**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, 2005.o
              TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934
                For
                  the transition period from ____________ to
                  _____________.
 
 
 Commission
        File Number: 0-20199
 
 
 **EXPRESS
        SCRIPTS, INC.**
 (Exact
        name of registrant as specified in its charter)
 
 
 **Delaware**
                (State
                  of Incorporation)
              **43-1420563**
                (I.R.S.
                  employer identification no.)**13900
                  Riverport Dr., Maryland Heights, Missouri**
                (Address
                  of principal executive offices)
              **63043**
                (Zip
                  Code)
 
 Registrant’s
        telephone number, including area code: (314) 770-1666
 
  
 
 Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports), and (2) has been subject to such filing requirements
        for
        the past 90 days.
 Yes X No
        ___
 
 Indicate
        by check mark whether the registrant is an accelerated filer (as defined
        in Rule
        12b-2 of the Exchange Act).
 Yes X No
        ___
 
 Common
                  stock outstanding as of June 30, 2005:
              148,629,000
              Shares
 
 
 
  
  EXPRESS
        SCRIPTS, INC.
 
 INDEX
 
 
 
 
 Part
        I  Financial
        Information
  Item 1. Financial
        Statements (unaudited)
  a)  Unaudited
        Consolidated Balance Sheet
 
 b)  Unaudited
        Consolidated Statement of Operations
 
 c)  Unaudited
        Consolidated Statement of Changes
 in
        Stockholders’ Equity
 
 d)  Unaudited
        Consolidated Statement of Cash Flows
 
 e)  Notes
        to
        Unaudited Consolidated Financial Statements
 
 Item
        2. Management’s
        Discussion and Analysis of Financial
 Condition
        and Results of Operations
 
 Item
        3. Quantitative
        and Qualitative Disclosures About
 Market
        Risk
 
 Item
        4. Controls
        and Procedures
 
 Part
        II Other
        Information
 
 Item
        1. Legal
        Proceedings
 
 Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of
                  Proceeds
 
 Item
        3. Defaults
        Upon Senior Securities - (Not Applicable)
 
 Item
        4. Submission
        of Matters to a Vote of Security Holders
 
 Item
        5. Other
        Information - (Not Applicable)
 
 Item
        6. Exhibits
 
 Signatures
 
 Index
        to
        Exhibits
 
 
  
   PART
                    I. FINANCIAL
                    INFORMATION
 **Item
        1.****Financial
        Statements**
 EXPRESS
        SCRIPTS, INC.
 Unaudited
        Consolidated Balance
        Sheet
  **June
                  30,**
              
              **December
                  31,***(in
                  thousands, except share data)*
              
              **2005**
              
              
              
              **2004**AssetsCurrent
                  assets:Cash
                  and cash equivalents
              $
              417,253
              
              
              $
              166,054Receivables,
                  net
              
              1,079,744
              
              
              
              1,057,222Inventories
              
              147,680
              
              
              
              158,775Deferred
                  taxes
              
              41,678
              
              
              
              33,074Prepaid
                  expenses and other current assets
              
              22,594
              
              
              
              27,892Total
                  current assets
              
              1,708,949
              
              
              
              1,443,017Property
                  and equipment, net
              
              168,690
              
              
              
              181,166Goodwill,
                  net
              
              1,707,382
              
              
              
              1,708,935Other
                  intangible assets, net
              
              230,163
              
              
              
              245,270Other
                  assets
              
              23,580
              
              
              
              21,698Total
                  assets
              $
              3,838,764
              
              
              $
              3,600,086Liabilities
                  and Stockholders’ EquityCurrent
                  liabilities:Claims
                  and rebates payable
              $
              1,244,386
              
              
              $
              1,236,775Accounts
                  payable
              
              353,280
              
              
              
              322,885Accrued
                  expenses
              
              266,755
              
              
              
              231,695Current
                  maturities of long-term debt
              
              22,056
              
              
              
              22,056Total
                  current liabilities
              
              1,886,477
              
              
              
              1,813,411Long-term
                  debt
              
              350,951
              
              
              
              412,057Other
                  liabilities
              
              184,533
              
              
              
              178,304Total
                  liabilities
              
              2,421,961
              
              
              
              2,403,772Stockholders’
                  equity:Preferred
                  stock, $0.01 par value per share, 5,000,000 shares
                  authorized,and
                  no shares issued and outstanding
              
              -
              
              
              
              -Common
                  Stock, 275,000,000 shares authorized, $0.01 par value;shares
                  issued: 159,446,000 and 79,787,000, respectively;shares
                  outstanding: 148,629,000 and 73,858,000, respectively
              
              1,595
              
              
              
              798Additional
                  paid-in capital
              
              462,851
              
              
              
              467,353Unearned
                  compensation under employee compensation plans
              
              (9,750
              )
              
              
              (18,177
              )Accumulated
                  other comprehensive income
              
              7,478
              
              
              
              8,266Retained
                  earnings
              
              1,330,033
              
              
              
              1,142,7571,792,207
              
              
              
              1,600,997Common
                  Stock in treasury at cost, 10,817,000 and 5,929,000shares,
                  respectively
              
              (375,404
              )
              
              
              (404,683
              )Total
                  stockholders’ equity
              
              1,416,803
              
              
              
              1,196,314Total
                  liabilities and stockholders’ equity
              $
              3,838,764
              
              
              $
              3,600,086
  *See
        accompanying Notes to Unaudited Consolidated Financial Statements*
 
  
  **EXPRESS
        SCRIPTS, INC.**
 **Unaudited
        Consolidated Statement of Operations**
 
 **Three
                  Months Ended**
              
              **Six
                  Months Ended****June
                  30,**
              
              **June
                  30,***(in
                  thousands, except per share data)*
              
              **2005**
              
              
              
              **2004**
              
              
              
              **2005**
              
              
              
