Note
      2 - Changes in business**





On
      January 30, 2004, we acquired the outstanding capital stock of CuraScript,
      for
      approximately $333.4 million, which includes a purchase price adjustment
      for working capital and transaction costs.  CuraScript is one of the
      nation’s largest specialty pharmacy services companies and has enhanced our
      ability to provide comprehensive pharmaceutical management services to our
      clients and their members.  CuraScript operates seven specialty pharmacies
      throughout the United States and serves over 175 managed care organizations,
      30
      Medicaid programs and the Medicare program.  The transaction was accounted
      for under the provisions of FAS 141, “Business Combinations.”  The purchase
      price has been allocated based upon the estimated fair value of net assets
      acquired at the date of the acquisition.  A portion of the excess of
      purchase price over tangible net assets acquired has been allocated to
      intangible assets, consisting of customer contracts in the amount of $28.7
      million and non-competition agreements in the amount of $2.7 million, which
      are
      being amortized using the straight-line method over estimated useful lives
      of
      ten years and three years, respectively, and trade names in the amount of $1.3
      million, which are not being amortized.  These assets are included in
      other
      intangible assets.  In addition, the excess of purchase price over tangible
      net assets and identified intangible assets acquired has been allocated to
      goodwill in the amount of $284.9 million, which is not being
      amortized.





**Note
      3 - Goodwill and other intangibles**





The
      following is a summary of our goodwill and other intangible assets (amounts
      in
      thousands).





**September
                30, 2005**
            
            **December
                31, 2004****Gross**
              **Carrying
                Amount**
            
            **Accumulated**
              **Amortization**
            
            **Gross**
              **Carrying
                Amount**
            
            **Accumulated**
              **Amortization**GoodwillPBM(1)
            $
            1,793,275
            
            $
            107,079
            
            $
            1,793,830
            
            $
            107,031Non-PBM
            
            22,136
            
            
            -
            
            
            22,136
            
            
            -$
            1,815,411
            
            $
            107,079
            
            $
            1,815,966
            
            $
            107,031Other
                intangible assetsPBM(1)Customer
                contracts(1)
            $
            294,224
            
            $
            96,401
            
            $
            294,063
            
            $
            85,067Other(1)
            
            72,904
            
            
            51,701
            
            
            72,346
            
            
            40,408367,128
            
            
            148,102
            
            
            366,409
            
            
            125,475Non-PBMCustomer
                contracts
            
            4,000
            
            
            1,792
            
            
            4,000
            
            
            1,416Other
            
            1,880
            
            
            161
            
            
            1,880
            
            
            1285,880
            
            
            1,953
            
            
            5,880
            
            
            1,544Total
                other intangible assets
            $
            373,008
            
            $
            150,055
            
            $
            372,289
            
            $
            127,019








(1) In
      the
      first quarter of 2005 we finalized the allocation of the CuraScript purchase
      price to tangible and intangible net assets resulting in a $1.1 million decrease
      in goodwill (See Note 2). Changes in goodwill and accumulated amortization
      from
      December 31, 2004 to September 30, 2005 are also a result of changes in foreign
      currency exchange rates.








The
      aggregate amount of amortization expense of other intangible assets was $7.4
      million and $6.9 million for the three months ended September 30, 2005 and
      2004,
      respectively, and $22.3 million and $27.0 million for the nine months ended
      September 30, 2005 and 2004, respectively.  The future aggregate amount
      of
      amortization expense of other intangible assets is approximately $7.6 million
      for fourth quarter of 2005, $24.2 million for 2006, $20.9 million for 2007,
      $17.5 million for 2008, and $15.9 million for 2009, and $15.0
      million
      for 2010.  These amounts exclude the future amortization of
      intangible assets which will be recorded in connection with the October
      14, 2005 acquisition of Priority Healthcare Corporation ("Priority")
      described in Note 10.  The weighted average amortization period of
      intangible assets subject to amortization is 17 years in total, and by major
      intangible class is 20 years for customer contracts and six years for other
      intangible assets.





**Note
      4 - Income Taxes**





Our
      effective tax rate decreased to 36.0% and 34.2% for the three and nine months
      ended September 30, 2005, as compared to 38.2% and 38.3%, respectively, for
      the
      same periods of 2004.  The decrease in effective tax rate for the three
      months ended September 30, 2005 reflects a non-recurring net tax benefit of
      $1.5
      million resulting primarily from the recognition of expected tax
      benefits associated with certain subsidiary losses generated
      in prior
      years.  The decrease in the effective tax rate for the nine months ended
      September 30, 2005 reflects the following non-recurring items:


·
            In
                the second quarter of 2005 we recorded a $10.2 million net tax benefit
                relating to a change in the apportionment of our income for state
                income
                tax purposes


·
            As
                a result of the recognition of expected state tax benefits associated
                with
                prior-year subsidiary losses, we recorded net tax benefits of $2.3
                million
                and approximately $1.5 million (as mentioned above) in the first
                and third
                quarters of 2005.





Excluding
      the $14.0 million non-recurring net tax benefits, the effective tax rate for
      the
      nine months ended September 30, 2005 would have been 37.4%.




**Note
      5 - Common Stock**





On
      May
      24, 2005, we announced a two-for-one stock split for stockholders of record
      on
      June 10, 2005, effective June 24, 2005.  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 period have been adjusted for the stock split.





**Note
      6 - Earnings per share (reflecting the two-for-one stock split effective June
      24, 2005)**





Basic
      earnings per share 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 in
      thousands):




**Three
                        Months Ended**
                      **September
                        30,**
                    
                    **Nine
                        Months Ended**
                      **September
                        30,**
 **2005**
                    **2004**
                    **2005**
                    **2004**Weighted
                        average number of common sharesoutstanding
                        during the period - Basic EPS
                    146,312
                    152,252
                    147,285
                    153,804Outstanding
                        stock options
                    2,285
                    1,724
                    2,122
                    1,928Executive
                        deferred compensation plan
                    41
                    90
                    39
                    92Restricted
                        stock awards
                    220
                    288
                    205
                    318Weighted
                        average number of common sharesoutstanding
                        during the period - Diluted EPS
                    148,858
                    154,354
                    149,651
                    156,142





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





**Note
      7 - Stock-based compensation plans**





We
      apply
      APB 25 and related interpretations in accounting for our stock-based
      compensation plans.  Accordingly, compensation cost has been recorded
      based
      upon the intrinsic value method of accounting for restricted stock and no
      compensation cost has been recognized for stock options granted as the exercise
      price of the options was not less than the fair market value of the shares
      at
      the time of grant.  If compensation cost for stock option grants had
      been
      determined based on the fair value at the grant dates consistent with the method
      prescribed by FAS 123, our net income and earnings per share for the three
      months ended September 30, 2005 and 2004 would have been $99.4 million, or
      $0.66
      per diluted share and $60.9 million, or $0.39 per diluted share, respectively,
      and our net income and earnings per share for the nine months ended September
      30, 2005 and 2004 would have been $280.8 million or $1.87 per diluted share
      and
      $194.9 million or $1.25 per diluted share, respectively (see also Note 1).





The
      fair
      value of options granted (which is amortized over the option-vesting period
      in
      determining the pro forma impact) is estimated on the date of grant using the
      Black-Scholes multiple option-pricing model with the following weighted average
      assumptions:








**Three
                Months Ended September 30,**
            **Nine
                Months Ended September 30,****2005**
            **2004**
            **2005**
            **2004**Expected
                life of option
            2.5-4.5
                years
            3-7
                years
            2.5-5
                years
            3-7
                yearsRisk-free
                interest rate
            3.93%-4.09%
            3.27%-3.93%
            3.48%-4.09%
            1.97%-4.18%Expected
                volatility of stock
            36%
            44%
            36%-40%
            44%-47%Expected
                dividend yield
            None
            None
            None
            None





A
      summary
      of the status of our fixed stock option plans as of September 30, 2005 and
      2003,
      and changes during the periods ending on those dates are presented
      below.






