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 June 30, 2008.o
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
                For
      the transition period from ____________ to _____________.
 
 
 Commission
File Number:  0-20199
 
 
 EXPRESS
SCRIPTS, INC.
 (Exact
name of registrant as specified in its charter)
 
 
 Delaware
                (State
      of Incorporation)
              43-1420563
                (I.R.S.
      employer identification no.)One
      Express Way, St. Louis, MO
                (Address
      of principal executive offices)
              63121
                (Zip
      Code)
 
 Registrant’s
telephone number, including area code:  (314) 996-0900
 
 Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days.
 Yes X   No  ___
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.  (check one):
 
 Large
accelerated filer
[X]                                                                                                  Accelerated filer
[   ]
 
 Non-accelerated
filer [   ] (Do not check if a smaller reporting
company)                                         Smaller
reporting company [   ]
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes___  No  X
 
 Common
      stock outstanding as of June 30, 2008:
              246,628,000
              
              Shares
 
  1
  EXPRESS
SCRIPTS, INC.
 
 INDEX
 
 
 Part
      I
              Financial
      InformationItem
      1.
              Financial
      Statements (unaudited)
              3a
              )
              Unaudited
      Consolidated Balance Sheet
              3b
              )
              Unaudited
      Consolidated Statement of Operations
              4c
              )
              Unaudited
      Consolidated Statement of Changes
              5in
      Stockholders’ Equityd
              )
              Unaudited
      Consolidated Statement of Cash Flows
              6e
              )
              Notes
      to Unaudited Consolidated Financial Statements
              7Item
      2.
              Management’s
      Discussion and Analysis of Financial
              14Condition
      and Results of OperationsItem
      3.
              Quantitative
      and Qualitative Disclosures About
              22Market
      RiskItem
      4.
              Controls
      and Procedures
              22Part
      II
              Other
      InformationItem
      1.
              Legal
      Proceedings
              23Item
      1A.
              Risk
      Factors – (Not Applicable)
              -Item
      2.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              24Item
      3.
              Defaults
      Upon Senior Securities – (Not Applicable)
              -Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              24Item
      5.
              Other
      Information – (Not Applicable)
              -Item
      6.
              Exhibits
              25
 
 Signatures
 
 Index to
Exhibits
 
  2
 PART I.
      FINANCIAL INFORMATION
 Item
      1.         Financial
      Statements
  EXPRESS
      SCRIPTS, INC.Unaudited
      Consolidated Balance SheetJune
      30,
              
              December
      31,(in
      millions, except share data)
              2008
              
              2007AssetsCurrent
      assets:Cash and cash
      equivalents
              $
              315.8
              
              
              $
              434.7Restricted cash and
      investments
              
              3.5
              
              
              
              2.2Receivables, net
              
              1,185.9
              
              
              
              1,184.6Inventories
              
              168.3
              
              
              
              166.1Deferred taxes
              
              113.2
              
              
              
              121.1Prepaid expenses and other current
      assets
              
              22.9
              
              
              
              18.7Current assets of discontinued
      operations
              
              3.2
              
              
              
              40.4Total current
      assets
              
              1,812.8
              
              
              
              1,967.8Property
      and equipment, net
              
              211.8
              
              
              
              215.5Goodwill
              
              2,694.0
              
              
              
              2,695.3Other
      intangible assets, net
              
              323.5
              
              
              
              342.0Other
      assets
              
              38.4
              
              
              
              30.2Non-current
      assets of discontinued operations
              
              -
              
              
              
              5.6Total assets
              $
              5,080.5
              
              
              $
              5,256.4Liabilities
      and Stockholders’ EquityCurrent
      liabilities:Claims and
      rebates payable
              $
              1,322.8
              
              
              $
              1,258.9Accounts payable
              
              508.5
              
              
              
              517.3Accrued expenses
              
              384.8
              
              
              
              432.5Current maturities of long-term
      debt
              
              300.1
              
              
              
              260.1Current liabilities of
      discontinued operations
              
              3.3
              
              
              
              6.2Total current
      liabilities
              
              2,519.5
              
              
              
              2,475.0Long-term
      debt
              
              1,600.3
              
              
              
              1,760.3Other
      liabilities
              
              332.9
              
              
              
              324.7Total
    liabilities
              
              4,452.7
              
              
              
              4,560.0Stockholders’
      Equity:Preferred
      stock, 5,000,000 shares authorized, $0.01 par value per share;and no
                  shares
      issued and outstanding
              
              -
              
              
              
              -Common Stock,
      1,000,000,000 authorized, $0.01 par value;shares
                issued:  318,919,000
      and 318,886,000, respectively; shares
                outstanding:  246,627,000
      and 252,371,000, respectively
              
              3.2
              
              
              
              3.2Additional paid-in
      capital
              
              603.0
              
              
              
              564.5Accumulated other
      comprehensive income
              
              18.5
              
              
              
              20.9Retained
      earnings
              
              2,952.2
              
              
              
              2,584.93,576.9
              
              
              
              3,173.5Common stock in
      treasury at cost, 72,291,000 and 66,515,000shares,
                  respectively
              
              (2,949.1
              )
              
              
              (2,477.1
              )Total stockholders’
      equity
              
              627.8
              
              
              
              696.4Total liabilities
      and stockholders’ equity
              $
              5,080.5
              
              
              $
              5,256.4
 See
accompanying Notes to Unaudited Consolidated Financial Statements
 3
  
 
 EXPRESS
      SCRIPTS, INC.Unaudited
      Consolidated Statement of OperationsThree
      Months Ended
              
              Six
      Months EndedJune
      30,
              
              June
      30,(in
      millions, except per share data)
              2008
              
              2007
              
              2008
              
              2007Revenues
      1
              $
              4,706.7
              
              
              $
              4,574.8
              
              
              $
              9,309.8
              
              
              $
              9,082.8Cost
      of revenues 1
              
              4,202.3
              
              
              
              4,135.7
              
              
              
              8,336.8
              
              
              
              8,223.6Gross profit
              
              504.4
              
              
              
              439.1
              
              
              
              973.0
              
              
              
              859.2Selling,
      general and administrative
              
              187.7
              
              
              
              176.0
              
              
              
              361.8
              
              
              
              343.6Operating
      income
              
              316.7
              
              
              
              263.1
              
              
              
              611.2
              
              
              
              515.6Other
      income (expense):Non-operating gains (charges),
      net
              
              -
              
              
              
              4.2
              
              
              
              -
              
              
              
              (18.8
              )Undistributed loss from joint
      venture
              
              (0.1
              )
              
              
              (0.4
              )
              
              
              (0.4
              )
              
              
              (0.8
              )Interest income
              
              3.3
              
              
              
              2.6
              
              
              
              8.7
              
              
              
              5.4Interest expense
              
              (17.0
              )
              
              
              (25.6
              )
              
              
              (40.3
              )
              
              
              (47.8
              )(13.8
              )
              
              
              (19.2
              )
              
              
              (32.0
              )
              
              
              (62.0
              )Income
      before income taxes
              
              302.9
              
              
              
              243.9
              
              
              
              579.2
              
              
              
              453.6Provision
      for income taxes
              
              111.0
              
              
              
              89.2
              
              
              
              209.1
              
              
              
              165.9Net
      income from continuing operations
              
              191.9
              
              
              
              154.7
              
              
              
              370.1
              
              
              
              287.7Net loss from discontinued operations, net of tax
              
              (1.7
              )
              
              
              (2.0
              )
              
              
              (2.8
              )
              
              
              (1.3
              )Net
      income
              $
              190.2
              
              
              $
              152.7
              
              
              $
              367.3
              
              
              $
              286.4Weighted
      average number of common shares
                  outstanding
      during the period:Basic:
              
              248.7
              
              
              
              263.6
              
              
              
              250.5
              
              
              
              267.6Diluted:
              
              252.0
              
              
              
              267.0
              
              
              
              253.9
              
              
              
              271.1Basic earnings per
      share:Continuing
      operations
              $
              0.77
              
              
              $
              0.59
              
              
              $
              1.48
              
              
              $
              1.08Discontinued
      operations
              
              (0.01
              )
              
              
              (0.01
              )
              
              
              (0.01
              )
              
              
              -Net earnings
              $
              0.76
              
              
              $
              0.58
              
              
              $
              1.47
              
              
              $
              1.07Diluted earnings per
      share:Continuing
      operations
              $
              0.76
              
              
              $
              0.58
              
              
              $
              1.46
              
              
              $
              1.06Discontinued
      operations
              
              (0.01
              )
              
              
              (0.01
              )
              
              
              (0.01)
              
              
              
              -Net earnings
              $
              0.75
              
              
              $
              0.57
              
              
              $
              1.45
              
              
              $
              1.06
 
 
 1
Excludes estimated retail pharmacy co-payments of $872.4 million and $943.9
million for the three months ended June 30, 2008 and 2007, respectively, and
$1,817.5 and $1,932.1 for the six months ended June 30, 2008 and 2007,
respectively.  These are amounts we instructed retail pharmacies to
collect from members.  We have no information regarding actual
co-payments collected.
  See
accompanying Notes to Unaudited Consolidated Financial Statements
 
  4
  
 EXPRESS
      SCRIPTS, INC.Unaudited
      Consolidated Statement of Changes in Stockholders’ EquityNumber
      of Shares
              
              Amount(in
      millions)
              Common
                Stock
              
              Common
                Stock
              
              Additional
                Paid-in
                Capital
              
              Accumulated
      Other Comprehensive Income
              
              Retained
      Earnings
              
              Treasury
                Stock
              
              TotalBalance
      at December 31, 2007
              
              318.9
              
              
              $
              3.2
              
              
              $
              564.5
              
              
              $
              20.9
              
              
              $
              2,584.9
              
              
              $
              (2,477.1
              )
              