              **2004**Revenues1
              $
              3,944,254
              
              
              $
              3,779,505
              
              
              $
              7,783,376
              
              
              $
              7,407,320Cost
                  of revenues1
              
              3,667,507
              
              
              
              3,555,983
              
              
              
              7,241,665
              
              
              
              6,962,011Gross
                  profit
              
              276,747
              
              
              
              223,522
              
              
              
              541,711
              
              
              
              445,309Selling,
                  general and administrative
              
              128,353
              
              
              
              96,723
              
              
              
              254,984
              
              
              
              191,967Operating
                  income
              
              148,394
              
              
              
              126,799
              
              
              
              286,727
              
              
              
              253,342Other
                  (expense) income:Undistributed
                  loss from joint venture
              
              (642
              )
              
              
              (1,460
              )
              
              
              (1,295
              )
              
              
              (2,800
              )Interest
                  income
              
              2,452
              
              
              
              801
              
              
              
              4,052
              
              
              
              1,625Interest
                  expense
              
              (4,683
              )
              
              
              (20,160
              )
              
              
              (9,430
              )
              
              
              (32,870
              )(2,873
              )
              
              
              (20,819
              )
              
              
              (6,673
              )
              
              
              (34,045
              )Income
                  before income taxes
              
              145,521
              
              
              
              105,980
              
              
              
              280,054
              
              
              
              219,297Provision
                  for income taxes
              
              43,521
              
              
              
              40,560
              
              
              
              92,778
              
              
              
              83,914Net
                  income
              $
              102,000
              
              
              $
              65,420
              
              
              $
              187,276
              
              
              $
              135,383Basic
                  earnings per share:
              $
              0.69
              
              
              $
              0.42
              
              
              $
              1.27
              
              
              $
              0.88Weighted
                  average number of common sharesOutstanding
                  during the period - Basic EPS
              
              148,285
              
              
              
              154,508
              
              
              
              147,779
              
              
              
              154,586Diluted
                  earnings per share:
              $
              0.68
              
              
              $
              0.42
              
              
              $
              1.25
              
              
              $
              0.86Weighted
                  average number of common sharesOutstanding
                  during the period - Diluted EPS
              
              150,532
              
              
              
              157,104
              
              
              
              149,971
              
              
              
              157,058
 
 *1**Excludes estimated retail pharmacy co-payments of $1,460,177 and $1,387,488
          for
          the three months ended June 30, 2005 and 2004, respectively, and $2,943,880
          and
          $2,784,599 for the six months ended June 30, 2005 and 2004, respectively.
          These
          are amounts we instructed retail pharmacies to collect from members. We
          have no
          information regarding actual co-payments collected.*
 
 *See
          accompanying Notes to Unaudited Consolidated Financial Statements*
  
   
 **EXPRESS
                  SCRIPTS, INC.****Unaudited
                  Consolidated Statement of Changes in Stockholders’
                  Equity**Number
                  of Shares
              
              Amount*(in
                  thousands)*
              Common
                Stock
              
              Common
                  Stock
              
              Additional
                Paid-in
                Capital
              
              Unearned
                  Compensation Under Employee Compensation Plans
              Accumulated
                Other
                  Comprehensive Income
              
              Retained
                  Earnings
              TreasuryStock
              
              TotalBalance
                  at December 31, 2004
              
              79,787
              
              $
              798
              
              $
              467,353
              
              $
              (18,177
              )
              $
              8,266
              
              $
              1,142,757
              
              $
              (404,683
              )
              $
              1,196,314Comprehensive
                  income:Net
                  income
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              187,276
              
              
              -
              
              
              187,276Other
                  comprehensive
                  income:Foreign
                  currencytranslation
                  adjustment
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (1,052
              )
              
              -
              
              
              -
              
              
              (1,052
              )Realized
                  and unrealized gainson
                  derivative financialinstruments,
                  net of taxes
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              264
              
              
              -
              
              
              -
              
              
              264Comprehensive
                  income
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (788
              )
              
              187,276
              
              
              -
              
              
              186,488Stock
                  split in form of stock
                  dividend
              
              79,724
              
              
              797
              
              
              (797
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Treasury
                  stock
                  acquired
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (487
              )
              
              (487
              )Changes
                  in stockholders’ equity
                  relatedto
                  employee stock plans
              
              (65
              )
              
              -
              
              
              (3,705
              )
              
              8,427
              
              
              -
              
              
              -
              
              
              29,766
              
              
              34,488Balance
                  at June 30, 2005
              
              159,446
              
              $
              1,595
              
              $
              462,851
              
              $
              (9,750
              )
              $
              7,478
              
              $
              1,330,033
              
              $
              (375,404
              )
              $
              1,416,803
 *See
        accompanying Notes to Unaudited Consolidated Financial Statements*
 
 
 
  
   
 **EXPRESS
                    SCRIPTS, INC.****Unaudited****Consolidated
                    Statement of Cash Flows****Six
                    Months Ended****June
                    30,***(in
                    thousands)*
                
                
                **2005**
                
                
                **2004**Cash
                    flows from operating activities:Net
                    income
                
                $
                187,276
                
                $
                135,383Adjustments
                    to reconcile net income to net cashprovided
                    by operating activities, excludingthe
                    effect of the acquisition:Depreciation
                    and amortization
                
                
                39,303
                
                
                32,825Non-cash
                    adjustments to net income
                
                
                31,705
                
                
                43,512Net
                    changes in operating assets and liabilities
                
                
                58,120
                
                
                (58,409
                )Net
                    cash provided by operating activities
                
                
                316,404
                
                
                153,311Cash
                    flows from investing activities:Purchases
                    of property and equipment
                
                
                (17,932
                )
                
                (17,354
                )Acquisition,
                    net of cash acquired, and investment in joint venture
                
                
                (387
                )
                
                (331,058
                )Loan
                    repayment from (loan to) PCA
                
                
                2,188
                
                
                (11,300
                )Other
                
                
                (296
                )
                
                96Net
                    cash used in investing activities
                
                
                (16,427
                )
                