**Nine
                  Months Ended**
              
              **Nine
                  Months Ended****September
                  30, 2005**
              
              **September
                  30, 2004***(share
                  data in thousands)*
              Shares
              Weighted-Average
                  Exercise Price
              
              Shares
              Weighted-Average
                  Exercise PriceOutstanding
                  at beginning of year
              
              7,170
              
              $
              21.86
              
              
              8,032
              
              $
              17.98Granted
              
              1,675
              
              $
              41.48
              
              
              1,440
              
              $
              36.54Exercised
              
              (1,943
              )
              $
              17.00
              
              
              (1,394
              )
              $
              15.86Forfeited/Cancelled
              
              (290
              )
              $
              28.44
              
              
              (428
              )
              $
              25.14Outstanding
                  at end of period
              
              6,612
              
              $
              27.97
              
              
              7,650
              
              $
              21.46Options
                  exercisable at period end
              
              3,638
              
              
              
              
              
              4,520Weighted-average
                  fair value of
                options
                  granted during the year
              $
              14.70
              
              
              
              
              $
              16.47





The
      following table summarizes information about fixed stock options outstanding
      at
      September 30, 2005:




Options
                  Outstanding
              Options
                  ExercisableRange
                  of
                Exercise
                  Prices
                *(share
                  data in thousands)*
              Number
                Outstanding
                  at
                9/30/05
              Weighted-Average
                  Remaining Contractual Life
              Weighted-Average
                  Exercise Price
              Number
                  Exercisable at 9/30/05
              Weighted-Average
                  Exercise Price


$
                3.72 - 16.42
                
                1,403
                
                
                3.5
                
                $
                12.64
                
                
                1,402
                
                $
                12.6416.85
                  - 23.98
                
                1,844
                
                
                5.0
                
                
                21.23
                
                
                1,557
                
                
                20.7324.07
                  - 37.58
                
                1,560
                
                
                5.7
                
                
                34.26
                
                
                645
                
                
                33.1337.62
                  - 47.14
                
                1,588
                
                
                6.4
                
                
                40.38
                
                
                34
                
                
                39.1947.37
                  - 59.11
                
                217
                
                
                6.7
                
                
                48.31
                
                
                -
                
                
                -6,612
                
                
                5.2
                
                $
                27.97
                
                
                3,638
                
                $
                19.98
  **Note
        8 - 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 (see Note 1, “Self-insurance reserves”).  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 that 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
      9 - Segment reporting**




We
      report
      segments on the basis of services offered and have determined that we have
      two
      reportable segments:  PBM services and non-PBM services.  Our
      PBM
      operating results include those of CuraScript from January 30, 2004, the date
      of
      acquisition.  Our domestic and Canadian PBM operating segments have
      similar
      characteristics and as such have been aggregated into a single PBM reporting
      segment.  Our Non-PBM operating segment includes our Specialty Distribution
      Services and Phoenix Marketing Group service lines.





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 to income before income taxes, for the three and nine months
      ended September 30, 2005 and 2004:





***(in
                thousands)***
            **PBM**
            
            **Non-PBM**
            
            **Total****Three
                months ended September 30, 2005**Product
                revenuesNetwork
                revenues
            $
            2,206,553
            
            $
            -
            
            $
            2,206,553Home
                delivery revenues
            
            1,520,231
            
            
            -
            
            
            1,520,231Other
                revenues
            
            -
            
            
            46,005
            
            
            46,005Service
                revenues
            
            38,516
            
            
            36,337
            
            
            74,853Total
                revenues
            
            3,765,300
            
            
            82,342
            
            
            3,847,642Depreciation
                and amortization expense
            
            18,712
            
            
            1,610
            
            
            20,322Operating
                income
            
            148,557
            
            
            12,576
            
            
            161,133Undistributed
                loss from joint venture
            
            
            
            
            
            
            
            (633
            )Interest
                income
            
            
            
            
            
            
            
            3,506Interest
                expense
            
            
            
            
            
            
            
            (5,102
            )Income
                before income taxes
            
            
            
            
            
            
            
            158,904Capital
                expenditures
            
            12,700
            
            
            3,579
            
            
            16,279**Three
                months ended September 30, 2004**Product
                revenuesNetwork
                revenues
            $
            2,283,010
            
            $
            -
            
            $
            2,283,010Home
                delivery revenues
            
            1,395,336
            
            
            -
            
            
            1,395,336Other
                revenues
            
            -
            
            
            32,199
            
            
            32,199Service
                revenues
            
            28,661
            
            
            28,484
            
            
            57,145Total
                revenues
            
            3,707,007
            
            
            60,683
            
            
            3,767,690Depreciation
                and amortization expense
            
            16,411
            
            
            1,241
            
            
            17,652Operating
                income
            
            95,071
            
            
            9,533
            
            
            104,604Undistributed
                loss from joint venture
            
            
            
            
            
            
            
            (954
            )Interest
                income
            
            
            
            
            
            
            
            867Interest
                expense
            
            
            
            
            
            
            
            (4,248
            )Income
                before income taxes
            
            
            
            
            
            
            
            100,269Capital
                expenditures
            
            14,328
            
            
            1,704
            
            
            16,032**Nine
                Months Ended September 30, 2005**Product
                revenuesNetwork
                revenues
            $
            6,830,902
            
            $
            -
            
            $
            6,830,902Home
                delivery revenues
            
            4,473,390
            
            
            -
            
            
            4,473,390Other
                revenues
            
            -
            
            
            123,168
            
            
            123,168Service
                revenues
            
            110,695
            
            
            92,863
            
            
            203,558Total
                revenues
            
            11,414,987
            
            
            216,031
            
            
            11,631,018Depreciation
                and amortization expense
            
            55,210
            
            
            4,415
            
            
            59,625Operating
                income
            
            419,176
            
            
            28,684
            
            
            447,860Undistributed
                loss from joint venture
            
            
            
            
            
            
            
            (1,928
            )Interest
                income
            
            
            
            
            
            
            
            7,558Interest
                expense
            
            
            
            
            
            
            
            (14,532
            )Income
                before income taxes
            
            
            
            
            
            
            
            438,958Capital
                expenditures
            
            27,935
            
            
            6,276
            
            
            34,211**Nine
                Months Ended September 30, 2004**Product
                revenuesNetwork
                revenues
            $
            6,985,738
            
            $
            -
            
            $
            6,985,738Home
                delivery revenues
            
            3,945,653
            
            
            -
            
            
            3,945,653Other
                revenues
            
            -
            
            
            94,374
            
            
            94,374Service
                revenues
            
            69,648
            
            
            79,597
            
            
            149,245Total
                revenues
            
            11,001,039
            
            
            173,971
            
            
            11,175,010Depreciation
                and amortization expense
            
            47,195
            
            
            3,282
            
            
            50,477Operating
                income
            
            331,171
            
            
            26,775
            
            
            357,946Undistributed
                loss from joint venture
            
            
            
            
            
            
            
            (3,754
            )Interest
                income
            
            
            
            
            
            
            
            2,492Interest
                expense
            
            
            
            
            
            
            
            (37,118
            )Income
                before income taxes
            
            
            
            
            
            
            
            319,566Capital
                expenditures
            
            26,906
            
            
            6,481
            
            
            33,387**As
                of September 30, 2005**Total
                assets
            $
            3,574,439
            
            $
            168,752
            
            $
            3,743,191Investment
                in equity method investees
            
            710
            
            
            -
            
            
            710**As
                of December 31, 2004**Total
                assets
            $
            3,460,426
            
            $
            139,660
            
            $
            3,600,086Investment
                in equity method investees
            
            808
            
            
            -
            
            
            808





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.  Non-PBM
      product revenues consist of revenues from certain 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.  Non-PBM service revenue includes revenues from certain specialty
      distribution services, and sample distribution and accountability
      services.





Revenues
      earned by our Canadian PBM totaled $7.7 million and $6.2 million for the three
      months ended September 30, 2005 and 2004, respectively, and $22.8 million and
      $19.2 million for the nine months ended September 30, 2005 and 2004,
      respectively.  All other revenues are earned in the United States.
      Long-lived assets of our Canadian PBM (consisting primarily of fixed assets
      and
      goodwill) totaled $37.5 million and $36.1 million as of September 30,
      2005
      and December 31, 2004, respectively.  All other long-lived assets are
      domiciled in the United States.





**Note
      10 - Subsequent Events**





On
      October 14, 2005, we purchased the capital stock of Priority in a cash
      transaction for $28 per share, or approximately $1.3 billion.  Priority,
      headquartered near Orlando, Fla., is among the nation’s largest specialty
      pharmacy and distribution companies, with approximately $1.7 billion in annual
      revenue during 2004 and approximately $1.1 billion in revenue for the
      six
      months ended July 2, 2005.  This acquisition is expected to enhance
      our
      specialty pharmacy business.  The $1.3 billion purchase price was financed
      with approximately $167.0 million of cash on hand and the remainder by adding
      $1.6 billion in Term A loans through a new credit facility which replaced
      our prior credit facility.  As a result of this refinancing,
      we will
      write off approximately $3.5 million of deferred financing fees relating to
      our
      existing credit facility in the fourth quarter of 2005.




Subsequent
      to the closing of our acquisition of
      Priority, Aetna, Inc. provided notice of its election to exercise its
      purchase option for Priority Healthcare's 60% ownership share of Aetna Specialty
      Pharmacy.  The transaction is subject to the satisfaction of certain
      contractual requirements and to the expiration of the waiting period under
      the
      Hart-Scott-Rodino Antitrust Improvements Act.