              $
              696.4Comprehensive
      income:Net
      income
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              367.3
              
              
              
              -
              
              
              
              367.3Other
      comprehensive (loss):Foreign
      currencytranslation
                  adjustment
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (2.4
              )
              
              
              -
              
              
              
              -
              
              
              
              (2.4
              )Comprehensive (loss)
      income
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (2.4
              )
              
              
              367.3
              
              
              
              -
              
              
              
              364.9Treasury stock
      acquired
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (494.4
              )
              
              
              (494.4
              )Changes in
      stockholders’ equity
                  related
      to employee stock plans
              
              -
              
              
              
              -
              
              
              
              38.5
              
              
              
              -
              
              
              
              -
              
              
              
              22.4
              
              
              
              60.9Balance
      at June 30, 2008
              
              318.9
              
              
              $
              3.2
              
              
              $
              603.0
              
              
              $
              18.5
              
              
              $
              2,952.2
              
              
              $
              (2,949.1
              )
              
              $
              627.8
 See
accompanying Notes to Unaudited Consolidated Financial Statements
 
 
  5
  
 EXPRESS
      SCRIPTS, INC.UnauditedConsolidated Statement of Cash FlowsSix
      Months EndedJune
      30,(in
      millions)
              2008
              
              2007Cash
      flows from operating activities:Net income
              $
              367.3
              
              
              $
              286.4Net loss from discontinued operations, net of tax
              
              2.8
              
              
              
              1.3Net income from continuing
      operations
              
              370.1
              
              
              
              287.7Adjustments to reconcile net
      income to net cash provided
      by operating activities:Depreciation and
      amortization
              
              49.6
              
              
              
              51.5Non-cash adjustments to net
      income
              
              51.5
              
              
              
              16.9Changes in operating assets and
      liabilities:Claims and rebates
      payable
              
              64.0
              
              
              
              (77.4
              )Other net changes in operating
      assets and liabilities
              
              (52.4
              )
              
              
              (23.4
              )Net
      cash provided by operating activities—continuing
operations
              
              482.8
              
              
              
              255.3Net
      cash provided by (used in) operating activities—discontinued
      operations
              
              3.6
              
              
              
              (4.0
              )Net
      cash flows provided by operating activities
              
              486.4
              
              
              
              251.3Cash
      flows from investing activities:Purchases of property and
      equipment
              
              (30.1
              )
              
              
              (29.0
              )Sale
      of marketable securities
              
              -
              
              
              
              34.2Other
              
              (0.7
              )
              
              
              (0.6
              )Net
      cash (used in) provided by investing activities—continuing
      operations
              
              (30.8
              )
              
              
              4.6Net
      cash used in investing activities—discontinued operations
              
              -
              
              
              
              (0.9
              )Net
      cash (used in) provided by investing activities
              
              (30.8
              )
              
              
              3.7Cash
      flows from financing activities:Proceeds from long-term debt
              
              -
              
              
              
              600.0Repayment of long-term
      debt
              
              (120.0
              )
              
              
              (80.1
              )Repayment of revolving credit
      line, net
              
              -
              
              
              
              (50.0
              )Tax benefit relating to employee
      stock compensation
              
              25.4
              
              
              
              39.3Treasury stock
      acquired
              
              (494.4
              )
              
              
              (826.7
              )Net proceeds from employee stock
      plans
              
              15.3
              
              
              
              42.1Deferred
      financing fees
              
              -
              
              
              
              (1.3
              )Net
      cash used in financing activities
              
              (573.7
              )
              
              
              (276.7
              )Effect
      of foreign currency translation adjustment
              
              (0.8
              )
              
              
              1.9Net
      decrease in cash and cash equivalents
              
              (118.9
              )
              
              
              (19.8
              )Cash
      and cash equivalents at beginning of period
              
              434.7
              
              
              
              131.0Cash
      and cash equivalents at end of period
              $
              315.8
              
              
              $
              111.2
 See
accompanying Notes to Unaudited Consolidated Financial Statements
 
 
  6
  EXPRESS
SCRIPTS, INC.
 
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
 
 Note 1 – Summary of
significant accounting policies
 
 Our
significant accounting policies normally included in financial statements
prepared in conformity with generally accepted accounting principles, have been
omitted from this Form 10-Q pursuant to the rules and regulations of the
Securities and Exchange Commission (“SEC”).  However, we believe the
disclosures contained in this Form 10-Q are adequate to make the information
presented not misleading when read in conjunction with the notes to the
consolidated financial statements included in our Annual Report on Form 10-K for
the year ended December 31, 2007 filed with the SEC on February 21,
2008.  For a full description of our accounting policies, please refer
to the Notes to Consolidated Financial Statements included in our Annual Report
on Form 10-K for the year ended December 31, 2007.
 
 We
believe the accompanying unaudited consolidated financial statements reflect all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the Unaudited Consolidated Balance Sheet at June 30, 2008, the
Unaudited Consolidated Statements of Operations for the three and six months
ended June 30, 2008 and 2007, the Unaudited Consolidated Statement of Changes in
Stockholders’ Equity for the six months ended June 30, 2008, and the Unaudited
Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and
2007.  Operating results for the three and six months ended June 30,
2008 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2008.
 
 New Accounting
Guidance.  In September 2006, the Financial Accounting
Standards Board (“FASB”) issued FAS 157, “Fair Value Measurements,” (“FAS
157”).  FAS 157 defines fair value, establishes guidelines for
measuring fair value and expands disclosures regarding fair value
measurements.  FAS 157 will apply whenever another standard requires
(or permits) assets or liabilities to be measured at fair value.  This
standard does not expand the use of fair value to any new
circumstances.  FAS 157 was effective for financial statements issued
for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years.  On February 6, 2008 the FASB approved the
Financial Staff Position that will defer the effective date of FAS 157 by one
year for nonfinancial assets and liabilities that are recognized or disclosed at
fair value in the financial statements on a nonrecurring basis.  Our
partial adoption of FAS 157 for financial assets and liabilities as of
January 1, 2008 did not have a material impact on our consolidated financial
position, results of operations or cash flows. See Note 2, “Fair Value
Measurements.”
 
 In
February 2007, the FASB issued FAS 159, “The Fair Value Option for Financial
Assets and Financial Liabilities—including an amendment of FASB Statement
No. 115,” (“FAS 159”).  Under FAS 159, a company may elect to
measure eligible financial assets and financial liabilities at fair
value.  Unrealized gains and losses on items for which the fair value
option has been elected are reported in earnings at each subsequent reporting
date.  Eligible items include, but are not limited to, accounts and
loans receivable, equity method investments, accounts payable, guarantees,
issued debt and firm commitments. If elected, FAS 159 is effective for fiscal
years beginning after November 15, 2007. Currently, we have not elected to
account for any of our eligible items using the fair value option under FAS
159.
 
 In
December 2007, the FASB issued FAS 141R, “Business Combinations” and FAS
160, “Business Combinations and Noncontrolling Interests” (“FAS 141R” and “FAS
160,” respectively).  FAS 141R and FAS 160 are effective for fiscal
years beginning after December 15, 2008.  FAS 141R changes the
definitions of a business and a business combination, and will result in more
transactions recorded as business combinations.  Certain acquired
contingencies will be recorded initially at fair value on the acquisition date,
transaction and restructuring costs generally will be expensed as incurred and
in partial acquisitions companies generally will record 100 percent of the
assets and liabilities at fair value, including goodwill.  We do not
expect these pronouncements to have an effect on our financial statements unless
we enter into a business combination subsequent to the effective
date.
 7
 Note 2 – Fair value
measurements
 
 We
adopted FAS 157 as of January 1, 2008, with the exception of the
application of the statement to nonrecurring nonfinancial assets and
nonfinancial liabilities. Nonrecurring nonfinancial assets and nonfinancial
liabilities for which we have not applied the provisions of FAS 157 include
those measured at fair value in goodwill impairment testing, indefinite lived
intangible assets measured at fair value for impairment testing, asset
retirement obligations initially measured at fair value, and those assets and
liabilities initially measured at fair value in a business
combination.
 
 FAS 157 establishes a three-tier fair value hierarchy, which
prioritizes the inputs used in measuring fair value.  These tiers
include: Level 1, defined as observable inputs such as quoted prices in active
markets for identical assets or liabilities; Level 2, defined as inputs other
than quoted prices for similar assets and liabilities in active markets that are
either directly or indirectly observable; and Level 3, defined as unobservable
inputs in which little or no market data exists, therefore requiring an entity
to develop its own assumptions.
 
 Financial
assets accounted for at fair value on a recurring basis at June 30, 2008 include
cash equivalents of $251.5 million, restricted cash and investments of $3.5
million and trading securities of $21.9 million (included in other
assets).  These assets are carried at fair value based on quoted
market prices for identical securities (Level 1
inputs).
 
 
 Note 3 – Discontinued
operations
 
 On June
30, 2008, we completed the sale of CuraScript Infusion Pharmacy, Inc. (“IP”),
our infusion pharmacy line of business, for $27.5 million and recorded a pre-tax
gain of approximately $8.2 million.  The gain is included in Net loss from discontinued
operations, net of tax in the consolidated statement of income for the
three and six months ended June 30, 2008.  Rights to certain working
capital balances related to IP were not sold and are retained on the balance
sheet as of June 30, 2008.  For a period of time, we will continue to
generate cash flows and income statement activity on assets and liabilities of
discontinued operations as these working capital balances wind down, which are
not expected to be material.
 
 IP
was identified as available for sale during the fourth quarter of 2007 as we
considered it non-core to our future operations.  In connection with
the classification of IP as a discontinued operation, we recorded a charge in
the fourth quarter of 2007 related to impairment losses.  IP is
headquartered in Louisville, Kentucky and operates twelve infusion pharmacies in
six states.  IP offers a broad range of infused therapies in the home
to patients with acute or chronic conditions.
 