                (359,616
                )Cash
                    flows from financing activities:Proceeds
                    from long-term debt
                
                
                -
                
                
                675,000Repayment
                    of long-term debt
                
                
                (11,056
                )
                
                (734,955
                )(Repayments
                    of) Proceeds from revolving credit line, net
                
                
                (50,000
                )
                
                25,000Treasury
                    stock acquired
                
                
                -
                
                
                (52,146
                )Deferred
                    financing fees
                
                
                -
                
                
                (6,032
                )Net
                    proceeds from employee stock plans
                
                
                12,607
                
                
                21,515Net
                    cash used in financing activities
                
                
                (48,449
                )
                
                (71,618
                )Effect
                    of foreign currency translation adjustment
                
                
                (329
                )
                
                (404
                )Net
                    increase (decrease) in cash and cash equivalents
                
                
                251,199
                
                
                (278,327
                )Cash
                    and cash equivalents at beginning of period
                
                
                166,054
                
                
                396,040Cash
                    and cash equivalents at end of period
                
                $
                417,253
                
                $
                117,713
 *See
        accompanying Notes to Unaudited Consolidated Financial Statements*
 
 
 
  
   **EXPRESS
        SCRIPTS, INC.**
 
 **NOTES
        TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**
 
 
 **Note
        1 - Summary of significant accounting policies**
 
 Certain
        of our significant accounting policies are described below. Other financial
        statement note disclosures, normally included in financial statements prepared
        in conformity with generally accepted accounting principles, have been omitted
        from this Form 10-Q pursuant to the rules and regulations of the Securities
        and
        Exchange Commission. However, we believe the disclosures contained in this
        Form
        10-Q are adequate to make the information presented not misleading when read
        in
        conjunction with the notes to the consolidated financial statements included
        in
        our Annual Report on Form 10-K for the year ended December 31, 2004 filed
        with
        the Securities and Exchange Commission on March 3, 2005. For a full description
        of our accounting policies, please refer to the Notes to Consolidated Financial
        Statements included in our Annual Report on Form 10-K for the year ended
        December 31, 2004.
 
 We
        believe the accompanying unaudited consolidated financial statements reflect
        all
        adjustments (consisting of only normal recurring adjustments except as otherwise
        disclosed) necessary to present fairly the Unaudited Consolidated Balance
        Sheet
        at June 30, 2005, the Unaudited Consolidated Statements of Operations for
        the
        three and six months ended June 30, 2005 and 2004, the Unaudited Consolidated
        Statement of Changes in Stockholders’ Equity for the six months ended June 30,
        2005, and the Unaudited Consolidated Statements of Cash Flows for the six
        months
        ended June 30, 2005 and 2004. Operating results for the three and six months
        ended June 30, 2005 are not necessarily indicative of the results that may
        be
        expected for the year ending December  31,  2005.
 
 *REVENUE
        RECOGNITION*
 
 Revenues
        from our pharmacy benefit management (“PBM”) segment are earned by dispensing
        prescriptions from our home delivery pharmacies, processing claims for
        prescriptions filled by retail pharmacies in our networks, and by providing
        services to drug manufacturers, including administration of discount programs
        (see also “—Rebate Accounting”).
 
 Revenues
        from dispensing prescriptions from our home delivery pharmacies, which include
        the co-payment received from members of the health plans we serve, are recorded
        when prescriptions are shipped. At the time of shipment, our earnings process
        is
        complete: the obligation of our customer to pay for the drugs is fixed, and,
        due
        to the nature of the product, the member may not return the drugs nor receive
        a
        refund.
 
 Revenues
        related to the sale of prescription drugs by retail pharmacies in our networks
        consist of the amount the client has contracted to pay us (which excludes
        the
        co-payment) for the dispensing of such drugs together with any associated
        administrative fees. These revenues are recognized when the claim is processed.
        When we independently have a contractual obligation to pay our network pharmacy
        providers for benefits provided to our clients’ members, we act as a principal
        in the arrangement and we include the total payments we have contracted to
        receive from these clients as revenue, and payments we make to the network
        pharmacy providers as cost of revenue in compliance with Emerging Issues
        Task
        Force (“EITF”) Issue No. 99-19, “Reporting Gross Revenue as a Principal vs. Net
        as an Agent.” When a prescription is presented by a member to a retail pharmacy
        within our network, we are solely responsible for confirming member eligibility,
        performing drug utilization review, reviewing for drug-to-drug interactions,
        performing clinical intervention, which may involve a call to the member’s
        physician, communicating plan provisions to the pharmacy, directing payment
        to
        the pharmacy and billing the client for the amount they are contractually
        obligated to pay us for the prescription dispensed, as specified within our
        client contracts. We also provide benefit design and formulary consultation
        services to clients. We have separately negotiated contractual relationships
        with our clients and with network pharmacies, and under our contracts with
        pharmacies we assume the credit risk of our clients’ ability to pay for drugs
        dispensed by these pharmacies to clients’ members. Our clients are not obligated
        to pay the pharmacies as we are primarily obligated to pay retail pharmacies
        in
        our network the contractually agreed upon amount for the prescription dispensed,
        as specified within our provider contracts. In addition, under most of our
        client contracts, we realize a positive or negative margin represented by
        the
        difference between the negotiated ingredient costs we will receive from our
        clients and the separately negotiated ingredient costs we will pay to our
        network pharmacies. These factors indicate we are a principal as defined
        by EITF
        99-19 and, as such, we record ingredient cost billed to clients in revenue
        and
        the corresponding ingredient cost paid to network pharmacies in cost of
        revenues.
 
 If
        we
        merely administer a client’s network pharmacy contracts to which we are not a
        party and under which we do not assume credit risk, we record only our
        administrative fees as revenue. For these clients, we earn an administrative
        fee
        for collecting payments from the client and remitting the corresponding amount
        to the pharmacies in the client’s network. In these transactions we act as a
        conduit for the client. Because we are not the principal in these transactions,
        drug ingredient cost is not included in our revenues or in our cost of
        revenues.
 