In
      October 2005, we refinanced our entire credit facility with a new $2.2 billion
      credit facility which includes $1.6 billion of Term A loans and a $600.0 million
      revolving credit facility.  The proceeds from the $2.2 billion credit
      facility were used to finance the Priority acquisition and to prepay borrowings
      on the Term A Loan outstanding under our existing credit facility. 
      The
      newly established $600.0 million revolving credit facility is also available
      for
      general corporate purposes.





Our
      new
      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.  The margin over the base rate
      will
      range from 0% to 0.125% depending upon our consolidated leverage ratio. 
      Initially, the margin over LIBOR will be 0.75% per annum.  Under our
      new
      credit facility we are required to pay commitment fees on the unused portion
      of
      the $600 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.  Initially, the commitment fee will be 0.15% per annum. 
      At
      October 19, 2005, the weighted average interest rate on the new facility was
      4.9%.  Our new 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.





The
      following represents the schedule of current maturities for our long-term debt,
      reflecting the increase in debt related to the Priority acquisition in October
      2005 and the refinancing of our bank credit facility in October 2005
      (amounts in thousands):





Year
                Ended
                December 31,2005
            $
            40,0002006
            
            160,0002007
            
            180,0002008
            
            260,0002009
            
            420,000Thereafter
            
            540,000$
            1,600,000








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





*Information
      that we have included or incorporated by reference in this Quarterly Report
      on
      Form 10-Q, and information that 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 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 that might cause such a difference to
      occur
      include, but are not limited to:*








•
            *risks
                of integration of Priority Healthcare and CuraScript after
                closing*


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


•
            *risks
                arising from investigations of certain PBM practices and pharmaceutical
                pricing, marketing and distribution practices currently being conducted
                by
                the U.S. Attorney offices in Philadelphia and Boston, and by other
                regulatory agencies including the Department of Labor, and various
                state
                attorneys general*


•
            *risks
                and**uncertainties
                regarding the implementation and the ultimate terms of the Medicare
                Part D
                prescription drug benefit, including financial risks to us if we
                participate in the program on a risk-bearing basis and risks of client
                or
                member losses to other providers under Medicare Part
                D*


•
            *risks
                associated with our acquisitions (including our acquisition of Priority
                Healthcare), which include integration risks and costs, risks of
                client
                retention and repricing of client contracts, and risks associated
                with the
                operations of acquired businesses*


•
            *risks
                associated with our ability to maintain growth rates, or to control
                operating or capital costs*


•
            *continued
                pressure on margins resulting from client demands for lower prices,
                enhanced service offerings and/or higher service levels, and the
                possible
                termination of, or unfavorable modification to, contracts with key
                clients
                or providers*


•
            *competition
                in the PBM industry, 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*


•
            *adverse
                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*


•
            *increased
                compliance risks relating to our contracts with the DoD TRICARE Plan
                and
                various state governments and
                agencies*


•
            *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*


•
            *risks
                associated with the possible loss, or adverse modification of the
                terms
                of, contracts with pharmacies in our retail pharmacy
                network*


•
            *risks
                associated with the use and protection of the intellectual property
                we use
                in our business*


•
            *risks
                associated with our leverage and debt service obligations, including
                the
                effect of certain covenants in our borrowing agreements*


•
            *risks
                associated with our ability to continue to develop new products,
                services
                and delivery channels*


•
            *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*


•
            *risks
                associated with changes in average wholesale prices, which could
                reduce
                prices and margins*


•
            *risks
                associated with our inability to attract and retain qualified
                personnel*


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







*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,
      2004.*








**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 and
      government health programs.  Our integrated PBM services include network
      claims processing, home delivery services, specialty home delivery claim
      fulfillment, benefit design consultation, drug utilization review, formulary
      management, disease management, and drug data analysis services.  We
      also
      provide non-PBM services, through our Pharma Business Solutions unit, which
      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 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 non-PBM.  We derive revenues primarily from the
      sale
      of PBM services in the United States and Canada.  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 pharmacies.  Service revenue
      includes administrative fees associated with the administration of retail
      pharmacy networks contracted by certain clients, market research programs,
      informed decision counseling services, certain specialty distribution services,
      and sample fulfillment and sample accountability services.  Tangible
      product revenue generated through both our PBM and non-PBM segments represented
      98.1% of revenues for the three months ended September 30, 2005 as compared
      to
      98.4% for the same period of 2004 and 98.3% for the nine months ended September
      30, 2005 as compared to 98.7% for the same period of 2004.





On
      January 30, 2004, we acquired the outstanding capital stock of CuraScript
      Pharmacy, Inc. and CuraScript PBM Services, Inc. (collectively, “CuraScript”),
      for approximately $333.4 million which includes a purchase price adjustment
      for
      working capital and transaction costs.  Consequently, our PBM operating
      results include those of CuraScript from January 30, 2004.





**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 that 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.  Certain of the accounting policies
      that most impact our consolidated financial statements and that require our
      management to make difficult, subjective or complex judgments are described
      below.  This should be read in conjunction with Note 1, “Summary of
      Significant Accounting Policies” and with the notes to the consolidated
      financial statements included in our Annual Report on Form 10-K for the year
      ended December 31, 2004, filed with the SEC on March 3, 2005.





***REBATE
      ACCOUNTING***





ACCOUNTING
      POLICY


We
      administer a rebate program based on actual market share performance in which
      rebates and the associated receivable from pharmaceutical manufacturers are
      estimated quarterly based on our estimate of the number of rebatable
      prescriptions and the rebate per prescription.  The portion of rebates
      payable to clients is estimated quarterly based on historical allocation
      percentages and our estimate of rebates receivable from pharmaceutical
      manufacturers.  With respect to our market share rebate program, estimates
      are adjusted to actual when amounts are received from manufacturers and the
      portion payable to clients is paid.  With respect to rebates that are
      not
      based on market share performance, the portion of rebates payable to clients
      is
      estimated based on historical and/or anticipated sharing percentages. 
      These estimates are adjusted to actual when amounts are paid to
      clients.





FACTORS
      AFFECTING ESTIMATE


The
      factors that could impact our estimates of rebates, rebates receivable and
      rebates payable are as follows:


·
            Differences
                between the actual and the estimated number of rebatable
                prescriptions;


·
            Differences
                between estimated aggregate allocation percentages and actual rebate
                allocation percentages calculated on a client-by-client
                basis;


·
            Differences
                between actual and estimated market share of a manufacturer’s brand drug
                for our clients as compared to the national market
                share;


·
            Drug
                patent expirations; and


·
            Changes
                in drug utilization patterns.


Historically,
      adjustments to our original estimates have been relatively
      immaterial.





***UNBILLED
      REVENUE AND RECEIVABLES***





ACCOUNTING
      POLICY


We
      bill
      our clients based upon the billing schedules established in client
      contracts.  At the end of a period, any unbilled revenues related to
      the
      sale of prescription drugs that have been adjudicated with retail pharmacies
      are
      estimated based on the amount we will pay to the pharmacies and historical
      gross
      margin.





FACTORS
      AFFECTING ESTIMATE


Unbilled
      amounts are estimated based on historical margin.  Historically,
      adjustments to our original estimates have been immaterial.  Significant
      differences between actual and estimated margin could impact subsequent
      adjustments.





***ALLOWANCE
      FOR DOUBTFUL ACCOUNTS***





ACCOUNTING
      POLICY


We
      provide an allowance for doubtful accounts equal to estimated uncollectible
      receivables.  This estimate is based on the current status of each
      customer’s receivable balance.





FACTORS
      AFFECTING ESTIMATE


We
      record
      allowances for doubtful accounts based on a variety of factors including the
      length of time the receivables are past due, the financial health of the
      customer and historical experience.  Our estimate could be impacted
      by
      changes in economic and market conditions as well as changes to our customers’
      financial condition.




***SELF-INSURANCE
      RESERVES***





ACCOUNTING
      POLICY


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
      Financial Accounting Standard (“FAS”) No. 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.





FACTORS
      AFFECTING ESTIMATE


Self-insurance
      reserves are based on management’s estimates of the costs to defend legal
      claims.  We do not have significant experience with certain of these
      types
      of cases.  As such, differences between actual costs and management’s
      estimates could be significant.  In addition, actuaries do not have
      a
      significant history with the PBM industry. Changes to assumptions used in the
      development of these reserves can affect net income in a given period. 
      In
      addition, changes in the legal environment and number and nature of claims
      could
      impact our estimate.








***OTHER
      ACCOUNTING POLICIES***





We
      consider the following information about revenue recognition policies important
      for an understanding of our results of operations:





·
            Revenues
                from dispensing prescriptions from our home delivery pharmacies are
                recorded when prescriptions are shipped.  These revenues include
                the
                co-payment received from members of the health plans we
                serve.