 Prior to being
classified as a discontinued operation, IP was included in our Specialty and
Ancillary Services (“SAAS”) segment.  The results of operations for IP
are reported as discontinued operations for all periods presented in the
accompanying Unaudited Consolidated Statements of
Operations.  Additionally, for all periods presented, assets and
liabilities of the discontinued operations are segregated in the accompanying
Unaudited Consolidated Balance Sheets, and cash flows of our discontinued
operations are segregated in our accompanying Unaudited Consolidated Statement
of Cash Flows.
 
 On April 4, 2008,
we completed the sale of Custom Medical Products, Inc. (“CMP”) and recorded a
pre-tax loss of approximately $1.3 million which is included in Net loss from discontinued
operations, net of tax in the consolidated statement of income for the
three and six months ended June 30, 2008.  CMP, which assembles
customer medical kits containing various types of medical supplies, was included
in our SAAS segment prior to being classified as a discontinued
operation.
 
 8
 Certain information with respect to the discontinued operations for the three
and six months ended June 30, 2008 and 2007 is summarized as
follows:
 
 Three
      Months Ended,
                June
      30,
              
              Six
      Months Ended,
                June
      30,(in
      millions)
              2008
              2007
              
              2008
              2007Revenues
              $
              18.9
              
              $
              25.7
              
              
              $
              44.7
              
              $
              57.1Net
      loss from discontinued operations, net of tax
              
              (1.7
              )
              
              (2.0
              )
              
              
              (2.8
              )
              
              (1.3
              )Income
      tax expense from discontinued operations
              
              (0.5
              )
              
              (0.7
              )
              
              
              (0.1
              )
              
              (0.3
              )
  Note 4 – Non-operating
charges, net
 
 On
December 18, 2006, we announced a proposal to acquire all of the outstanding
shares of Caremark Rx, Inc. (“Caremark”) common stock.  On March 16,
2007, Caremark shareholders approved a merger agreement with CVS Corporation
(“CVS”) and we subsequently withdrew our proposal to acquire
Caremark.  Legal and other professional fees (which do not include
expenses incurred internally) of $27.4 million were expensed in the first six
months of 2007.   These expenses were partially offset by a $4.4
million special dividend CVS/Caremark Corporation (“CVS/ Caremark”) paid on
Caremark stock we owned prior to the CVS/Caremark merger and by a non-operating
gain of $4.2 million resulting from the sale of our shares of CVS/Caremark stock
in the second quarter of 2007.  We recognized net non-operating
charges of $18.8 million in the first six months of 2007.
 
 Note 5 – Earnings per
share
 
 Basic
earnings per share (“EPS”) is computed using the weighted average number of
common shares outstanding during the period.  Diluted earnings per
share is computed in the same manner as basic earnings per share but adds the
number of additional common shares that would have been outstanding for the
period if the dilutive potential common shares had been issued.  The
following is the reconciliation between the number of weighted average shares
used in the basic and diluted earnings per share calculation for all
periods:
 
 Three
      Months Ended
                June
      30,
              
              Six
      Months Ended
                June
      30,(in
      millions)
              2008
              2007
              
              2008
              2007Weighted
      average number of common shares outstanding
      during the
                period
      – Basic EPS(1)
              248.7
              
              263.6
              
              
              250.5
              
              267.6Dilutive
      common stock equivalents:Outstanding
      stock options, “stock-settled” stock appreciation
                rights
      (“SSRs”), restricted stock units, and executive
                deferred
      compensation units(2)
              3.3
              
              3.4
              
              
              3.4
              
              3.5Weighted
      average number of common shares outstanding
      during
                the
      period – Diluted EPS(1)
              252.0
              
              267.0
              
              
              253.9
              
              271.1
 
 
 (1)
              The
      decrease in weighted average number of common shares outstanding from the
      prior year for Basic and Diluted EPS resulted from 7.2 million treasury
      shares repurchased in 2008 and 23.1 million treasury shares repurchased in
      2007.
 (2)
              Excludes
      SSRs of 0.2 million for the six months ended June 30,
      2007.  These were excluded because their effect was
      anti-dilutive.
 
 The above
shares are all calculated under the “treasury stock” method in accordance with
FAS 128, “Earnings per Share.”
 9
 Note 6 – Stock-based
compensation plans
 
 Under our
stock-based compensation plans, we have issued stock options, SSRs, restricted
stock and performance share awards.  Awards are typically settled
using treasury shares.  The maximum contractual term of stock options
and SSRs granted under the 2000 Long Term Incentive Plan (“LTIP”) is 10
years.  Due to the nature of the awards, we use the same valuation
methods and accounting treatments for SSRs and stock options.  During
the first six months of 2008, we granted 1,787,000 stock options with a weighted
average fair market value of $17.85.  The SSRs and stock options have
three-year graded vesting.
 
 During
the first six months of 2008, we granted to certain officers and employees
approximately 197,000 restricted shares of common stock and performance shares
with a weighted average fair market value of $65.10.  The restricted
stock awards have three-year graded vesting, and the performance shares cliff
vest at the end of the three years.  The number of performance shares
that ultimately vest is dependent upon achieving specific performance
targets.  Prior to vesting, these shares are subject to forfeiture to
us without consideration upon termination of employment under certain
circumstances.  The total number of non-vested restricted stock and
performance share awards was 775,000 at June 30, 2008 and 677,000 at December
31, 2007.
 
 We
recognized stock-based compensation expense of $10.8 million and $8.2 million in
the three months ended June 30, 2008 and 2007, respectively, and $19.8 million
and $16.8 million in the six months ended June 30,
2008 and 2007, respectively.  Unamortized stock-based compensation as
of June 30, 2008 was $44.7 million for stock options and SSRs, and $19.6 million
for restricted stock and performance shares.
 
 The fair
value of options and SSRs granted is estimated on the date of grant using a
Black-Scholes multiple option-pricing model with the following weighted average
assumptions:
 
 Three
      Months Ended
                June
      30,
              Six
      Months Ended
                June
      30,2008
              2007
              2008
              2007Expected
      life of option
              3-5
      years
              3-5
      years
              3-5
      years
              3-5
      yearsRisk-free
      interest rate
              2.8%-3.4%
              4.8%
              1.9%-3.4%
              4.5%-5.2%Expected
      volatility of stock
              31%
              31%
              30%-31%
              31%Expected
      dividend yield
              None
              None
              None
              None
 
 Note 7 –
Contingencies
 
 We accrue
self-insurance reserves based upon estimates of the aggregate liability of claim
costs in excess of our insurance coverage.  Reserves are estimated
using certain actuarial assumptions followed in the insurance industry and our
historical experience.  The majority of these claims are legal claims
and our liability estimate is primarily related to the cost to defend these
claims.  We do not accrue for settlements, judgments, monetary fines
or penalties until such amounts are probable and estimable, in compliance with
FAS 5, “Accounting for Contingencies.”  Under FAS 5, if the range of
possible loss is broad, the liability accrued should be based on the lower end
of the range.
  While we
believe our services and business practices are in compliance with applicable
laws, rules and regulations in all material respects, we cannot predict the
outcome of these matters at this time.  An unfavorable outcome in one
or more of these matters could result in the imposition of judgments, monetary
fines or penalties, or injunctive or administrative remedies.  We can
give no assurance that such judgments, fines and remedies, and future costs
associated with legal matters, would not have a material adverse effect on our
financial condition, our consolidated results of operations or our consolidated
cash flows.
 
 On May
27, 2008, we entered into an Assurance of Voluntary Compliance (“AVC”) with 28
states and the District of Columbia.  In connection with the AVC, we
paid approximately $9.3 million during the second quarter 2008.  In
addition, we have agreed to pay $200,000 which will be allocated for payments
not to exceed $25 each to patients for physician visits and tests related to
drug switches between brand statin drugs.  These amounts had
previously been fully reserved and did not impact our results for the second
quarter of 2008 (see— “Legal Proceedings”).
 10
 On July
29, 2008, a consent order and judgment was entered into that resolves the
complaint filed by the State of New York against us and Cigna Life Insurance Co.
on August 4, 2004.  The Company and Cigna agreed to pay a total of $27
million.  These amounts had previously been fully reserved and will
not have an effect on our results for the third quarter of 2008 or any future
period (see— “Legal Proceedings”).
  
 Note 8 – Segment
information
 
 We report
segments on the basis of services offered and have determined we have two
reportable segments: Pharmacy Benefit Management (“PBM”) and
SAAS.  Our domestic and Canadian PBM operating segments have similar
characteristics and as such have been aggregated into a single PBM reporting
segment.  As described in Note 3, the IP and CMP line of
businesses were included in our SAAS segment prior to being classified as
discontinued operations.
 