 In
        retail
        pharmacy transactions, amounts paid to pharmacies and amounts charged to
        clients
        are always exclusive of the applicable co-payment. Under our pharmacy
        agreements, the pharmacy is solely obligated to collect the co-payment from
        the
        member based on the amount we advise them to collect. We have no information
        regarding actual co-payments collected. As such, we do not include member
        co-payments to retail pharmacies in our revenue or in our cost of revenue.
        Retail pharmacy co-payments, which we instructed retail pharmacies to collect
        from members, of $1.5 billion and $1.4 billion for the three months ended
        June
        30, 2005 and 2004, respectively, and $2.9 billion and $2.8 billion for the
        six
        months ended June 30, 2005 and 2004, respectively, are excluded from revenues
        and cost of revenues.
 
 We
        bill
        our clients based upon the billing schedules established in client contracts.
        At
        the end of a period, any unbilled revenues related to the sale of prescription
        drugs that have been adjudicated with retail pharmacies are estimated based
        on
        the amount we will pay to the pharmacies and historical gross margin. Those
        amounts due from our clients are recorded as revenue as they are contractually
        due to us for past transactions. Adjustments are made to these estimated
        revenues to reflect actual billings at the time clients are billed;
        historically, these adjustments have not been material.
 
 Certain
        implementation and other fees paid to clients upon the initiation of a
        contractual agreement are considered an integral part of overall contract
        pricing and are recorded as a reduction of revenue. Where they are refundable
        upon early termination of the contract, these payments are capitalized and
        amortized as a reduction of revenue on a straight-line basis over the life
        of
        the contract.
 
 Revenues
        from our non-PBM segment, Pharma Business Solutions (“PBS”), are derived from
        the distribution of pharmaceuticals requiring special handling or packaging
        where we have been selected by the pharmaceutical manufacturer as part of
        a
        limited distribution network, the distribution of pharmaceuticals through
        Patient Assistance Programs where we receive a fee from the pharmaceutical
        manufacturer for administrative and pharmacy services for the delivery of
        certain drugs free of charge to doctors for their indigent patients, sample
        fulfillment and sample accountability services. Revenues earned by PBS include
        administrative fees received from pharmaceutical manufacturers for dispensing
        or
        distributing consigned pharmaceuticals requiring special handling or packaging
        and administrative fees for verification of practitioner licensure and
        distribution of consigned drug samples to doctors based on orders received
        from
        pharmaceutical sales representatives. We also administer sample card programs
        for certain manufacturers and include the ingredient costs of those drug
        samples
        dispensed from retail pharmacies in PBS revenues, and the associated costs
        for
        these sample card programs in cost of revenues. Because manufacturers are
        independently obligated to pay us and we have an independent contractual
        obligation to pay our network pharmacy providers for free samples dispensed
        to
        patients under sample card programs, we include the total payments from these
        manufacturers (including ingredient costs) as revenue, and payments to the
        network pharmacy provider as cost of revenue. These transactions require
        us to
        assume credit risk.
 
 *REBATE
        ACCOUNTING*
 
 We
        administer two rebate programs through which we receive rebates and
        administrative fees from pharmaceutical manufacturers. Rebates earned for
        the
        administration of these programs, performed in conjunction with claim processing
        and home delivery services provided to clients, are recorded as a reduction
        of
        cost of revenue and the portion of the rebate payable to customers is treated
        as
        a reduction of revenue. When we earn rebates and administrative fees in
        conjunction with formulary management services, but do not process the
        underlying claims, we record rebates received from manufacturers, net of
        the
        portion payable to customers, in revenue. We record rebates and administrative
        fees receivable from the manufacturer and payable to clients when the
        prescriptions covered under contractual agreements with the manufacturers
        are
        dispensed; these amounts are not dependent upon future pharmaceutical sales.
  With
        respect to rebates based on actual market share performance, we estimate
        rebates
        and the associated receivable from pharmaceutical manufacturers quarterly
        based
        on our estimate of the number of rebatable prescriptions and the rebate per
        prescription. The portion of rebates payable to clients is estimated quarterly
        based on historical and/or anticipated sharing percentages and our estimate
        of
        rebates receivable from pharmaceutical manufacturers. These estimates are
        adjusted to actual when amounts are received from manufacturers and the portion
        payable to clients is paid.
 
 With
        respect to rebates that are not based on market share performance, no estimation
        is required for the manufacturer billing amounts which are
        determinable when the drug is dispensed. We pay all or a contractually agreed
        upon portion of such rebates to our clients.  The portion of rebates
        payable to clients is estimated based on historical and/or anticipated sharing
        percentages.  These estimates are adjusted to actual when amounts
        are paid
        to clients.
 
 *COST
        OF REVENUES*
 
 Cost
        of
        revenues includes product costs, network pharmacy claims payments and other
        direct costs associated with dispensing prescriptions, including shipping
        and
        handling (see also “—Revenue Recognition” and “—Rebate
        Accounting”).
 
 *CASH
        AND CASH EQUIVALENTS*
 
 Cash
        and
        cash equivalents include cash on hand and investments with original maturities
        of three months or less. We have banking relationships resulting in certain
        cash
        disbursement accounts being maintained by banks not holding our cash
        concentration accounts. As a result, cash disbursement accounts carrying
        negative book balances of $142.8 million and $160.3 million (representing
        outstanding checks not yet presented for payment) have been reclassified
        to
        claims and rebates payable, accounts payable and accrued expenses at June
        30,
        2005 and December 31, 2004, respectively. This reclassification restores
        balances to cash and current liabilities for liabilities to our vendors which
        have not been defeased. No overdraft or unsecured short-term loan exists
        in
        relation to these negative balances.
 