·
            Revenues
                from the sale of prescription drugs by retail pharmacies are recognized
                when the claim is processed.  We do not include member co-payments
                to
                retail pharmacies in revenue or cost of
                revenue.


·
            When
                we independently have a contractual obligation to pay our network
                pharmacy
                providers for benefits provided to our clients’ member, we act as a
                principal in the arrangement and we include the total payments we
                have
                contracted to receive from these clients as revenue and the total
                payments
                we make to the network pharmacy providers as cost of
                revenue.


·
            When
                we merely administer a client’s network pharmacy contracts to which we are
                not a party and under which we do not assume credit risk, we earn
                an
                administrative fee for collecting payments from the client and remitting
                the corresponding amount to the pharmacies in the client’s network. 
                In these transactions, drug ingredient cost is not included in our
                revenues nor in our cost of
                revenues.


·
            We
                administer two rebate programs through which we receive rebates and
                administrative fees from pharmaceutical manufacturers.


·
            Gross
                rebates and administrative fees earned for the administration of
                our
                rebate programs, performed in conjunction with claim processing services
                provided to clients, are recorded as a reduction of cost of revenue
                and
                the portion of the rebate payable to customers is treated as a reduction
                of revenue.


·
            When
                we earn rebates and administrative fees in conjunction with formulary
                management services, but do not process the underlying claims, we
                record
                rebates received from manufacturers, net of the portion payable to
                customers, in revenue.


·
            We
                distribute pharmaceuticals in connection with our management of patient
                assistance programs and earn a fee from the manufacturer for
                administrative and pharmacy services for the delivery of certain
                drugs
                free of charge to doctors for their indigent
                patients.


·
            We
                earn a fee for the distribution of consigned pharmaceuticals requiring
                special handling or packaging where we have been selected by the
                pharmaceutical manufacturer as part of a limited distribution
                network.


·
            Non-PBM
                product revenues include revenues earned through administering sample
                card
                programs for certain manufacturers.  We include ingredient
                cost of
                those drug samples dispensed from retail pharmacies in our Non-PBM
                revenues and the associated costs for these sample card programs
                in cost
                of revenues.


·
            Non-PBM
                service revenues include administrative fees for the verification
                of
                practitioner licensure and the distribution of consigned drug samples
                to
                doctors based on orders received from pharmaceutical sales
                representatives.














**RESULTS
      OF OPERATIONS**





*PBM
      OPERATING INCOME*





**Three
                Months Ended September 30,**
            
            **Nine
                Months Ended September 30,*****(in
                thousands)***
            **2005**
            
            ***Increase/***
              ***(Decrease)***
            **2004**
            
            **2005**
            
            ***Increase/***
              ***(Decrease)***
            **2004**Product
                revenuesNetwork
                revenues
            $
            2,206,553
            
            
            *(3.3*
            *)%*
            $
            2,283,010
            
            $
            6,830,902
            
            
            *(2.2*
            *)%*
            $
            6,985,738Home
                delivery revenues
            
            1,520,231
            
            
            *9.0*
            *%*
            
            1,395,336
            
            
            4,473,390
            
            
            *13.4*
            *%*
            
            3,945,653Service
                revenues
            
            38,516
            
            
            *34.4*
            *%*
            
            28,661
            
            
            110,695
            
            
            *58.9*
            *%*
            
            69,648Total
                PBM revenues
            
            3,765,300
            
            
            *1.6*
            *%*
            
            3,707,007
            
            
            11,414,987
            
            
            *3.8*
            *%*
            
            11,001,039Cost
                of PBM revenues
            
            3,489,104
            
            
            *0.1*
            *%*
            
            3,484,928
            
            
            10,622,053
            
            
            *2.5*
            *%*
            
            10,357,941PBM
                Gross Profit
            
            276,196
            
            
            *24.4*
            *%*
            
            222,079
            
            
            792,934
            
            
            *23.3*
            *%*
            
            643,098PBM
                SG&A expenses
            
            127,639
            
            
            *0.5*
            *%*
            
            127,008
            
            
            373,758
            
            
            *19.8*
            *%*
            
            311,927PBM
                operating income
            $
            148,557
            
            
            *56.3*
            *%*
            $
            95,071
            
            $
            419,176
            
            
            *26.6*
            *%*
            $
            331,171





Network
      claims increased by 14.9 million and 46.3 million claims, respectively, in
      the
      three and nine months ended September 30, 2005 over the three and nine months
      ended September 30, 2004.  The increase in network claims for the three
      and
      nine months ended September 30, 2005 as compared to 2004 is primarily due to
      increased volume resulting from the implementation of our contract with the
      DoD
      TRICARE Retail Pharmacy (“TRICARE”) program in June 2004.  Note that
      revenues for the TRICARE program are included in service revenue (see discussion
      below).





The
      $76.5
      million, or 3.3%, decrease in network pharmacy revenues in the three months
      ended September 30, 2005 as compared to the same period of 2004 is
      attributable to the following factors:


·
            Network
                pharmacy revenues decreased $96.7 million in the three months ended
                September 30, 2005, as compared to the same period of 2004 as a result
                of
                a higher mix of generic claims and a 2.7% increase in the average
                co-payment per retail pharmacy claim.  Generic claims made
                up 55.6%
                of total network claims in the three months ended September 30, 2005
                as
                compared to 52.6% of total network claims for the same period of
                2004.  As mentioned in our Critical Accounting Policies above,
                we do
                not include member co-payments to retail pharmacies in revenue or
                cost of
                revenue.


·
            These
                factors were partially offset by an increase in pharmacy claims,
                resulting
                in a $20.2 million increase in overall network pharmacy
                revenues.





The
      $154.8 million, or 2.2%, decrease in network pharmacy revenues in the nine
      months ended September 30, 2005 as compared to the same period of 2004
      is
      attributable to the following factors:


·
            Network
                pharmacy revenues decreased $269.2 million in the nine months ended
                September 30, 2005, as compared to the same period of 2004 as a result
                of
                a higher mix of generic claims and a 2.1% increase in the average
                co-payment per retail pharmacy claim.  Generic claims made
                up 55.0%
                of total network claims in the nine months ended September 30, 2005
                as
                compared to 51.2% of total network claims for the same period of
                2004.  As mentioned in our Critical Accounting Policies above,
                we do
                not include member co-payments to retail pharmacies in revenue or
                cost of
                revenue.


·
            These
                factors were partially offset by an increase in pharmacy claims,
                resulting
                in a $114.4 million increase in overall network pharmacy
                revenues.





The
      $124.9 million, or 9.0%, increase in home delivery revenues in the three months
      ended September 30, 2005 as compared to the same period of 2004 is attributable
      to the following factors:


·
            Growth
                of our specialty pharmacy business contributed to an $87.3 million
                increase in home delivery revenues for the three months ended September
                30, 2005 over the same period of 2004.


·
            Excluding
                our specialty pharmacy business, we processed an additional 0.3 million
                claims in the three months ended September 30, 2005 as compared to
                the
                same period of 2004.  The increase in home delivery claim
                volume is
                primarily due to greater usage of our home delivery pharmacies by
                members
                of existing clients.  This increase in volume resulted in
                a $38.3
                million increase in home delivery revenues.


·
            Excluding
                our specialty pharmacy business, a decrease in the average home delivery
                revenue per claim reduced revenues by $0.7 million in the third quarter
                of
                2005 over the same period in 2004.  The decrease in average
                home
                delivery revenue per claim is primarily due to a higher mix of generic
                claims.  Our generic fill rate increased to 43.4% in the third
                quarter of 2005 as compared to 40.8% for the third quarter of 2004. 
                Our home delivery generic fill rate is lower than the retail generic
                fill
                rate as fewer generic substitutes are available among maintenance
                medications (e.g. therapies for diabetes, high cholesterol, etc.)
                commonly
                dispensed from home delivery pharmacies compared to acute medications
                that
                are dispensed primarily by pharmacies in our retail networks.





The
      $527.7 million, or 13.4%, increase in home delivery revenues in the first nine
      months of 2005 as compared to the same period of 2004, is attributable to the
      following factors:


·
            Growth
                of our specialty pharmacy business contributed to a $339.1 million
                increase in home delivery revenue for the nine months ended September
                30,
                2005 over the same period of 2004.  This increase is partially
                due to
                an additional month of claims and revenues in 2005, as well as the
                growth
                of CuraScript as it increases its penetration into the existing ESI
                book
                of business.