 Operating
income is the measure used by our chief operating decision maker to assess the
performance of each of our operating segments.  The following table
presents information about our reportable segments, including a reconciliation
of operating income from continuing operations to income before income taxes
from continuing operations for the three and six months ended June 30, 2008 and
2007:
  (in
      millions)
              PBM
              
              SAAS
              
              TotalFor
      the three months ended June 30, 2008Product
      revenue:Network
      revenues
              $
              2,475.1
              
              
              $
              -
              
              
              $
              2,475.1Home
      delivery revenues
              
              1,243.1
              
              
              
              -
              
              
              
              1,243.1Other
      revenues
              
              -
              
              
              
              911.9
              
              
              
              911.9Service
      revenues
              
              48.4
              
              
              
              28.2
              
              
              
              76.6Total revenues
              
              3,766.6
              
              
              
              940.1
              
              
              
              4,706.7Depreciation
      and amortization expense
              
              15.0
              
              
              
              10.2
              
              
              
              25.2Operating
      income
              
              303.0
              
              
              
              13.7
              
              
              
              316.7Undistributed
      loss from joint venture
              
              
              
              
              
              
              
              
              
              (0.1
              )Interest
      income
              
              
              
              
              
              
              
              
              
              3.3Interest
      expense
              
              
              
              
              
              
              
              
              
              (17.0
              )Income
      before income taxes
              
              
              
              
              
              
              
              
              
              302.9Capital
      expenditures
              
              17.8
              
              
              
              0.6
              
              
              
              18.4For
      the three months ended June 30, 2007Product
      revenue:Network
      revenues
              $
              2,376.8
              
              
              $
              -
              
              
              $
              2,376.8Home
      delivery revenues
              
              1,250.5
              
              
              
              -
              
              
              
              1,250.5Other
      revenues
              
              -
              
              
              
              872.8
              
              
              
              872.8Service
      revenues
              
              42.0
              
              
              
              32.7
              
              
              
              74.7Total revenues
              
              3,669.3
              
              
              
              905.5
              
              
              
              4,574.8Depreciation
      and amortization expense
              
              16.8
              
              
              
              9.1
              
              
              
              25.9Operating
      income
              
              249.8
              
              
              
              13.3
              
              
              
              263.1Non-operating
      gains
              
              
              
              
              
              
              
              
              
              4.2Undistributed
      loss from joint venture
              
              
              
              
              
              
              
              
              
              (0.4
              )Interest
      income
              
              
              
              
              
              
              
              
              
              2.6Interest
      expense
              
              
              
              
              
              
              
              
              
              (25.6
              )Income
      before income taxes
              
              
              
              
              
              
              
              
              
              243.9Capital
      expenditures
              
              17.4
              
              
              
              3.3
              
              
              
              20.7
  11
   (in
      millions)
              PBM
              
              SAAS
              
              TotalFor
      the six months ended June 30, 2008Product
      revenue:Network revenues
              $
              4,865.9
              
              
              $
              -
              
              
              $
              4,865.9Home delivery
      revenues
              
              2,478.5
              
              
              
              -
              
              
              
              2,478.5Other revenues
              
              -
              
              
              
              1,814.9
              
              
              
              1,814.9Service
      revenues
              
              93.0
              
              
              
              57.5
              
              
              
              150.5Total revenues
              
              7,437.4
              
              
              
              1,872.4
              
              
              
              9,309.8Depreciation
      and amortization expense
              
              30.5
              
              
              
              19.1
              
              
              
              49.6Operating
      income
              
              586.9
              
              
              
              24.3
              
              
              
              611.2Undistributed
      loss from joint venture
              
              
              
              
              
              
              
              
              
              (0.4
              )Interest
      income
              
              
              
              
              
              
              
              
              
              8.7Interest
      expense
              
              
              
              
              
              
              
              
              
              (40.3
              )Income
      before income taxes
              
              
              
              
              
              
              
              
              
              579.2Capital
      expenditures
              
              28.7
              
              
              
              1.4
              
              
              
              30.1For
      the six months ended June 30, 2007Product
      revenue:Network revenues
              $
              4,708.9
              
              
              $
              -
              
              
              $
              4,708.9Home delivery
      revenues
              
              2,486.4
              
              
              
              -
              
              
              
              2,486.4Other revenues
              
              -
              
              
              
              1,742.4
              
              
              
              1,742.4Service
      revenues
              
              82.9
              
              
              
              62.2
              
              
              
              145.1Total revenues
              
              7,278.2
              
              
              
              1,804.6
              
              
              
              9,082.8Depreciation
      and amortization expense
              
              33.3
              
              
              
              18.2
              
              
              
              51.5Operating
      income
              
              486.8
              
              
              
              28.8
              
              
              
              515.6Non-operating
      charges net
              
              
              
              
              
              
              
              
              
              (18.8
              )Undistributed
      loss from joint venture
              
              
              
              
              
              
              
              
              
              (0.8
              )Interest
      income
              
              
              
              
              
              
              
              
              
              5.4Interest
      expense
              
              
              
              
              
              
              
              
              
              (47.8
              )Income
      before income taxes
              
              
              
              
              
              
              
              
              
              453.6Capital
      expenditures
              
              22.2
              
              
              
              6.8
              
              
              
              29.0
 
 12
 
 The
following table presents balance sheet information about our reportable
segments, including the discontinued operations (“Disc Op”):
 
 (in
      millions)
              PBM
              
              SAAS
              
              Disc
      Op
              
              TotalAs
      of June 30, 2008Total
      assets
              $
              2,921.5
              
              
              $
              2,155.8
              
              
              $
              4.8
              
              
              $
              5,082.1Investment
      in equity method investees
              
              0.8
              
              
              
              3.6
              
              
              
              -
              
              
              
              4.4As
      of December 31, 2007Total
      assets
              $
              2,958.5
              
              
              $
              2,251.9
              
              
              $
              46.0
              
              
              $
              5,256.4Investment
      in equity method investees
              
              0.2
              
              
              
              3.4
              
              
              
              -
              
              
              
              3.6
 
 
 PBM
product revenue consists of revenues from the dispensing of prescription drugs
from our home delivery pharmacies and revenues from the sale of prescription
drugs by retail pharmacies in our retail pharmacy networks.  SAAS
product revenues consist of distribution of certain specialty drugs and revenues
from specialty distribution activities.  PBM service revenue includes
administrative fees associated with the administration of retail pharmacy
networks contracted by certain clients, market research programs and informed
decision counseling services.  SAAS service revenue includes revenues
from certain specialty distribution services, and sample distribution and
accountability services.
 
 Revenues
earned by our Canadian PBM totaled $11.3 million and $10.1 million for the three
months ended June 30, 2008 and 2007, respectively, and $23.3 million and $19.6
million for the six months ended June 30, 2008 and 2007,
respectively.  All other revenues were earned in the United
States.  Long-lived assets of our Canadian PBM (consisting primarily
of fixed assets) totaled $25.7 million and $23.4 million as of June 30,
2008 and December 31, 2007, respectively.  All other long-lived assets
are domiciled in the United States.
 
 Note 9 – Subsequent
event
 
 On
July 22, 2008, we completed the acquisition of the Pharmacy Services Division of
MSC-Medical Services Company (“MSC”),
a privately held PBM, for a purchase price of $248 million, subject to certain
purchase price adjustments. MSC is a leader in providing PBM services to clients
providing workers compensation benefits.  The transaction will be
accounted for under the provisions of FAS 141, “Business
Combinations.”  The purchase price was funded through internally
generated cash and borrowings under the revolving credit
facility.  This acquisition will be reported as part of our PBM
segment
 
 
  13
 Item
      2.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
 
 Information
we have included or incorporated by reference in this Quarterly Report on Form
10-Q, and information which may be contained in our other filings with the
Securities and Exchange Commission (the “SEC”) and our press releases or other
public statements, contain or may contain forward-looking
statements.  These forward-looking statements include, among others,
statements of our plans, objectives, expectations (financial or otherwise) or
intentions.
 
 Our
forward-looking statements involve risks and uncertainties.  Our
actual results may differ significantly from those projected or suggested in any
forward-looking statements.  We do not undertake any obligation to
release publicly any revisions to such forward-looking statements to reflect
events or circumstances occurring after the date hereof or to reflect the
occurrence of unanticipated events.  Factors which might cause such a
difference to occur include, but are not limited to:
 
 ·
              results
      in regulatory matters, the adoption of new legislation or regulations
      (including increased costs associated with compliance with new laws and
      regulations), more aggressive enforcement of existing legislation or
      regulations, or a change in the interpretation of existing legislation or
      regulations
 ·
              costs
      and uncertainties of adverse results in litigation, including a number of
      pending class action cases that challenge certain of our business
      practices
 ·
              continued
      pressure on margins resulting from client demands for lower prices or
      different pricing approaches, enhanced service offerings and/or higher
      service levels
 ·
              uncertainties
      associated with our acquisitions, which include integration risks and
      costs, uncertainties associated with client retention and repricing of
      client contracts, and uncertainties associated with the operations of
      acquired businesses
 ·
              the
      possible loss, or adverse modification of the terms, of contracts with
      pharmacies in our retail pharmacy
network
 ·
              the
      possible termination of, or unfavorable modification to, contracts with
      key clients or providers, some of which could have a material impact on
      our financial results
 ·
              changes
      in industry pricing benchmarks such as average wholesale price (“AWP”) and
      average manufacturer price (“AMP”), which could have the effect of
      reducing prices and margins
 ·
              competition
      in the PBM and specialty pharmacy industries, and our ability to
      consummate contract negotiations with prospective clients, as well as
      competition from new competitors offering services that may in whole or in
      part replace services that we now provide to our
  customers
 ·
              our
      ability to continue to develop new products, services and delivery
      channels
 ·
              increased
      compliance risk  relating to our contracts with the Department
      of Defense (“DoD”) TRICARE Management Activity and various state
      governments and agencies
 ·
              uncertainties
      and risks regarding the Medicare Part D prescription drug benefit,
      including the financial impact  to us to the extent that we
      participate in the program on a risk-bearing basis, uncertainties of
      client or member losses to other providers under Medicare Part D,
      implementation of regulations that adversely affect our profitability or
      cash flow, and increased regulatory
risk
 ·
              our
      ability to maintain growth rates, or to control operating or capital
      costs
 ·
              the
      possible loss, or adverse modification of the terms, of relationships with
      pharmaceutical manufacturers, or changes in pricing, discount or other
      practices of pharmaceutical manufacturers or interruption of the supply of
      any pharmaceutical products
 ·
              uncertainties
      associated with U.S. Centers for Medicare & Medicaid’s (“CMS”)
      implementation of the Medicare Part B Competitive Acquisition Program
      (“CAP”), including the potential loss of clients/revenues to providers
      choosing to participate in the CAP
 ·
              the
      use and protection of the intellectual property we use in our business or
      infringement of intellectual property claimed by
  others
 ·
              our
      leverage and debt service obligations, including the effect of certain
      covenants in our borrowing
agreements
 ·
              general
      developments in the health care industry, including the impact of
      increases in health care costs, changes in drug utilization and cost
      patterns and introductions of new
drugs
 ·
              increase
      in credit risk relative to our clients due to adverse economic trends or
      other factors
 ·
              our
      ability to attract and retain qualified
  employees
 ·
              other
      risks described from time to time in our filings with the
    SEC
  See
the more comprehensive description of risk factors under the captions “Forward
Looking Statements and Associated Risks” contained in Item 1 – “Business”and
Item IA – “Risk Factors”  of our Annual Report on Form 10-K for the
year ended December 31, 2007, filed with the SEC on February 21,
2008.
 14
 OVERVIEW
 
 As one of
the largest full-service pharmacy benefit management (“PBM”) companies, we
provide health care management and administration services on behalf of our
clients, which include health maintenance organizations, health insurers,
third-party administrators, employers, union-sponsored benefit plans, workers
compensation plans, and government health programs.  Our integrated
PBM services include network claims processing, home delivery services, benefit
design consultation, drug utilization review, formulary management, and drug
data analysis services.
 