 *RECEIVABLES*
 
 Based
        on
        our revenue recognition policies discussed above, certain claims at the end
        of a
        period are unbilled. Revenue and unbilled receivables for those claims are
        estimated each period based on the amount to be paid to network pharmacies
        and
        historical gross margin. Estimates are adjusted to actual at the time of
        billing. In addition, revenue and unbilled receivables for rebates based
        on
        market share performance are calculated quarterly based on an estimate of
        rebatable prescriptions and the rebate per prescription. These estimates
        are
        adjusted to actual when the number of rebatable prescriptions and the rebate
        per
        prescription have been determined and the billing to the manufacturers has
        been
        completed. Historically, adjustments to our estimates have been immaterial.
 
 Included
        in receivables, net, as of June 30, 2005 and December 31, 2004, is an allowance
        for doubtful accounts of $37.8 million and $31.4 million, respectively. This
        increase is due to an increase in the allowance for receivables from our
        clients’ members.
 
 As
        of
        June 30, 2005 and December 31, 2004, unbilled receivables were $684.3 million
        and $664.5 million, respectively. Unbilled receivables are billed to clients
        typically within 30 days of the transaction date based on the contractual
        billing schedule agreed upon with the client.
 
 *IMPAIRMENT
        OF LONG-LIVED ASSETS*
 
 We
        evaluate whether events and circumstances have occurred that indicate the
        remaining estimated useful life of long lived assets, including intangible
        assets, may warrant revision or that the remaining balance of an asset may
        not
        be recoverable. The measurement of possible impairment is based on the ability
        to recover the balance of assets from expected future operating cash flows
        on an
        undiscounted basis. Impairment losses, if any, would be determined based
        on the
        present value of the cash flows using discount rates that reflect the inherent
        risk of the underlying business. Absent events or circumstances indicating
        an
        impairment of goodwill, we perform an annual goodwill impairment test during
        the
        fourth quarter. No impairments existed as of June 30, 2005 and December 31,
        2004.
 
 *SELF-INSURANCE
        RESERVES*
 
 We
        maintain insurance coverage for claims that arise in the normal course of
        business. Where insurance coverage is not available, or, in our judgment,
        is not
        cost-effective, we maintain self-insurance reserves to reduce our exposure
        to
        future legal costs, settlements and judgments. Self-insured losses are accrued
        based upon estimates of the aggregate liability for the costs of uninsured
        claims incurred using certain actuarial assumptions followed in the insurance
        industry and our historical experience (see Note 8). It is not possible to
        predict with certainty the outcome of these claims, and we can give no
        assurances that any losses, in excess of our insurance and any self-insurance
        reserves, will not be material.
 
 *EMPLOYEE
        STOCK-BASED COMPENSATION*
  We
          account for employee stock options in accordance with Accounting Principles
          Board (“APB”) No.  25, “Accounting for Stock Issued to Employees.” Under
          APB 25, we apply the intrinsic value method of accounting and, therefore,
          have
          not recognized compensation expense for options granted, because we grant
          options at a price equal to market value at the time of grant. During 1996,
          Financial Accounting Standard (“FAS”) No. 123, “Accounting for Stock-Based
          Compensation”, became effective for us. FAS 123 prescribes the recognition of
          compensation expense based on the fair value of options determined on the
          grant
          date. However, FAS 123 grants an exception that allows companies currently
          applying APB 25 to continue using that method. We have, therefore, elected
          to
          continue applying the intrinsic value method under APB 25. In December
          2004, the
          Financial Accounting Standards Board (“FASB”) revised FAS 123 (“FAS 123R”),
“Share-Based Payment”, which replaces FAS 123, “Accounting for Stock-Based
          Compensation”, and supersedes APB 25. FAS 123R will require compensation cost
          related to share-based payment transactions to be recognized in the financial
          statements. We will adopt FAS 123R using the modified prospective method
          beginning January 1, 2006 (see “New Accounting Guidance”).
 
 The
        following table shows stock-based compensation expense included in net income
        and pro forma stock-based compensation expense, net income and earnings per
        share had we elected to record compensation expense based on the estimated
        fair
        value of options at the grant date for the three and six months ended
        June
        30, 2005 and 2004 (see also Note 7):
 
 **Three
                  Months Ended**
                **June
                  30,**
              
              **Six
                  Months Ended**
                **June
                  30,*****(in
                  thousands, except per share data)***
              
              **2005**
              
              
              **2004**
              
              
              **2005**
              
              
              **2004**Net
                  income, as reported(1)
              $
              102,000
              
              $
              65,420
              
              $
              187,276
              
              $
              135,383Less:Employee
                  stock-based
                compensation expense determined
                using fair-value based method forstock-based
                  awards, net of tax(2)
              
              (2,634
              )
              
              (369
              )
              
              (5,815
              )
              
              (1,352
              )Pro
                  forma net income
              $
              99,366
              
              $
              65,051
              
              $
              181,461
              
              $
              134,031Basic
                  earnings per shareAs
                  reported
              $
              0.69
              
              $
              0.43
              
              $
              1.27
              
              $
              0.88Pro
                  forma
              
              0.67
              
              
              0.42
              
              
              1.23
              
              
              0.87Diluted
                  earnings per shareAs
                  reported
              $
              0.68
              
              $
              0.42
              
              $
              1.25
              
              $
              0.86Pro
                  forma
              
              0.66
              
              
              0.42
              
              
              1.21
              
              
              0.86
 
 (1) 
        Net income, as reported, includes stock-based compensation expense for the
        three
        months ended June 30, 2005 and 2004 of $994 ($1,591 pre-tax) and $1,352 ($2,190
        pre-tax), respectively, and for the six months ended June 30, 2005 and 2004
        of
        $4,589 ($7,262 pre-tax) and $2,738 ($4,434 pre-tax), respectively, related
        to
        restricted shares of Common Stock awarded to certain of our officers and
        employees.
 
 (2) The
        increase in pro forma compensation expense is due to the forfeiture of options
        during the year which resulted in expense reductions of $876 and $3,190 during
        the three and six months ended June 30, 2004, respectively.
 