·
            Excluding
                our specialty pharmacy business, we processed an additional 1.5 million
                claims in the nine months ended September 30, 2005 as compared to
                the same
                period in 2004, resulting in a $192.7 million increase in home delivery
                revenues.  The increase in home delivery volume is primarily
                due to
                the increased usage of our home delivery pharmacies by members of
                existing
                clients.


·
            Excluding
                our specialty pharmacy business, a decrease in the average home delivery
                revenue per claim reduced revenues by $4.1 million for the nine months
                ended September 30, 2005 over the same period in 2004.  The
                decrease
                in average home delivery revenue per claim is primarily due to a
                higher
                mix of generic claims.  Our generic fill rate increased to
                43.4% for
                the nine months ended September 30, 2005 from 39.6% for the same
                period of
                2004.  Our home delivery generic fill rate is lower than the
                retail
                generic fill rate as fewer generic substitutes are available among
                maintenance medications (e.g. therapies for diabetes, high cholesterol,
                etc.) commonly dispensed from home delivery pharmacies compared to
                acute
                medications that are dispensed primarily by pharmacies in our retail
                networks.





PBM
      service revenues include amounts received from clients for therapy management
      services such as prior authorization and step therapy protocols and
      administrative fees earned for processing claims for clients utilizing their
      own
      retail pharmacy networks.  The $9.9 million, or 34.4%, increase in PBM
      service revenues for the three months ended September 30, 2005, as compared
      to
      the same period in 2004, is primarily due to increased revenues resulting from
      the implementation of the TRICARE contract in June 2004.





The
      $41.0
      million, or 58.9%, increase in PBM service revenues in the nine months ended
      September 30, 2005 as compared to the nine months ended September 30, 2004
      is
      primarily due to the implementation of the TRICARE contract in June 2004. 
      This increase was partially offset by a payment of $5.5 million received in
      the
      first quarter of 2004 in connection with the early termination by a client
      in
      2001.





PBM
      cost
      of revenues increased $4.1 million, or 0.1%, and $264.1 million, or 2.5%, in
      the
      three and nine months ended September 30, 2005 as compared to the same periods
      in 2004 primarily as a result of the following:


·
            The
                addition of our specialty pharmacy business in January 2004 resulted
                in
                increases of $82.3 million and $321.8 million for the three
                and nine
                months ended September 30, 2005, respectively, as compared to the
                same
                periods of 2004, primarily due to the growth of CuraScript. 
                In
                addition, an additional month of Curascript claims and revenues was
                included in the nine months ended September 30, 2005, as compared
                to the
                same period of 2004.


·
            Excluding
                our specialty pharmacy business, increases in network and home delivery
                claims volume resulted in higher PBM cost of revenues of $36.6 million
                and
                $198.3 million for the three and nine months ended September 30,
                2005,
                respectively, as compared to the same periods of
                2004.


·
            These
                increases were partially offset by the net decreases in the average
                cost
                per claim and a higher mix of generic claims, which decreased cost
                of
                revenues by approximately $114.7 million and $256.0 million in the
                three
                and nine months ended September 30, 2005, respectively, as compared
                to the
                same periods of 2004.  The decrease in average cost per claim
                is due
                principally to reductions in our acquisition cost for retail pharmacy
                services and home delivery inventory.  These cost reductions
                are
                expected to benefit future periods as
                well.





Our
      PBM
      gross profit increased $54.1 million, or 24.4%, and $149.8 million, or 23.3%,
      respectively, for the three and nine months ended September 30, 2005. 
      Increases in gross profit result from our ability to successfully reduce our
      acquisition costs of drugs, from the streamlining of operations, and from higher
      rebate revenues, which were partially offset by increases in the portion of
      rebates that we share with our clients.  In addition, the increase in
      gross
      profit for the nine months ended September 30, 2005 was partially offset
      by a $5.5 million termination payment received in the first quarter
      of
      2004.





Selling,
      general and administrative expenses (“SG&A”) increased $0.6 million, or
      0.5%, and $61.8 million, or 19.8%, respectively, in the three and nine
      months ended September 30, 2005 over the same periods of 2004.  This
      is
      primarily attributable to the following factors:





·
            Increased
                spending of $11.1 million and $44.3 million in the three and nine
                months
                ended September 30, 2005 as compared to the same periods of 2004,
                on costs
                to improve the operation and the administrative functions supporting
                the
                management of the pharmacy benefit, primarily through increased management
                incentive compensation.


·
            For
                the three and nine months ended September 30, 2005, professional
                fees
                increased $10.1 million and $25.5 million, respectively, as compared
                to
                the same periods of 2004 primarily due to increased legal fees.


·
            Increased
                bad debt expense of $1.5 million and $6.7 million in the three and
                nine
                months ended September 30, 2005 as compared to the same periods of
                2004,
                related to an increase in the allowance for receivables from our
                clients’
                members.


·
            Partially
                offsetting the increases noted above, prior year SG&A included a $25.0
                million charge recorded in the third quarter to increase legal reserves.





In
      addition to the increases in SG&A above, we also incurred expenses related
      our Medicare Part D Program in the third quarter of 2005, and we expect spending
      to continue to increase in the fourth quarter of 2005.





PBM
      operating income increased $53.5 million, or 56.3%, and $88.0 million, or 26.6%,
      respectively, in the three and nine months ended September 30, 2005 over the
      same period of 2004.








*NON-PBM
      OPERATING INCOME*





**Three
                Months Ended September 30,**
            
            **Nine
                Months Ended September 30,*****(in
                thousands)***
            **2005**
            
            ***Increase/***
              ***(Decrease)***
            **2004**
            
            **2005**
            
            ***Increase/***
              ***(Decrease)***
            **2004**Product
                revenues
            $
            46,005
            
            
            *42.9*
            *%*
            $
            32,199
            
            $
            123,168
            
            
            *30.5*
            *%*
            $
            94,374Service
                revenues
            
            36,337
            
            
            *27.6*
            *%*
            
            28,484
            
            
            92,863
            
            
            *16.7*
            *%*
            
            79,597Total
                Non-PBM revenues
            
            82,342
            
            
            *35.7*
            *%*
            
            60,683
            
            
            216,031
            
            
            *24.2*
            *%*
            
            173,971Non-PBM
                cost of revenues
            
            65,338
            
            
            *38.0*
            *%*
            
            47,352
            
            
            174,054
            
            
            *27.7*
            *%*
            
            136,350Non-PBM
                Gross Profit
            
            17,004
            
            
            *27.6*
            *%*
            
            13,331
            
            
            41,977
            
            
            *11.6*
            *%*
            
            37,621Non-PBM
                SG&A expense
            
            4,428
            
            
            *16.6*
            *%*
            
            3,798
            
            
            13,293
            
            
            *22.6*
            *%*
            
            10,846Non-PBM
                operating income
            $
            12,576
            
            
            *31.9*
            *%*
            $
            9,533
            
            $
            28,684
            
            
            *7.1*
            *%*
            $
            26,775








Non-PBM
      product revenues increased $13.8 million, or 42.9%, and $28.8 million, or 30.5%,
      respectively, for the three and nine months ended September 30, 2005 over the
      same periods of 2004.  This is mainly due to a higher mix of specialty
      distribution volumes in which we include ingredient cost of pharmaceuticals
      dispensed in our revenues, including two new specialty distribution contracts
      in
      2005.  N on-PBM
      service revenues increased $ 7.9 million,
      or 27.6 %,
      and
      $ 13.3 million,
      or 16.7 %,
      respectively, for the three and nine
      months ended September
      30, 2005.  The increase is due in large part to an increase in existing
      client volumes as well as higher volumes under our RxOutreach
      program.





Non-PBM
      cost of revenues increased $18.0 million, or 38.0%, and $37.7 million, or 27.7%,
      respectively, in the three and nine months ended September 30, 2005 as compared
      to the same periods of 2004, mainly due to the additional volume in sample
      card
      programs where we include the ingredient costs of pharmaceuticals dispensed
      from
      retail pharmacies in our Non-PBM revenues and cost of revenues (as discussed
      above).  Gross profit increased $3.7 million, or 27.6%, and $4.4 million,
      or 11.6%, for the three and nine months ended September 30, 2005 as compared
      to
      the same periods of 2004.





Non-PBM
      SG&A increased $0.6 million, or 16.6%, and $2.4 million, or 22.6%,
      respectively, for the three and nine months ended September 30, 2005 as compared
      to the same time periods of 2004.  This is primarily due to an increase
      in
      marketing expenditures related to the RxOutreach program and increased sales
      expenses.





Non-PBM
      operating income increased $3.0 million, or 31.9%, and $1.9 million, or 7.1%,
      respectively, during the three and nine months ended September 30, 2005 as
      compared to the same periods of 2004.