 Through
our Specialty and Ancillary Services (“SAAS”) segment, we provide specialty
services, including: patient care and direct specialty home delivery to
patients; distribution of injectable drugs to patient homes and physician
offices; distribution of pharmaceuticals and medical supplies to providers and
clinics; fertility services to providers and patients; and bio-pharmaceutical
services including marketing, reimbursement and customized logistics
solutions.  SAAS does not include the fulfillment of specialty
prescriptions at retail pharmacies participating in our networks; these
prescriptions are reflected in PBM network revenues.  We also provide
services that include distribution of specialty pharmaceuticals requiring
special handling or packaging where we have been selected by the pharmaceutical
manufacturer as part of a limited distribution network, distribution of
pharmaceuticals to low-income patients through manufacturer-sponsored patient
assistance programs and company-sponsored generic patient assistance programs,
and distribution of sample units to physicians and verification of practitioner
licensure.
 
 We report
two segments: PBM and SAAS (see “—Results of Operations”).  Revenue
generated by our segments can be classified as either tangible product revenue
or service revenue.  We earn tangible product revenue from the sale of
prescription drugs by retail pharmacies in our retail pharmacy networks and from
dispensing prescription drugs from our home delivery and specialty
pharmacies.  Service revenue includes administrative fees associated
with the administration of retail pharmacy networks contracted by certain
clients, market research programs, medication counseling services, certain
specialty distribution services, and sample fulfillment and accountability
services.  Tangible product revenue generated by our PBM and SAAS
segments represented 98.4% of revenues for both the six months ended June 30,
2008 and for the same period of 2007.
 
 During
2008, we established the Center for Cost-Effective Consumerism (the “Center”)
which will assist us in the advancement of our understanding of consumers and
the way they use health care.  The Center combines our
industry-leading research capabilities with insights from a multidisciplinary
advisory board of national experts in science of human behavior and decision
making.  Using work done by the Center, we plan to better equip plan
sponsors to achieve: lowest cost drug mix (e.g., generics), maximum therapy
adherence (in key classes), greatest use of most cost-effective delivery
channel, uncompromising safety standards and increasing member engagement and
satisfaction.
 
 
 EXECUTIVE
SUMMARY AND TREND FACTORS AFFECTING THE BUSINESS
 
 Our
results in the first six months of 2008 reflect the successful execution of our
business model, which emphasizes the alignment of our financial interests with
those of our clients through greater use of generics, home delivery and
specialty pharmacy.  In the first six months of 2008 we benefited from
a higher generic fill rate (65.5% compared to 60.6% in the same period of 2007)
and better management of ingredient costs through renegotiation of supplier
contracts, increased competition among generic manufacturers and other actions
which helped to reduce ingredient costs.  In addition, through the
research performed by the Center, as described above, we intend to provide our
clients with additional tools designed to generate higher generic fill rates,
and further increase the use of our home delivery and specialty pharmacy
services.
 15
 We expect
certain activities within our SAAS segment to improve, including specialty
pharmacy fulfillment to our PBM clients.  Recently, these operating
results have been negatively impacted by margin declines in various other lines
of business within our SAAS segment.
 
 We
believe the positive trends we see in the first six months of 2008, including
increased generic usage and lower drug purchasing costs, should continue to
offset the negative impact of various marketplace forces effecting pricing and
plan structure, among other factors, and thus generate improvements in our
results of operations in the future.
 
 
 CRITICAL
ACCOUNTING POLICIES
 
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions which affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Our estimates and assumptions are based
upon a combination of historical information and various other assumptions
believed to be reasonable under the
particular circumstances.
Actual results may differ from our estimates.  For a full description
of our accounting policies, please refer to the notes to  the
consolidated financial statements included in our Annual Report on Form 10-K for
the year ended December 31, 2007, filed with the   SEC on
February 21, 2008.
 
 
 RESULTS
OF OPERATIONS
 
 PBM
OPERATING INCOME
 
 Three
      Months Ended June 30,
              
              Six
      Months Ended June 30,(in
      millions)
              2008
              
              2007
              
              2008
              
              2007Product
      revenuesNetwork
      revenues
              $
              2,475.1
              
              
              $
              2,376.8
              
              
              $
              4,865.9
              
              
              $
              4,708.9Home
      delivery revenues
              
              1,243.1
              
              
              
              1,250.5
              
              
              
              2,478.5
              
              
              
              2,486.4Service
      revenues
              
              48.4
              
              
              
              42.0
              
              
              
              93.0
              
              
              
              82.9Total
      PBM revenues
              
              3,766.6
              
              
              
              3,669.3
              
              
              
              7,437.4
              
              
              
              7,278.2Cost
      of PBM revenues
              
              3,317.0
              
              
              
              3,281.4
              
              
              
              6,573.7
              
              
              
              6,522.0PBM gross
profit
              
              449.6
              
              
              
              387.9
              
              
              
              863.7
              
              
              
              756.2PBM
      SG&A expenses
              
              146.6
              
              
              
              138.1
              
              
              
              276.8
              
              
              
              269.4PBM operating
      income
              $
              303.0
              
              
              $
              249.8
              
              
              $
              586.9
              
              
              $
              486.8Total
      adjusted PBM Claims(1)
              
              126.9
              
              
              
              124.8
              
              
              
              255.4
              
              
              
              251.6
 
 
 (1)
              Adjusted
      PBM claims represent network claims plus home delivery claims, which are
      multiplied by 3, as home delivery claims are typically 90 day claims and
      network claims are generally 30 day
claims.
 
 Network
claims increased by 2.0 million and 3.4 million, or 2.1% and 1.8%, in the three
and six months ended June 30, 2008 from the same periods of
2007.  Total unadjusted home delivery claims remained relatively
constant for the three and six months ended June 30, 2008 when compared to the
same periods of 2007.  On an adjusted basis, total PBM claims
increased 1.7% and 1.5% in the first three and six months ended June 30, 2008,
respectively.
 16
 Product
Revenues for the three months ended June 30, 2008:  Network
pharmacy revenues increased $98.3 million, or 4.1%, in the three months ended
June 30, 2008 over the same period of 2007. There are two primary components to
our change in network revenues: changes in volume and changes in price.
Approximately, $49.8 million of the increase is due to higher claim volumes, as
described above. In addition, approximately $48.5 million of the increase
in network pharmacy revenues is attributable to changes in price.  Two
factors affected changes in our revenue per network claim: inflation and the mix
of the generic prescriptions processed at network pharmacies.  Our
generic fill rate increased to 67.0% of total network claims in the second
quarter of 2008 as compared to 62.4% in the same period of 2007, which reduces
revenue (but not margin) as generic drugs are generally less expensive than the
corresponding brand drug.
  Home delivery revenues decreased by $7.4 million, or 0.6%, in the three months
ended June 30, 2008 from the same period in 2007.  This reduction in
home delivery revenues is primarily due to the impact of the higher generic fill
rate on average revenue per home delivery claim.  Our generic fill
rate increased to 56.8% of total home delivery claims in the three months ended
June 30, 2008 as compared to 49.9% in the same period of 2007.
 
 Product Revenues for the six months
ended June 30, 2008:Network pharmacy revenues increased
$157.0 million, or 3.3%, in the six months ended June 30, 2008 from the
same period in 2007.  Approximately $84.3 million of the increase in
network pharmacy revenues is attributable to changes in volume.  In
addition, approximately $72.7 million of the increase in network pharmacy
revenues is attributable to changes in price.
 
 Average
revenue per network claim remained constant for the six months ended June 30,
2008 from the same period of 2007.  Our generic fill rate affects our
average revenue per network claim, as noted above. As our generic fill rate has
increased to 66.7% of total network claims in the first six months of 2008 as
compared to 62.1% in the same period in 2007, it offsets the upward trend in
price caused by inflation as generic drugs are less expensive than brand
drugs.
 
 For the
six months ended June 30, 2008, home delivery revenues decreased $7.9 million,
or 0.3%, as compared to the same period of 2007 primarily due to the impact of
higher generic fill rate on average revenue per home delivery claim.  Our
generic fill rate increased to 55.4% of total home delivery claims in the six
months ended June 30, 2008 as compared to 49.0% in the same period of
2007.  The decrease in revenue per home delivery claim of 0.8% was
partially offset by ingredient cost inflation.
 