 
 *NEW
        ACCOUNTING GUIDANCE*
  In
          June
          2005, the FASB issued FAS 154, “Accounting Changes and Error Corrections”, which
          superceded APB No. 20, “Accounting Changes”. APB No. 20 previously required that
          most voluntary changes in accounting principle be recognized by including
          in the
          current period’s net income the cumulative effect of changing to the new
          accounting principle. In contrast, FAS 154 requires entities that voluntarily
          make a change in accounting principle to apply that change retrospectively
          to
          prior periods’ financial statements, unless this would be impracticable. In
          addition, FAS 154 makes a distinction between retrospective application
          of an
          accounting principle and the restatement of financial statements to reflect
          the
          correction of an error. FAS 154 is effective for accounting changes and
          corrections of errors made in fiscal years beginning after December 15,
          2005. We
          do not expect the implementation of FAS 154 to have an impact on our
          consolidated results of operations.
 In
        December 2004, the FASB revised FAS 123. FAS 123R will require compensation
        cost
        related to share-based payment transactions to be recognized in the financial
        statements. As permitted by FAS 123, we currently follow the guidance of
        APB 25,
        which allows the use of the intrinsic value method of accounting to value
        share-based payment transactions with employees. FAS 123R requires measurement
        of the cost of share-based payment transactions to employees at the fair
        value
        of the award on the grant date and recognition of expense over the requisite
        service or vesting period. FAS 123R allows implementation using a modified
        version of prospective application, under which compensation expense for
        the
        unvested portion of previously granted awards and all new awards will be
        recognized on or after the date of adoption. FAS 123R also allows companies
        to
        implement by restating previously issued financial statements, basing the
        amounts on the expense previously calculated and reported in their pro forma
        footnote disclosures required under FAS 123. We will adopt FAS 123R using
        the
        modified prospective method beginning January 1, 2006. The impact of adopting
        FAS 123R on our consolidated results of operations is not expected to differ
        materially from the pro forma disclosures currently required by FAS 123 (see
        “Employee stock-based compensation”).
 
 **Note
        2 - Changes in business**
 
 On
        January 30, 2004, we acquired the outstanding capital stock of CuraScript,
        for
        approximately $333.4 million, which includes a purchase price adjustment
        for working capital and transaction costs. CuraScript is one of the nation’s
        largest specialty pharmacy services companies and has enhanced our ability
        to
        provide comprehensive pharmaceutical management services to our clients and
        their members. CuraScript operates seven specialty pharmacies throughout
        the
        United States and serves over 175 managed care organizations, 30 Medicaid
        programs and the Medicare program. The transaction was accounted for under
        the
        provisions of FAS 141, “Business Combinations.” The purchase price has been
        allocated based upon the estimated fair value of net assets acquired at the
        date
        of the acquisition. A portion of the excess of purchase price over tangible
        net
        assets acquired has been allocated to intangible assets, consisting of customer
        contracts in the amount of $28.7 million and non-competition agreements in
        the
        amount of $2.7 million, which are being amortized using the straight-line
        method
        over estimated useful lives of ten years and three years, respectively, and
        trade names in the amount of $1.3 million, which are not being amortized.
        These
        assets are included in other intangible assets. In addition, the excess of
        purchase price over tangible net assets and identified intangible assets
        acquired has been allocated to goodwill in the amount of $284.9 million,
        which
        is not being amortized.
 
 **Note
        3 - Goodwill and other intangibles**
 
 The
        following is a summary of our goodwill and other intangible assets (amounts
        in
        thousands).
 
 **June
                  30, 2005**
              
              **December
                  31, 2004****Gross
                  Carrying Amount**
              
              **Accumulated**
                **Amortization**
              
              **Gross
                  Carrying Amount**
              
              **Accumulated**
                **Amortization**GoodwillPBM(1)
              $
              1,792,231
              
              $
              106,985
              
              $
              1,793,830
              
              $
              107,031Non-PBM
              
              22,136
              
              
              -
              
              
              22,136
              
              
              -$
              1,814,367
              
              $
              106,985
              
              $
              1,815,966
              
              $
              107,031Other
                  intangible assetsPBM(1)Customer
                  contracts(1)
              $
              293,909
              
              $
              92,565
              
              $
              294,063
              
              $
              85,067Other(1)
              
              72,623
              
              
              47,867
              
              
              72,346
              
              
              40,408366,532
              
              
              140,432
              
              
              366,409
              
              
              125,475Non-PBMCustomer
                  contracts
              
              4,000
              
              
              1,667
              
              
              4,000
              
              
              1,416Other
              
              1,880
              
              
              150
              
              
              1,880
              
              
              1285,880
              
              
              1,817
              
              
              5,880
              
              
              1,544Total
                  other intangible assets
              $
              372,412
              
              $
              142,249
              
              $
              372,289
              
              $
              127,019
 
 
 (1)
        In the first quarter of 2005 we finalized the allocation of the CuraScript
        purchase price to tangible and intangible net assets resulting in a $1.1
        million
        decrease in goodwill (See Note 2). Changes in goodwill and accumulated
        amortization from December 31, 2004 to June 30, 2005 are also a result of
        changes in foreign currency exchange rates.
 
 
 The
        aggregate amount of amortization expense of other intangible assets was $7.4
        million and $7.0 million for the three months ended June 30, 2005 and 2004,
        respectively, and $14.9 million and $13.7 million for the six months ended
        June
        30, 2005 and 2004, respectively. The future aggregate amount of amortization
        expense of other intangible assets is approximately $15.0 million for 2005,
        $25.5 million for 2006, $21.6 million for 2007, $17.2 million for 2008, and
        $15.8 million for 2009. The weighted average amortization period of intangible
        assets subject to amortization is 17 years in total, and by major intangible
        class is 20 years for customer contracts and six years for other intangible
        assets.
 