*OTHER
      (EXPENSE) INCOME*





In
      February 2001, we entered into an agreement with AdvancePCS (now owned by
      Caremark RX, Inc.) and Medco Health Solutions, Inc. (formerly, “Merck-Medco,
      L.L.C.”) to form RxHub, an electronic exchange enabling physicians who use
      electronic prescribing technology to link to pharmacies, PBMs and health
      plans.  We own one-third of the equity of RxHub (as do each of the other
      two founders) and have committed to invest up to $20 million over five years,
      with approximately $19.2 million invested through September 30, 2005. 
      We
      have recorded our investment in RxHub under the equity method of accounting,
      which requires our percentage interest in RxHub’s results to be recorded in our
      Unaudited Consolidated Statement of Operations.  Our percentage of RxHub’s
      loss for the three and nine months ended September 30, 2005 was $0.6 million
      ($0.4 million, net of tax) and $1.9 million ($1.3 million, net of tax),
      respectively, compared to $1.0 million ($0.6 million, net of tax) and $3.8
      million ($2.3 million, net of tax) for the same periods of 2004.





For
      the
      three and nine months ended September 30, 2005, net interest expense decreased
      $1.8 million, or 52.8%, and $27.7 million, or 79.9%, respectively, as compared
      to the same periods in 2004, resulting from the refinancing of our entire credit
      facility during the first quarter of 2004 (see “—Bank Credit Facility”).





*PROVISION
      FOR INCOME TAXES*





Our
      effective tax rate decreased to 36.0% and 34.2% for the three and nine months
      ended September 30, 2005, as compared to 38.2% and 38.3%, respectively, for
      the
      same periods of 2004.  The decrease in effective tax rate for the three
      months ended September 30, 2005 reflects a non-recurring net tax benefit of
      $1.5
      million resulting primarily from the recognition of expected tax benefits
      associated with certain subsidiary losses generated in prior
      years.  The decrease in the effective tax rate for the nine months ended
      September 30, 2005 reflects the following non-recurring items:


·
            In
                the second quarter of 2005 we recorded a $10.2 million net tax benefit
                relating to a change in the apportionment of our income for state
                income
                tax purposes


·
            As
                a result of the recognition of expected state tax benefits associated
                with
                prior-year subsidiary losses, we recorded net tax benefits of $2.3
                million
                and approximately $1.5 million (as mentioned above) in the first
                and third
                quarters of 2005.





Excluding
      the $14.0 million non-recurring net tax benefits, the effective tax rate for
      the
      nine months ended September 30, 2005 would have been 37.4%.





*NET
      INCOME AND EARNINGS PER SHARE*





Net
      income for the three months ended September 30, 2005 increased $39.8 million,
      or
      64.2%, over the same period of 2004.  Net income increased $91.7 million,
      or 46.5%, for the nine months ended September 30, 2005 over the same period
      of
      2004.





Basic
      and
      diluted earnings per share increased 70.7% and 70.0%, respectively, for
      the
      three months ended September 30, 2005 over the same period of 2004. 
      Basic and diluted earnings per share increased 53.1% and 53.2%, respectively,
      for the nine months ended September 30, 2005, over the nine months ended
      September 30, 2004.





On
      May
      24, 2005, we announced a two-for-one stock split for stockholders of record
      on
      June 10, 2005, effective June 24, 2005.  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 period have been adjusted for the stock split.





**LIQUIDITY
      AND CAPITAL RESOURCES**





*OPERATING
      CASH FLOW AND CAPITAL EXPENDITURES*





For
      the
      nine months ended September 30, 2005, net cash provided by operations increased
      $227.8 million to $531.1 million from $303.3 million during the nine months
      ended September 30, 2004.  This increase reflects a $128.1 million increase
      from net changes in our working capital components, increased earnings of $91.7
      million, and a $9.1 million increase in depreciation and amortization, partially
      due to the acquisition of CuraScript in January 2004.  The increase
      from
      changes in our working capital components primarily consists of a $64.6 million
      increase due to a lower accounts receivable balance, a $39.9 million increase
      due to improved inventory management, and a $16.6 million increase resulting
      from the timing of payments to vendors.  Partially offsetting these
      increases was a $1.1 million reduction from changes in non-cash adjustments
      to net income.




Our
      capital expenditures for the nine months ended September 30, 2005 decreased
      $0.8
      million, or 2.5%, as compared to the same period of 2004.  We intend
      to
      continue to invest in 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.





We
      are
      developing a new Patient Care Contact Center in Pueblo, Colorado which will
      be
      completed during the fourth quarter of 2005.  To date, we have expensed
      approximately $3.0 million and capitalized approximately $5.0 million for this
      project (net of reimbursements from the city of Pueblo and state of
      Colorado).  Total 2005 expenditures for the project are expected to
      range
      from $11.0 million to $13.0 million, of which approximately $4.0 million to
      $6.0
      million will be expensed and approximately $7.0 million will be
      capitalized.  We expect that a portion of these expenditures will be
      reimbursed by the city of Pueblo and the state of Colorado, and that such
      reimbursements will reduce the amount capitalized for this project.





*CHANGES
      IN BUSINESS*





On
      October 14, 2005, we purchased the capital stock of Priority in a cash
      transaction for $28 per share, or approximately $1.3 billion.  Priority,
      headquartered near Orlando, Fla., is among the nation’s largest specialty
      pharmacy and distribution companies, with approximately $1.7 billion
      in
      annual revenue during 2004 and approximately $1.1 billion in revenue for
      the six months ended July 2, 2005.  This acquisition is expected to
      enhance
      our specialty pharmacy business.  The $1.3 billion purchase price was
      financed with approximately $167.0 million of cash on hand and the remainder
      by
      adding $1.6 billion in Term A loans through a new credit facility
      which replaced our prior credit facility.  As a result
      of this
      refinancing, we will write off approximately $3.5 million of deferred financing
      fees relating to our existing credit facility in the fourth quarter of
      2005.





On
      January 30, 2004, we acquired the outstanding capital stock of CuraScript,
      for
      approximately $333.4 million, which includes a purchase price adjustment
      for working capital and transaction costs.  CuraScript is one of the
      nation’s largest specialty pharmacy services companies and has enhanced our
      ability to provide comprehensive pharmaceutical management services to our
      clients and their members.  CuraScript operates seven specialty pharmacies
      throughout the United States and serves over 175 managed care organizations,
      30
      Medicaid programs and the Medicare program.  The transaction was accounted
      for under the provisions of FAS 141, “Business Combinations.”  The purchase
      price has been allocated based upon the estimated fair value of net assets
      acquired at the date of the acquisition.  A portion of the excess of
      purchase price over tangible net assets acquired has been allocated to
      intangible assets, consisting of customer contracts in the amount of $28.7
      million and non-competition agreements in the amount of $2.7 million, which
      are
      being amortized using the straight-line method over estimated useful lives
      of
      ten years and three years, respectively, and trade names in the amount of $1.3
      million, which are not being amortized.  These assets are included in
      other
      intangible assets.  In addition, the excess of purchase price over tangible
      net assets and identified intangible assets acquired has been allocated to
      goodwill in the amount of $284.9 million, which is not being
      amortized.





Goodwill
      is evaluated for impairment annually or when events or circumstances occur
      indicating that goodwill might be impaired.  In addition, we evaluate
      whether events or circumstances have occurred that indicate the remaining
      estimated useful lives of other intangible assets may warrant revision or that
      the remaining balance of an asset may not be recoverable.  The measurement
      of possible impairment is based on the ability to recover the balance of assets
      from expected future operating cash flows on an undiscounted basis. 
      Impairment losses, if any, would be determined based on the present value of
      the
      cash flows using discount rates that reflect the inherent risk of the underlying
      business.  No such impairment existed at September 30, 2005 or December
      31,
      2004.





We
      regularly review potential acquisitions and affiliation opportunities. 
      We
      believe available cash resources, bank financing or the issuance of additional
      common stock or other securities could be used to finance future acquisitions
      or
      affiliations.  There can be no assurance we will make new acquisitions
      or
      establish new affiliations in 2005 or thereafter.





In
      January 2004, we entered into an agreement to provide PBM services for the
      Medicare discount program of Pharmacy Care Alliance, Inc. (“PCA”), a nonstock,
      not-for-profit entity jointly controlled by the National Association of Chain
      Drugstores (“NACDS”) and us.  Our PBM services include the negotiation of
      discounts from individual retailers and pharmaceutical manufacturers, the
      enrollment of cardholders and the processing of prescription claims.





During
      2004, we entered into a lending agreement with PCA, whereby we committed to
      lend
      up to $17.0 million to PCA in the form of a revolving line of credit
      available through December 31, 2005.  Requests for borrowings on the
      revolving line of credit require the unanimous consent of PCA’s board of
      directors, which consists of representatives from NACDS and from our management
      team, or its designated representatives.  PCA will utilize the
      revolving line of credit to fund its operating expenditures.  NACDS
      has
      agreed to guarantee $2.0 million on the revolving line of credit.  As
      of
      September 30, 2005, we have loaned PCA $14.6 million, and have received
      $2.9 million in interest and principal payments.