 Cost of
PBM revenues increased $35.6 million, or 1.1%, and $51.7 million, or 0.8%, in
the three and six months ended June 30, 2008, respectively, from the same period
of 2007.  This increase was primarily due to the 1.7% and 1.5%
increase in adjusted claims volume and ingredient cost inflation for the three
and six months ended June 30, 2008, respectively, as discussed
above.  Offsetting the increase in ingredient cost inflation were
improvements in the aggregate generic fill rate, and better management of
ingredient costs resulting from renegotiation of certain supplier
contracts.
 
 Our PBM
gross profit increased $61.7 million, or 15.9%, and $107.5 million, or 14.2%,
respectively, for the three and six months ended June 30, 2008 as compared to
the same periods of 2007.  Client cost savings from the increase in
the aggregate generic fill rate and better management of ingredient costs were
only partially offset by margin pressures arising from ingredient cost inflation
and the current competitive environment.
 
 Selling,
general and administrative expense (“SG&A”) for our PBM segment for the
three months and six months ended June 30, 2008 increased by $8.5 million, or
6.2%, and $7.4 million, or 2.7%, respectively, primarily due to increases in
management incentive compensation which is based on corporate financial
results.
 
 PBM
operating income increased $53.2 million, or 21.3%, and $100.1 million, or
20.6%, respectively, for the three months and six months ended June 30, 2008 as
compared to the same period of 2007, based on the various factors described
above.
  17
 SAAS
OPERATING INCOME
 
 
 Three
      Months Ended June 30,
              
              Six
      Months Ended June 30,(in
      millions)
              2008
              
              2007
              
              2008
              
              2007Product
      revenues
              $
              911.9
              
              
              $
              872.8
              
              
              $
              1,814.9
              
              
              $
              1,742.4Service
      revenues
              
              28.2
              
              
              
              32.7
              
              
              
              57.5
              
              
              
              62.2Total SAAS
    revenues
              
              940.1
              
              
              
              905.5
              
              
              
              1,872.4
              
              
              
              1,804.6Cost
      of SAAS revenues
              
              885.3
              
              
              
              854.3
              
              
              
              1,763.1
              
              
              
              1,701.6SAAS gross
    profit
              
              54.8
              
              
              
              51.2
              
              
              
              109.3
              
              
              
              103.0SAAS
      SG&A expenses
              
              41.1
              
              
              
              37.9
              
              
              
              85.0
              
              
              
              74.2SAAS operating
      income
              $
              13.7
              
              
              $
              13.3
              
              
              $
              24.3
              
              
              $
              28.8
 
 As
previously noted, our SAAS results for 2008 and 2007 have been adjusted for the
discontinued operations, which were formerly part of our SAAS
segment.
 
 SAAS Continuing
Operations.SAAS revenues increased $34.6 million, or
3.8%, and $67.8 million, or 3.8%, respectively, in the three and six months
ended June 30, 2008 over the same periods of 2007. This is partially due to
increased cross-selling of specialty services to our PBM clients.  The
increase in revenues was partially offset by a reduction in sales of higher
margin drugs through our Specialty Distribution line of business.
 
 Consistent with the increase in
revenues, SAAS cost of revenues increased $31.0 million, or 3.6%, and $61.5, or
3.6%, in the three and six months ended June 30, 2008 over the same periods of
2007.  The increase in revenue resulted in an increase in gross profit
of $3.6 million, or 7.0% and $6.3 million, or 6.1%, in the three and six
months ended June 30, 2008 over the same periods of 2007.
 
 SG&A
for our SAAS segment for the three and six months ended June 30, 2008 increased
by $3.2 million, or 8.4%, and $10.8 million, or 14.6% from the same periods of
2007.  The increase is primarily due to an increase in bad debt
expense, severance charges and site closure costs by our Specialty Distribution
line of business.
 
 SAAS
income from continuing operations increased slightly by $0.4 million, or 3.0%,
for the three months ended June 30, 2008 from the same periods of
2007.  SAAS income from continuing operations decreased $4.5 million,
15.6%, in the six months ended June 30, 2008 from the same periods of 2007 based
on the factors described above.
 
 
 OTHER
(EXPENSE) INCOME
 
 Net
interest expense decreased $9.3 million, or 40.4%, and $10.8 million, or 25.5%
respectively, in the three and six months ended June 30, 2008 as compared to the
same periods in 2007 due to decreases in interest rates and increases in
interest income from higher average cash balances (see “—Liquidity and Capital
Resources—Bank Credit Facility”).
 
 On
December 18, 2006, we announced a proposal to acquire all of the outstanding
shares of Caremark Rx, Inc. (“Caremark”) common stock.  On March 16,
2007, Caremark shareholders approved a merger agreement with CVS Corporation
(“CVS”) and we subsequently withdrew our proposal to acquire
Caremark.  Legal and other professional fees (which do not include
expenses incurred internally) of $27.4 million were expensed in the first six
months of 2007.   These expenses were partially offset by a $4.4
million special dividend CVS/Caremark Corporation (“CVS/Caremark”) paid on
Caremark stock we owned prior to the CVS/Caremark merger and by a non-operating
gain of $4.2 million resulting from the sale of our shares of CVS/Caremark stock
in the second quarter of 2007.  We recognized net non-operating
charges of $18.8 million in the first six months of 2007.
 18
 PROVISION
FOR INCOME TAXES
 
 Our effective tax rate was 36.6% and
36.1% for the three and six months ended June 30, 2008, respectively, as
compared to 36.6% for the same periods of 2007.  The six months ended
June 30, 2008 includes discrete tax adjustments resulting in a tax benefit of
$2.5 million.  These adjustments reflect changes in our unrecognized
tax benefits, primarily attributable to a lapse in the applicable statute of
limitations.
 
 
 NET
LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX
 
 Net loss from discontinued operations,
net of tax, decreased $0.3 million and increased $1.5 million for the
three and six months ended June 30, 2008, respectively, compared to the same
periods of 2007. The changes are primarily due to the pre-tax gain on sale of IP
for $8.2 million which was more than offset by the pre-tax loss on sale of
CMP for $1.3 million, current period losses and additional IP related bad debt
expense.
 
 NET
INCOME AND EARNINGS PER SHARE
 
 Net
income for the three months ended June 30, 2008 increased $37.5 million, or
24.6%, over the same period of 2007. Net income increased $80.9 million, or
28.2%, for the six months ended June 30, 2008 over the same period of
2007.
 
 On May
23, 2007, we announced a two-for-one stock split for stockholders of record on
June 8, 2007, effective June 22, 2007.  The split was effected in the
form of a dividend by issuance of one additional share of common stock for each
share of common stock outstanding.  The earnings per share and the
weighted average number of shares outstanding for basic and diluted earnings per
share for each respective period have been adjusted for the stock
split.
 
 Basic and
diluted earnings per share increased 31.0% and 31.6%, respectively, for the
three months ended June 30, 2008 over the same period of 2007.  For
the six months ended June 30, 2008, basic and diluted earnings per share
increased 37.3% and 36.8%, respectively, over the six months ended June 30,
2007.  This increase is primarily due to improved operating results,
as well as the decrease in the basic and diluted weighted average number of
common shares, relating to the repurchase of 7.2 million shares in the six
months of 2008 and 23.1 million shares during 2007 (see “—Stock Repurchase
Program”).
 
 LIQUIDITY
AND CAPITAL RESOURCES
 
 OPERATING
CASH FLOW AND CAPITAL EXPENDITURES
 
 For the
six months ended June 30, 2008, net cash provided by continuing operations
increased $227.5 million to $482.8 million. Changes in operating cash flows
from continuing operations for the six months ended June 30, 2008 were impacted
by the following factors:
 ·
              Net
      income from continuing operations increased $82.4 million in the six
      months ended June 30, 2008 as compared to the same period of
      2007.
 ·
              Changes
      in working capital resulted in a cash inflow of $11.6 million in the six
      months ended June 30, 2008 as compared to a cash outflow of $100.8 million
      in the same period of 2007.  The change in working capital is
      primarily due to a $141.4 million net cash inflow in claims and rebates
      payable year over year due to the timing of invoices and
      payments.
 ·
              Net
      non-cash adjustments to net income increased from $16.9 million in the
      first six months of 2007 to $51.5 million in the first six months of
      2008, reflecting changes in the deferred tax provision caused by the first
      quarter 2007 implementation of Financial Accounting Standards Board
      (“FASB”) Interpretation Number 48, “Accounting for Uncertainty in Income
      Taxes – an interpretation of FASB Statement No. 109”.  In
      addition, bad debt expense increased by approximately $8.3 million in the
      first six months of 2008, primarily driven by our Specialty Distribution
      line of business, as described
above.
  19
  Our
capital expenditures for the six months ended June 30, 2008 were relatively
consistent as compared to the same period of 2007.  We intend to
continue to invest in infrastructure and technology that we believe will provide
efficiencies in operations and facilitate growth and enhance the service we
provide to our clients.  We expect future anticipated capital
expenditures will be funded primarily from operating cash flow or, to the extent
necessary, with borrowings under our revolving credit facility, discussed
below.
 