 **Note
        4 - Income Taxes**
 
 Our
        effective tax rate decreased to 29.9% and 33.1% for the three and six months
        ended June 30, 2005, as compared to 38.3% for the same periods of 2004. 
        The decrease in effective tax rate for the three months ended June 30, 2005
        reflects a net tax benefit of $11.9 million, of which $11.0 million is
        non-recurring, relating to a change in the apportionment of our income for
        state
        income tax purposes.  The decrease in the effective tax rate for the
        six
        months ended June 30, 2005 reflects a net tax benefit of $14.2 million, of
        which
        $12.5 million is non-recurring.  The decrease in the effective tax
        rate for
        the six months ended June 30, 2005 reflects both the $11.9 million net tax
        benefit relating to a change in the apportionment of our income for state
        income
        tax purposes and a $2.3 million net tax benefit resulting from the recognition
        of the expected state tax benefit associated with certain subsidiary losses
        generated in 2004.  Excluding the $12.5 million non-recurring net
        tax
        benefit, the effective tax rate for the six months ended June 30, 2005 would
        have been 37.6%.
  Note 5
        - Common Stock
  On
        May
        24, 2005, we announced a two-for-one stock split for stockholders of record
        on
        June 10, 2005, effective June 24, 2005. The split was effected in the form
        of a
        dividend by issuance of one additional share of common stock for each share
        of
        common stock outstanding. The earnings per share and the weighted average
        number
        of shares outstanding for basic and diluted earnings per share for each period
        have been adjusted for the stock split.
 
 **Note 6
        - Earnings per share (reflecting the two-for-one stock split effective June
        24,
        2005)**
 
 Basic
        earnings per share is computed using the weighted average number of common
        shares outstanding during the period. Diluted earnings per share is computed
        in
        the same manner as basic earnings per share but adds the number of additional
        common shares that would have been outstanding for the period if the dilutive
        potential common shares had been issued. The following is the reconciliation
        between the number of weighted average shares used in the basic and diluted
        earnings per share calculation for all periods (amounts in
        thousands):
 
 **Three
                  Months Ended**
                **June
                  30,**
              **Six
                  Months Ended**
                **June
                  30,****2005**
              **2004**
              **2005**
              **2004**Weighted
                  average number of common sharesoutstanding
                  during the period - Basic EPS
              148,285
              154,508
              147,779
              154,586Outstanding
                  stock options
              2,032
              2,170
              1,989
              2,064Executive
                  deferred compensation plan
              39
              92
              37
              90Restricted
                  stock awards
              176
              334
              166
              318Weighted
                  average number of common sharesoutstanding
                  during the period - Diluted EPS
              150,532
              157,104
              149,971
              157,058
 
 The
        above
        shares are all calculated under the “treasury stock” method in accordance with
        FAS 128, “Earnings per Share.”
 
 **Note
        7- Stock-based compensation plans**
 
 We
        apply
        APB 25 and related interpretations in accounting for our stock-based
        compensation plans. Accordingly, compensation cost has been recorded based
        upon
        the intrinsic value method of accounting for restricted stock and no
        compensation cost has been recognized for stock options granted as the exercise
        price of the options was not less than the fair market value of the shares
        at
        the time of grant. If compensation cost for stock option grants had been
        determined based on the fair value at the grant dates consistent with the
        method
        prescribed by FAS 123, our net income and earnings per share for the three
        months ended June 30, 2005 and 2004 would have been $99.4 million, or $0.66
        per
        diluted share and $65.1 million, or $0.42 per diluted shares, respectively,
        and
        our net income and earnings per share for the six months ended June 30, 2005
        and
        2004 would have been $181.5 million or $1.21 per diluted share and $134.0
        million or $0.86 per diluted share, respectively (see also Note 1).
 
 The
        fair
        value of options granted (which is amortized over the option-vesting period
        in
        determining the pro forma impact) is estimated on the date of grant using
        the
        Black-Scholes multiple option-pricing model with the following weighted average
        assumptions:
 
 
 **Three
                  Months Ended June 30,**
              **Six
                  Months Ended June 30,****2005**
              **2004**
              **2005**
              **2004**Expected
                  life of option
              3-5
                  years
              3-5
                  years
              3-5
                  years
              3-5
                  yearsRisk-free
                  interest rate
              3.68%
                  - 4.09%
              1.97%-3.85%
              3.48%
                  - 4.09%
              1.97%-3.85%Expected
                  volatility of stock
              38%
              46%-47%
              38%
                  - 40%
              46%-47%Expected
                  dividend yield
              None
              None
              None
              None
 
 A
        summary
        of the status of our fixed stock option plans as of June 30, 2005 and 2004,
        and
        changes during the periods ending on those dates are presented
        below.
 
 **Six
                  Months**
                **Ended**
                **June
                  30, 2005**
              
              
              **Six
                  Months**
                **Ended**
                **June
                  30, 2004***(share
                  data in thousands)*
              Shares
              
              Weighted-Average
                  Exercise Price
              
              Shares
              
              
              Weighted-Average
                  Exercise
                PriceOutstanding
                  at beginning of year
              
              7,170
              
              $
              21.86
              
              8,032
              
              $
              17.98Granted
              
              1,647
              
              $
              40.68
              
              936
              
              $
              36.85Exercised
              
              (1,054
              )
              $
              18.87
              
              (1,270
              )
              $
              16.10Forfeited/Cancelled
              
              (67
              )
              $
              28.60
              
              (388
              )
              $
              25.39Outstanding
                  at end of period
              
              7,696
              
              $
              26.24
              
              7,310
              
              $
              20.33Options
                  exercisable at period end
              
              4,626
              
              
              
              
              4,554Weighted-average
                  fair value of
                options
                  granted during the year
              $
              14.53
              
              
              
              $
              14.48
 
 
 The
        following table summarizes information about fixed stock options outstanding
        at
        June 30, 2005:
 Options
                    Outstanding
                