In
      regard
      to the revolving line of credit extended to PCA, the collectibility of any
      unsecured borrowings will be a function of PCA’s success in enrolling new
      members for its Medicare discount program.  Enrollment as of September
      30, 2005 is approximately 254,000 members. Because 2004 enrollment and
      utilization was lower than expected, the outstanding balance of our receivable
      from PCA was fully reserved at the end of 2004.





*BANK
      CREDIT FACILITY*





On
      February 13, 2004, we refinanced our entire credit facility, negotiating an
      $800.0 million credit facility with a bank syndicate which includes
      $200.0
      million of Term A loans, $200.0 million of Term B loans and a $400.0
      million revolving credit facility.  At September 30, 2005, our credit
      facility consisted of $170.0 million of Term A loans, $197.0 million of Term
      B
      loans and a $400.0 million revolving credit facility (of which no debt was
      outstanding at September 30, 2005).  During the third quarter
      of 2005,
      we made scheduled payments on our Term A and Term B loans totaling
      $5.0 million and $0.5 million, respectively.





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 on
      the Term A loans and on amounts outstanding under the revolving credit facility
      is dependent on our credit rating and our ratio of debt to earnings before
      interest, taxes, depreciation and amortization (“EBITDA”).  The Term B loan
      interest is based on the LIBOR or alternative base rate options plus a margin
      of
      1.5% or 0.25% per annum, respectively.  Under our credit facility we
      are
      required to pay commitment fees on the unused portion of the $400.0 million
      revolving credit facility ($400.0 million at September
      30, 2005).  The commitment fee will range from 0.2% to 0.5% depending
      on our credit rating and our consolidated leverage ratio.  The commitment
      fee is currently 0.25% per annum.





At
      September 30, 2005, the weighted average interest rate on the facility was
      5.03%.  Our credit facility contains covenants that limit the indebtedness
      we may incur, the common shares we may repurchase and dividends we may
      pay.  The covenants also include a minimum interest coverage ratio and
      a
      maximum leverage ratio.  At September 30, 2005, we were in compliance
      with
      all covenants associated with our credit facility.





In
      October 2005, we refinanced our entire credit facility with a new $2.2 billion
      credit facility which includes $1.6 billion of Term A loans and a $600.0 million
      revolving credit facility.  The proceeds from the $2.2 billion credit
      facility were used to finance the Priority acquisition and to prepay borrowings
      on the Term A Loan outstanding under our existing credit facility. 
      The
      newly established $600.0 million revolving credit facility is also available
      for
      general corporate purposes.





Our
      new
      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.  The margin over the base rate
      will
      range from 0% to 0.125% depending upon our consolidated leverage ratio. 
      Initially, the margin over LIBOR will be 0.75% per annum.  Under our
      new
      credit facility we are required to pay commitment fees on the unused portion
      of
      the $600 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.  Initially,
      the
      commitment fee will be 0.15% per annum.  At October 19, 2005, the weighted
      average interest rate on the new facility was 4.9%.  Our new 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.





The
      following represents the schedule of current maturities for our long-term debt,
      reflecting the increase in debt related to the Priority acquisition in October
      2005 and the refinancing of our bank credit facility in October 2005
      (amounts in thousands):


Year
                  Ended
                  December 31,2005
              $
              40,0002006
              
              160,0002007
              
              180,0002008
              
              260,0002009
              
              420,000Thereafter
              
              540,000$
              1,600,000




*CONTRACTUAL
      OBLIGATIONS*





The
      following table sets forth our schedule of maturities of our long-term debt
      and
      future minimum lease payments due under noncancellable operating leases as
      of
      September 30, 2005 (in thousands):





**Payments
                Due by Period as of September 30,****Contractual
                obligations**
            **Total**
            
            **2005**
            
            **2006
                - 2007**
            
            **2008
                - 2009**
            
            **After
                2009**Long-term
                debt(1)
            $
            367,507
            
            $
            5,500
            
            $
            69,112
            
            $
            245,112
            
            $
            47,783Future
                minimum lease
              payments(2)
            
            106,009
            
            
            6,070
            
            
            44,328
            
            
            22,961
            
            
            32,650Total
                contractual
              obligations
            $
            473,516
            
            $
            11,570
            
            $
            113,440
            
            $
            268,073
            
            $
            80,433





(1)
      As a
      result of our financing activities subsequent to September 30, 2005, including
      the addition of a Term A loan to partially finance the Priority acquisition,
      borrowing on our revolving credit facility and the refinancing of our bank
      credit facility (see “—Bank Credit Facility”), maturities on our long-term debt
      have changed.  As of October 14, 2005, the effective date of
      our bank
      credit facility refinancing, we are required to make long-term debt principal
      payments totaling $40.0 million in 2005, $160.0 million in 2006, $180.0 million
      in 2007, $260.0 million in 2008, $420.0 million in 2009, and $540.0 million
      after 2009.





(2)
      In
      July 2004, we entered into a capital lease with the Camden County Joint
      Development Authority in association with the development of our new Patient
      Care Contact Center in St. Marys, Georgia.  At September 30, 2005, our
      lease obligation is $13.5 million.  In accordance with Financial Accounting
      Standards Board (“FASB”) Interpretation Number 39, “Offsetting of Amounts
      Related to Certain Contracts,” our lease obligation has been offset against
      $13.5 million of industrial revenue bonds issued to us by the Camden County
      Joint Development Authority.





**OTHER
      MATTERS**





In
      June
      2005, the FASB issued Financial Accounting Standard (“FAS”) No. 154, “Accounting
      Changes and Error Corrections”, which superceded Accounting Principles Board No.
      (“APB”) 20, “Accounting Changes”.   APB No. 20 previously required
      that most voluntary changes in accounting principle be recognized by including
      in the current period’s net income the cumulative effect of changing to the new
      accounting principle.  In contrast, FAS 154 requires entities that
      voluntarily make a change in accounting principle to apply that change
      retrospectively to prior periods’ financial statements, unless this would be
      impracticable.  In addition, FAS 154 makes a distinction between
      retrospective application of an accounting principle and the restatement of
      financial statements to reflect the correction of an error. FAS 154 is effective
      for accounting changes and corrections of errors made in fiscal years beginning
      after December 15, 2005.  We do not expect the implementation of FAS
      154 to
      have an impact on our consolidated results of operations.





In
      December 2004, the FASB revised FAS 123, “Share-Based Payment” (“FAS 123R”),
      which replaced FAS 123, “Accounting for Stock-Based Compensation”, and
      superseded APB No. 25, “Accounting for Stock Issued to Employees.”  FAS
      123R will require compensation cost related to share-based payment transactions
      to be recognized in the financial statements.  As permitted by FAS 123,
      we
      currently follow the guidance of APB 25, which allows the use of the intrinsic
      value method of accounting to value share-based payment transactions with
      employees.  FAS 123R requires measurement of the cost of share-based
      payment transactions to employees at the fair value of the award on the grant
      date and recognition of expense over the requisite service or vesting
      period.  FAS 123R allows implementation using a modified version of
      prospective application, under which compensation expense for the unvested
      portion of previously granted awards and all new awards will be recognized
      on or
      after the date of adoption.  FAS 123R also allows companies to implement
      by
      restating previously issued financial statements, basing the amounts on the
      expense previously calculated and reported in their pro forma footnote
      disclosures required under FAS 123.  We will adopt FAS 123R using the
      modified prospective method beginning January 1, 2006.  The impact of
      adopting FAS 123R on our consolidated results of operations is not expected
      to
      differ materially from the pro forma disclosures currently required by FAS
      123
      (see note 7 to our unaudited consolidated financial statements).





We
      make
      available through our website (www.express-scripts.com), access to our annual
      report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
      8-K, all amendments to those reports (when applicable), and other filings with
      the SEC.  Such access is free of charge and is available as soon as
      reasonably practicable after such information is filed with the SEC. 
      In
      addition, the SEC maintains an internet site (www.sec.gov) containing reports,
      proxy and information statements, and other information regarding issuers filing
      electronically with the SEC (which includes us).  Information included
      on
      our website is not part of this quarterly report.





**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,
      and accordingly we have been able to recover price increases from our clients
      under the terms of our agreements.




**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 September 30,
      2005,
      we had $367.5 million of obligations 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 $3.7 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 President and Chief Executive Officer and our
      Senior Vice President and Chief Financial Officer, we have evaluated the
      effectiveness of the design and operation of our disclosure controls and
      procedures as of the end of the period covered by this report.  Based
      upon
      this evaluation, the President and Chief Executive Officer and the Senior 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 third quarter ended September 30, 2005, 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.