 
 CHANGES
IN BUSINESS
  On July
22, 2008, we completed the acquisition of the Pharmacy Services Division of
MSC-Medical Services Company (“MSC”),
a privately held PBM, for a purchase price of $248 million, subject to certain
purchase price adjustments. MSC is a leader in providing PBM services clients
providing workers compensation benefits.  The transaction will be
accounted for under the provisions of FAS 141, “Business
Combinations.”  The purchase price was funded through internally
generated cash and borrowings under the revolving credit
facility.  This acquisition will be reported as part of our PBM
segment.
  On July
1, 2008, the merger of RxHub and SureScripts was announced.  We are
one of the founders of RxHub, an electronic exchange enabling physicians who use
electronic prescribing technology to link to pharmacies, PBM companies, and
health plans.  The new organization will enable physicians to securely
access health information when caring for their patients through a fast and
efficient health exchange.  We will retain one-sixth ownership in the
merged company.  Due to the decreased ownership percentage, the
investment will be prospectively recorded using the cost method, under which
dividends are the basis of recognition of earnings from an
investment.
  On June
30, 2008, the Company completed the sale of CuraScript Infusion Pharmacy, Inc.
(“IP”) for $27.5 million and recorded a pre-tax gain of approximately $8.2
million which is included in Net
loss from discontinued operations, net of tax in the consolidated
statement of income for the three and six months ended June 30,
2008.  IP was identified as available for sale during the fourth
quarter of 2007 as we considered it non-core to our future
operations.  In connection with the classification of IP as a
discontinued operation, we recorded a charge in the fourth quarter of 2007
related to impairment losses.
 On
October 10, 2007, we purchased Connect Your Care, LLC (“CYC”), a leading
provider of consumer directed healthcare technology solutions to the employer,
health plan and financial services markets.  The purchase price was
funded through internally generated cash.  The purchase agreement
includes an earnout provision, payable after three years based on the
performance of the business.  This acquisition is reported as part of
our PBM segment.
 We
regularly review potential acquisitions and affiliation
opportunities.  We believe available cash resources, bank financing or
the issuance of additional common stock could be used to finance future
acquisitions or affiliations.  There can be no assurance we will make
new acquisitions or establish new affiliations in 2008 or
thereafter.
 
 
 STOCK
REPURCHASE PROGRAM
 
 We have a
stock repurchase program, originally announced on October 25,
1996.  Treasury shares are carried at first in, first out
cost.  There is no limit on the duration of the
program.  During the three and six months ended June 30, 2008, we
repurchased 5.3 million shares for $373.3 million, and $7.2 million shares
for $494.4 million, respectively.  Current year repurchases were
funded through internally generated cash.  On July 22, 2008, the Board
approved an increase in the share repurchase program by an additional 15 million
shares to an aggregate program of 135 million shares.  Additional
share repurchases, if any, will be made in such amounts and at such times as we
deem appropriate based upon prevailing market and business conditions and other
factors.
 20
 BANK
CREDIT FACILITY
 
 At June
30, 2008, our credit facility includes $1.1 billion of Term A loans, $800.0
million of Term-1 loans and a $600.0 million revolving credit
facility.  The revolving credit facility (none of which was
outstanding as of June 30, 2008) is available for general corporate
purposes.  During the first and second quarters of 2008, we made
scheduled payments of $60.0 million, respectively, on our Term A
loan.  The maturity date of our credit facility is October 14,
2010.
 
 Our
credit facility requires us to pay interest periodically on the London Interbank
Offered Rates (“LIBOR”) or base rate options, plus a margin.  The
margin over LIBOR will range from 0.50% to 1.125%, depending on our consolidated
leverage ratio or our credit rating.  Under our credit facility, we
are required to pay commitment fees on the unused portion of the
$600.0 million revolving credit facility.  The commitment fee
will range from 0.10% to 0.25% depending on our consolidated leverage ratio or
our credit rating.
 
 At June
30, 2008, the weighted average interest rate on the facility was
3.1%.  Our credit facility contains covenants that limit the
indebtedness we may incur, the common shares we may repurchase, and dividends we
may pay.  The repurchase and dividend covenant applies if certain
leverage thresholds are exceeded.  The covenants also include a
minimum interest coverage ratio and a maximum leverage ratio.  At June
30, 2008, we believe we are in compliance with all covenants associated with our
credit facility.
 
 
 OTHER
MATTERS
  In September 2006, the FASB issued FAS 157, “Fair Value Measurements,”
(“FAS 157”).  FAS 157 defines fair value, establishes guidelines for
measuring fair value and expands disclosures regarding fair value
measurements.  FAS 157 will apply whenever another standard requires
(or permits) assets or liabilities to be measured at fair value.  This
standard does not expand the use of fair value to any new
circumstances.  FAS 157 was effective for financial statements
issued for fiscal years beginning after November 15, 2007 and interim periods
within those fiscal years.  On February 6, 2008 the FASB approved the
Financial Staff Position that will defer the effective date of FAS 157 by one
year for nonfinancial assets and liabilities that are recognized or disclosed at
fair value in the financial statements on a nonrecurring basis.  Our
partial adoption of FAS 157 for financial assets and liabilities as of
January 1, 2008 did not have a material impact on our consolidated financial
position, results of operations or cash flows. See Note 2, “Fair Value
Measurements.”
 
 In
February 2007, the FASB issued FAS 159, “The Fair Value Option for Financial
Assets and Financial Liabilities—including an amendment of FASB Statement
No. 115,” (“FAS 159”).  Under FAS 159, a company may elect to
measure eligible financial assets and financial liabilities at fair
value.  Unrealized gains and losses on items for which the fair value
option has been elected are reported in earnings at each subsequent reporting
date.  Eligible items include, but are not limited to, accounts and
loans receivable, equity method investments, accounts payable, guarantees,
issued debt and firm commitments. If elected, FAS 159 is effective for fiscal
years beginning after November 15, 2007. Currently, we have not elected to
account for any of our eligible items using the fair value option under FAS
159.
 
 In
December 2007, the FASB issued FAS 141R, “Business Combinations” and FAS
160, “Business Combinations and Noncontrolling Interests” (FAS 141R and FAS 160,
respectively).  FAS 141R and FAS 160 are effective for fiscal years
beginning after December 15, 2008.  FAS 141R changes the definitions
of a business and a business combination, and will result in more transactions
recorded as business combinations.  Certain acquired contingencies
will be recorded initially at fair value on the acquisition date, transaction
and restructuring costs generally will be expensed as incurred and in partial
acquisitions companies generally will record 100 percent of the assets and
liabilities at fair value, including goodwill.  We do not expect these
pronouncements to have an effect on our financial statements unless we enter
into a business combination subsequent to the effective date.
 
 
 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.
  21
  
 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 June 30,
2008, we had $1,584.6 million of obligations, net of cash, which were subject to
variable rates of interest under our credit facility.  A hypothetical
increase in interest rates of 1% would result in an increase in annual interest
expense of approximately $15.8 million (pre-tax), presuming that obligations
subject to variable interest rates remained constant.
  
 Item
      4.
              Controls and
      Procedures
 
 We
maintain a comprehensive set of disclosure controls and procedures (as defined
in Rules 13a-15(e) and under the Securities Exchange Act of 1934 (“Exchange
Act”)) designed to provide reasonable assurance that information required to be
disclosed in our filings under the Exchange Act is recorded, processed,
summarized and reported accurately and within the time periods specified in the
SEC’s rules and forms.  Under the supervision and with the
participation of our management, including our Chairman, President and Chief
Executive Officer and our Executive Vice President and Chief Financial Officer,
we have evaluated the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the period covered by this
report.  Based upon this evaluation, the Chairman, President and Chief
Executive Officer and the Executive Vice President and Chief Financial Officer
concluded that the design and operation of these disclosure controls and
procedures are effective in providing reasonable assurance of the achievement of
the objectives described above.
 
 During
the second quarter ended June 30, 2008, there was no change in our internal
control over financial reporting that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
  22
  PART II. OTHER
      INFORMATION
  Item
      1.
              Legal
      Proceedings
  We and/or
our subsidiaries are defendants in a number of lawsuits that purport to be class
actions.  Each case seeks damages in an unspecified
amount.  We cannot ascertain with any certainty at this time the
monetary damages or injunctive relief that any of the plaintiffs may seek to
recover.  In addition, we are the subject of several governmental
investigations described in our Annual Report on Form 10-K for the year ended
December 31, 2007.  Such investigations could result in civil damages
or other sanctions, the nature and amount of which we cannot currently
estimate.  We cannot, however, provide any assurance that the outcome
of any of these matters, or some number of them in the aggregate, will not be
materially adverse to our financial condition, consolidated results of
operations, cash flows or business prospects.  In addition, the
expenses of defending these cases may have a material effect on our financial
results. The following developments have occurred since the filing of our last
Form 10-Q on April 29, 2008.
 
 
 ·
              Multi-District
      Litigation -- The previously reported case, Brynien, et
      al.  v. Express Scripts, Inc. and ESI Mail Services, Inc.
      (Case No. 1258/2008, Supreme Court of the State of New York, Albany
      County), has been transferred to the MDL in the Eastern District of
      Missouri.
 
 ·
              On
      May 27, 2008, we entered into an Assurance of Voluntary Compliance (“AVC”)
      with 28 states and the District of Columbia.  We admitted no
      wrongdoing, but agreed to pay $9.3 million to the States for monetary
      payments and costs.  Additionally, we will reimburse individual
      patients for medical costs associated with statin drug interchanges up to
      an aggregate maximum of $200,000.   We also agreed to
      certain injunctive provisions which require us to make certain disclosures
      to clients and with respect to brand to brand drug
      interchanges.  This AVC resolves the multi-state investigation
      which began in July 2004.
 
 ·
              People of the State of
      New York, et al v. Express Scripts, Inc.(Case No.4669-04, Supreme
      Court of the State of New York, County of Albany).  On August 4,
      2004, the State of New York filed a complaint against us and Cigna Life
      Insurance Co.  All parties have settled this
      lawsuit.  On July 29, 2008, a consent order and
      judgment was entered by the Court.  In this judgment, the
      Company and Cigna agreed to pay a total of $27 million.  The
      judgment requires us, among other things, to make certain disclosures
      regarding pharmaceutical revenue and generic pricing to client plans and
      prospective client plans located in the State of New York. It also places
      some restrictions and requirements on drug preference programs for clients
      in the State of New York.  This judgment completely resolves
      this matter.
 
 
 In
addition, in the ordinary course of our business there have arisen various legal
proceedings, investigations or claims now pending against our subsidiaries and
us.  The effect of these actions on future financial results is not
subject to reasonable estimation because considerable uncertainty exists about
the outcomes.  Where insurance coverage is not available for such
claims, or in our judgment, is not cost-effective, we maintain self-insurance
reserves to reduce our exposure to future legal costs, settlements and judgments
related to uninsured claims.  Our self-insured reserves are based upon
estimates of the aggregate liability for the costs of uninsured claims incurred
and the retained portion of insured claims using certain actuarial assumptions
followed in the insurance industry and our historical experience.  It
is not possible to predict with certainty the outcome of these claims, and we
can give no assurance that any losses in excess of our insurance and any
self-insurance reserves will not be material.
   23
 Item
      2.
              Unregistered Sales of
      Equity Securities and Use of
Proceeds
 
 The
following is a summary of our stock repurchasing activity during the three
months ended June 30, 2008 (share data in millions):
 
 Period
              Totalnumber
                of
                shares
                purchased
              
              Average
                price
      paid
                per
      share
              
              Total
      numberof
      sharespurchased
                as
      part of a
                publicly
                announced
                program
              
              Maximumnumber
                ofshares
                that
      may yetbe
      purchasedunder
                the
      program4/1/2008
      – 4/30/2008
              -
              
              
              $
              -
              
              
              -
              
              
              11.35/1/2008
      – 5/31/2008
              3.8
              
              
              
              70.7
              
              
              3.8
              
              
              7.56/1/2008
      – 6/30/2008
              1.5
              
              
              
              72.3
              
              
              1.5
              
              
              6.0Second
      Quarter 2008 Total
              5.3
              
              
              $
              71.1
              
              
              5.3
  We have a
stock repurchase program, originally announced on October 25,
1996.  Treasury shares are carried at first in, first out
cost.  There is no limit on the duration of the
program.  During the three months ended June 30 2008, we repurchased
5.3 million shares for $373.3 million.   Current year
repurchases were funded through internally generated cash.  On July
22, 2008, the Board approved an increase in the share repurchase program by an
additional 15 million shares to an aggregate program of 135 million
shares.  Additional share repurchases, if any, will be made in such
amounts and at such times as we deem appropriate based upon prevailing market
and business conditions and other factors.
 
 
 Item 4.
              Submission
      of Matters to a Vote of Security
Holders
 
 (a)
              The
      Company’s annual meeting of stockholders was held on May 28,
      2008.(b)
              The
      following persons were elected directors of the Company to serve until the
      next Annual Meeting of Stockholders and until their respective successors
      are elected and qualified: Gary G. Benanav, Frank J. Borelli, Maura C.
      Breen, Nicholas LaHowchic, Thomas P. Mac Mahon, Woodrow A. Myers Jr.,
      M.D., John O. Parker, Jr., George Paz, Samuel K. Skinner, Seymour
      Sternberg and Barrett A. Toan.(c)
              The
      stockholder vote for each director was as
follows:
  Votes
                Cast for
              
              Votes
                WithheldGary G. Benanav
              206,306,260
              
              
              16,666,175Frank J. Borelli
              205,260,127
              
              
              17,712,308Maura C. Breen
              206,331,814
              
              
              16,640,621Nicholas LaHowchic
              206,316,794
              
              
              16,655,641Thomas P. Mac Mahon
              206,310,995
              
              
              16,661,440Woodrow
      A. Myers Jr., M.D.
              206,321,725
              
              
              16,650,710John O. Parker, Jr.
              205,464,002
              
              
              17,508,433George Paz
              199,453,160
              
              
              23,519,275Samuel K. Skinner
              202,822,404
              
              
              20,150,031Seymour Sternberg
              198,028,855
              
              
              24,943,580Barrett A. Toan
              206,303,387
              
              
              16,669,048
  24
  The
stockholders also voted to:
  i)
approve and ratify an amendment to the Company’s Amended and Restated
Certificate of Incorporation to increase the number of authorized shares of the
Company’s common stock from 650,000,000 shares to 1,000,000,000 shares
(191,068,071 affirmative votes; 29,891,102 negative votes; 2,013,262 abstention
votes);
  ii)
approve and ratify an increase in the number of shares of the Company’s common
stock authorized for issuance under the Express Scripts, Inc. Employee Stock
Purchase Plan from 2,000,000 shares to 3,500,000 shares  (192,126,904
affirmative votes; 7,692,486 negative votes; 1,970,898 abstention
votes);
 
 iii)
ratify the appointment of PricewaterhouseCoopers LLP as the Company’s
independent registered public accountants for 2008 (213,270,172 affirmative
votes; 7,755,398 negative votes; 1,946,865 abstention votes).
 
 
 Item
      6.
              Exhibits
 
 (a)
              See
      Index to Exhibits below.
 
  25
  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: 
      July 30, 2008
                By:
                /s/ George
      PazGeorge
      PazChairman,
      President and Chief Executive Officer
  
  Date: 
      July 30, 2008
                By:
                /s/ Jeffrey
      HallJeffrey
      HallExecutive
      Vice President and Chief Financial Officer
 
 
  26
  INDEX TO
EXHIBITS
 (Express
Scripts, Inc. – Commission File Number 0-20199)
 Exhibit
                Number
              Exhibit3.1
              Amended
      and Restated Certificate of Incorporation of the Company, incorporated by
      reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for
      the year ending December 31, 2001.3.2
              Certificate
      of Amendment to the Certificate of Incorporation of the Company dated June
      2, 2004, incorporated by reference to Exhibit No. 3.2 to the Company’s
      Quarterly Report on Form 10-Q for the quarter ending June 30,
      2004.3.3
              Certificate
      of Amendment to the Certificate of Incorporation of the Company dated May
      24, 2006, incorporated by reference to Exhibit No. 3.3 to the Company’s
      Quarterly Report on Form 10-Q for the quarter ending June 30,
      2006.3.42
              Certificate
      of Amendment to the Certificate of Incorporation of the Company dated May
      29, 2008.3.5
              Third
      Amended and Restated Bylaws, incorporated by reference to Exhibit No. 3.3
      to the Company’s Quarterly Report on Form 10-Q for the quarter ending June
      30, 2004.4.1
              Form
      of Certificate for Common Stock, incorporated by reference to Exhibit No.
      4.1 to the Company’s Registration Statement on Form S-1 filed June 9, 1992
      (No. 33-46974) (the “Registration Statement”).4.2
              Stockholder
      and Registration Rights Agreement dated as of October 6, 2000 between the
      Company and New York Life Insurance Company, incorporated by reference to
      Exhibit No. 4.2 to the Company's Amendment No. 1 to Registration Statement
      on Form S-3 filed October 17, 2000 (Registration Number
      333-47572).4.3
              Asset
      Acquisition Agreement dated October 17, 2000, between NYLIFE Healthcare
      Management, Inc., the Company, NYLIFE LLC and New York Life Insurance
      Company, incorporated by reference to Exhibit No. 4.3 to the Company's
      amendment No. 1 to the Registration Statement on Form S-3 filed October
      17, 2000 (Registration Number 333-47572).4.4
              Rights
      Agreement, dated as of July 25, 2001, between the Corporation and American
      Stock Transfer & Trust Company, as Rights Agent, which includes the
      Certificate of Designations for the Series A Junior Participating
      Preferred Stock as Exhibit A, the Form of Right Certificate as Exhibit B
      and the Summary of Rights to Purchase Preferred Shares as Exhibit C,
      incorporated by reference to Exhibit No. 4.1 to the Company's Current
      Report on Form 8-K filed July 31, 2001.4.5
              Amendment
      dated April 25, 2003 to the Stockholder and Registration Rights Agreement
      dated as of October 6, 2000 between the Company and New York Life
      Insurance Company, incorporated by reference to Exhibit No. 4.8 to the
      Company’s Quarterly Report on Form 10-Q for the period ending March 31,
      2003.4.6
              Amendment
      No. 1 to the Rights Agreement between the Corporation and American Stock
      Transfer & Trust Company, as Rights Agent, dated May 25, 2005,
      incorporated by reference to Exhibit No. 10.1 to the Company’s Current
      Report on Form 8-K filed May 31, 2005.10.11
              Executive
      Employment Agreement between the Company and George Paz, dated March 31,
      2008 and effective as of April 1, 2008, incorporated by reference to
      Exhibit No. 10.1 to the Company’s Current Report on Form 8-K filed April
      4, 2008.10.21
              Executive
      Employment Agreement between the Company and Jeffrey L. Hall, dated and
      effective as of April 1, 2008, incorporated by reference to Exhibit No.
      10.2 to the Company’s Current Report on Form 8-K filed April 4,
      2008.
  27
  10.31
              Amended
      and Restated Express Scripts, Inc. Employee Stock Purchase Plan,
      incorporated by reference to Exhibit A to the Company’s Proxy Statement
      filed April 14, 2008.10.41
              Description
      of Compensation Payable to Non-Employee Directors, incorporated by
      reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
      filed May 30, 2008.31.12
              Certification
      by George Paz, as Chairman, President and Chief Executive Officer of
      Express Scripts, Inc., pursuant to Exchange Act Rule
      13a-14(a).31.22
              Certification
      by Jeffrey Hall, as Executive Vice President and Chief Financial Officer
      of Express Scripts, Inc., pursuant to Exchange Act Rule
      13a-14(a).32.12
              Certification
      by George Paz, as Chairman, President and Chief Executive Officer of
      Express Scripts, Inc., pursuant to 18 U.S.C. § 1350 and Exchange Act Rule
      13a-14(b).32.22
              Certification
      by Jeffrey Hall, as Executive Vice President and Chief Financial Officer
      of Express Scripts, Inc., pursuant to 18 U.S.C. § 1350 and Exchange Act
      Rule 13a-14(b).
 
 ____
              ________________________1
              Management
      contract or compensatory plan or
arrangement.
 2
              Filed
      herein.
  26