PART
      II. OTHER INFORMATION




**Item 1.****Legal
      Proceedings**


We
      and/or the
      Company’s subsidiary, NPA, are defendants in several lawsuits that purport to be
      class actions, which were described in our Annual Report on Form 10-K for the
      year ended December 31, 2004.  Each case seeks damages in an unspecified
      amount, and the allegations are such that the Company cannot at this time
      estimate with any certainty the damages that the plaintiffs seek to
      recover.  Because none of the cases has yet been certified by the court
      as
      a class action, we are unable to evaluate the effect that unfavorable outcomes
      might have on our financial condition or consolidated results of
      operations.  The following developments have occurred since the Annual
      Report:





·
            International
                Association of Firefighters, Local No. 22, et al. v. National Prescription
                Administrators and Express Scripts, Inc.(Cause No. L03216-02, Superior Court of New Jersey, Law Division,
                Camden
                County).  Plaintiff has voluntarily dismissed all remaining
                class
                action claims.  We no longer deem the case to have the potential
                to
                be material to us.





**·**
            City
                of Paterson, et al. v. Benecard Prescription Services, et.
                al.(Cause No. L-005908-02, Superior Court of New Jersey, Law Division,
                Camden
                County).  Following the filing of the dismissal of the claims
                by the
                Township of Hamilton, the settlement between the Township of Hamilton
                and
                co-defendant Benecard was not finalized.  The dismissal was
                withdrawn
                and we have renewed our motion for summary judgment**.**





**·**
            Irwin
                v. AdvancePCS, et al.(Cause No. RG030886393, Superior Court of the State of California
                for
                Alameda County).  Plaintiffs filed the second amended complaint
                and
                we filed a motion to dismiss the complaint.





·
            North
                Jackson Pharmacy, Inc., et al. v. Express Scripts(Civil Action No. CV-03-B-2696-NE, United States District Court for
                the
                Northern District of Alabama).  Plaintiffs have filed a motion
                for
                class certification.  We have filed a response opposing the
                motion.





·
            People
                of the State of New York, et al v. Express Scripts, Inc.(Cause No. 4669-04, Supreme Court of the State of New York, County
                of
                Albany)  The State of New York filed a motion with the appellate
                division for permission to appeal the stay issued by the trial
                court.  This motion was
                denied.





·
            In
                re Express Scripts Securities Litigation(Cause No. 4:04-CV-1009, United States District Court for the Eastern
                District of Missouri )  The shareholder lawsuit,Sylvia
                Childress, et al v. Express Scripts, Inc., et al(Cause No. 04-CV-01191, United States District Court for the Eastern
                District of Missouri)Lidia
                Garcia, et al v. Express Scripts, Inc., et al(Cause No. 04-CV-1009, United States District Court for the Eastern
                District of Missouri);Robert
                Espriel, et al v. Express Scripts, Inc., et al(Cause No. 04-CV-01084, United States District Court for the Eastern
                District of Missouri);Raymond
                Hoffman, et al v. Express Scripts, Inc., et al(Cause No. 04-CV-01054, United States District Court for the Eastern
                District of Missouri);John
                R. Nicholas, et al v. Express Scripts, Inc., et al(Cause No. 04-CV-1295, United States District Court for the Eastern
                District of Missouri);John
                Keith Tully, et al v. Express Scripts, Inc., et al(Cause No. 04-CV-01338, United States District Court for the Eastern
                District of Missouri), were consolidated. Plaintiffs have filed an
                amended
                complaint.





The
      investigation by the U.S.
      Attorney’s Office in Boston, Massachusetts into certain of our business
      practices, including our formulary development process and our business
      relationships with certain group buying entities and pharmaceutical
      manufacturers continues.  From time to time we have received subpoenas
      requesting additional information.  We continue to cooperate with the
      investigation.





The
      investigation by the Kansas City, Missouri office of the DOL continues. 
      The Company has received an additional letter from the DOL requesting additional
      documents relating to various aspects of the Company’s business.  The
      Company continues to cooperate with the investigation.





We
      believe that our services and business practices are in compliance with all
      applicable laws, rules and regulations in all material respects, and we will
      cooperate fully with the government in these investigations.  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 monetary
      fines
      or penalties, or injunctive or administrative remedies, and we can give no
      assurance that such fines and remedies would not have a material adverse effect
      on our financial condition, our consolidated results of operation or our
      consolidated cash flows.








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





(e)
      The
      following is a summary of our stock repurchasing activity during the three
      months ended September 30, 2005 (share data in thousands):




Period
              Shares
                purchased
              Average
                price
                  paid
                per
                  share
              Shares
                  purchased
                as
                  part of a
                publicly
                announced
                program
              Maximum
                  shares
                that
                  may yet be purchased under
                the
                  program7/1/2005
                  - 7/31/2005
              
              -
              
              $
              -
              
              
              -
              
              
              12,1048/1/2005
                  - 8/31/2005
              
              3,954
              
              
              55.63
              
              
              3,954
              
              
              8,1509/1/2005
                  - 9/30/2005
              
              -
              
              
              -
              
              
              -
              
              
              8,150Third
                  quarter 2005 total
              
              3,954
              
              $
              55.63
              
              
              3,954





We
      have a
      stock repurchase program, originally announced on October 25, 1996, under which
      our Board of Directors has approved the repurchase of a total of 38.0 million
      shares.  There is no limit on the duration of the program. 
      Approximately 29.9 million of the 38.0 million total shares have been
      repurchased through September 30, 2005.  Additional share purchases,
      if
      any, will be made in such amounts and at such times as we deem appropriate
      based
      upon prevailing market and business conditions, subject to restrictions on
      the
      amount of stock repurchases contained in our bank credit facility.




























**Item
        6.** **Exhibits**





(a)  See
      Index
      to Exhibits below.








**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:  October
      26, 2005  By:/s/
      George
      Paz


George
      Paz, Chief Executive Officer and


President








Date:  October
      26, 2005  By: /s/ Edward
      Stiften


Edward
      Stiften, Sr. Vice President and


Chief
      Financial Officer








INDEX
      TO
      EXHIBITS—TO BE UPDATED


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


Exhibit
              Number
            Exhibit2.11
            Stock
                Purchase Agreement, dated December 19, 2003, by and among the Company,
                CPS
                Holdings, LLC, CuraScript Pharmacy, Inc. and CuraScript PBM Services,
                Inc,
                incorporated by reference to Exhibit No. 2.1 to the Company’s Current
                Report on Form 8-K filed December 24, 2003.2.21
            Agreement
                and Plan of Merger, dated July 21, 2005, by and among the Company,
                Pony
                Acquisition Corporation, and Priority Healthcare Corporation, incorporated
                by reference to Exhibit No. 2.1 to the Company’s Current Report on Form
                8-K filed July 22, 2005.3.1
            Amended
                and Restated Certificate of Incorporation of the Company, incorporated
                by
                reference to the Company’s Annual Report on Form 10-K for the year ending
                December 31, 2001, incorporated by reference to Exhibit No. 3.2 to
                the
                Company’s Quarterly Report on Form 10-Q for the quarter ending June 30,
                2004.3.2
            Certificate
                of Amendment to the Certificate of Incorporation of the Company dated
                June
                2, 2004, incorporated by reference to Exhibit No. 3.3 to the Company’s
                Quarterly Report on Form 10-Q for the quarter ending June 30,
                2004.3.3
            Third
                Amended and Restated Bylaws, incorporated by reference to Exhibit
                No. 3.2
                to the Company’s Annual Report on Form 10-K for the year ending December
                31, 2000.4.1
            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, 2005.10.1
            Credit
                Agreement, dated as of October 14, 2005, among Express Scripts, Inc.,
                Credit Suisse, as administrative agent, Citigroup Global Markets
                Inc., as
                syndication agent, Bank of Nova Scotia, Calyon New York Branch, Deutsche
                Bank Securities Inc., JPMorgan Chase Bank, N.A., The Royal Bank of
                Scotland plc, Sun Trust and Union Bank of California, as co−documentation
                agents and the lenders named therein, incorporated by reference to
                Exhibit
                No. 10.1 to the Company’s Current Report on Form 8-K filed October 14,
                2005.31.12
            Certification
                by George Paz, as President and Chief Executive Officer of Express
                Scripts, Inc., pursuant to Exchange Act Rule 13a-14(a).31.22
            Certification
                by Edward Stiften, as Senior 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 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 Edward Stiften, as Senior 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
              The
                  Company agrees to furnish supplementally a copy of any omitted
                  schedule to
                  this agreement to the Commission upon
                  request.


2
            Filed
                herein.