                Options
                    ExercisableRange
                    of
                  Exercise
                    Prices
                  *(share
                    data in*
                  *thousands)*
                Number
                    Outstanding at 6/30/05
                Weighted-Average
                    Remaining Contractual Life
                Weighted-Average
                  Exercise
                    Price
                
                Number
                    Exercisable
                  at
                    6/30/05
                Weighted-
                  Average
                  Exercise
                    Price
 $
                    3.72
                        - 13.78
                    
                    1,483
                    3.1
                    
                    $
                    11.32
                    
                    
                    
                    1,482
                    
                    $
                    11.3214.11 - 19.62
                    
                    1,629
                    4.1
                    
                    
                    17.73
                    
                    
                    
                    1,626
                    
                    
                    17.7320.10
                        - 27.10
                    
                    1,368
                    3.9
                    
                    
                    24.00
                    
                    
                    
                    993
                    
                    
                    24.0029.74
                        - 37.62
                    
                    1,572
                    5.7
                    
                    
                    35.55
                    
                    
                    
                    489
                    
                    
                    35.6338.64
                        - 47.37
                    
                    1,644
                    6.6
                    
                    
                    41.07
                    
                    
                    
                    36
                    
                    
                    39.21$
                    3.71 - 47.37
                    
                    7,696
                    4.7
                    
                    $
                    26.24
                    
                    
                    
                    4,626
                    
                    $
                    19.08
 **Note 8
        - Contingencies**
 
 We
        accrue
        self-insurance reserves based upon estimates of the aggregate liability of
        claim
        costs in excess of our insurance coverage. Reserves are estimated using certain
        actuarial assumptions followed in the insurance industry and our historical
        experience (see Note 1, “Self-insurance reserves”). The majority of these claims
        are legal claims and our liability esimate is primarily related to the cost
        to
        defend these claims. We do not accrue for settlements, judgments, monetary
        fines
        or penalties until such amounts are probable and estimable, in compliance
        with
        FAS 5, “Accounting for Contingencies.” Under FAS 5, if the range of possible
        loss is broad, the liability accrual should be based on the lower end of
        the
        range.
 
 While
        we
        believe that our services and business practices are in compliance with
        applicable laws, rules and regulations in all material respects, we cannot
        predict the outcome of these matters at this time. An unfavorable outcome
        in one
        or more of these matters could result in the imposition of judgments, monetary
        fines or penalties, or injunctive or administrative remedies. We can give
        no
        assurance that such judgments, fines and remedies, and future costs associated
        with legal matters, would not have a material adverse effect on our financial
        condition, our consolidated results of operations or our consolidated cash
        flows.
 
 
 **Note 9
        - Segment reporting**
 
 We report segments on the basis of services offered and have determined that
        we
        have two reportable segments: PBM services and non-PBM services. Our PBM
        operating results include those of CuraScript from January 30, 2004, the
        date of
        acquisition. Our domestic and Canadian PBM operating segments have similar
        characteristics and as such have been aggregated into a single PBM reporting
        segment. Our Non-PBM operating segment includes our Specialty Distribution
        Services and Phoenix Marketing Group service lines.
 
 Operating
        income is the measure used by our chief operating decision maker to assess
        the
        performance of each of our operating segments. The following table presents
        information about our reportable segments, including a reconciliation of
        operating income to income before income taxes, for the three and six months
        ended June 30, 2005 and 2004:
 ***(in
                        thousands)***
                    **PBM**
                    
                    **Non-PBM**
                    
                    **Total****Three
                        months ended June 30, 2005**Product
                        revenuesNetwork
                        revenues
                    $
                    2,323,085
                    
                    $
                    -
                    
                    $
                    2,323,085Home
                        delivery revenues
                    
                    1,513,073
                    
                    
                    -
                    
                    
                    1,513,073Other
                        revenues
                    
                    -
                    
                    
                    41,744
                    
                    
                    41,744Service
                        revenues
                    
                    38,352
                    
                    
                    28,000
                    
                    
                    66,352Total
                        revenues
                    
                    3,874,510
                    
                    
                    69,744
                    
                    
                    3,944,254Depreciation
                        and amortization expense
                    
                    18,094
                    
                    
                    1,432
                    
                    
                    19,526Operating
                        income
                    
                    139,621
                    
                    
                    8,773
                    
                    
                    148,394Undistributed
                        loss from joint venture
                    
                    
                    
                    
                    
                    
                    
                    (642
                    )Interest
                        income
                    
                    
                    
                    
                    
                    
                    
                    2,452Interest
                        expense
                    
                    
                    
                    
                    
                    
                    
                    (4,683
                    )Income
                        before income taxes
                    
                    
                    
                    
                    
                    
                    
                    145,521Capital
                        expenditures
                    
                    11,331
                    
                    
                    663
                    
                    
                    11,994**Three
                        months ended June 30, 2004**Product
                        revenue:Network
                        revenues
                    $
                    2,365,476
                    
                    
                    -
                    
                    $
                    2,365,476Home
                        delivery revenues
                    
                    1,337,237
                    
                    
                    -
                    
                    
                    1,337,237Other
                        revenues
                    
                    -
                    
                    
                    31,151
                    
                    
                    31,151Service
                        revenues
                    
                    19,022
                    
                    
                    26,619
                    
                    
                    45,641Total
                        revenues
                    
                    3,721,735
                    
                    
                    57,770
                    
                    
                    3,779,505Depreciation
                        and amortization expense
                    
                    16,030
                    
                    
                    1,090
                    
                    
                    17,120Operating
                        income
                    
                    117,281
                    
                    
                    9,518
                    
                    
                    126,799Undistributed
                        loss from joint venture
                    
                    
                    
                    
                    
                    
                    
                    (1,460
                    )Interest
                        income
                    
                    
                    
                    
                    
                    
                    
                    801Interest
                        expense
                    
                    
                    
                    
                    
                    
                    
                    (20,160
                    )Income
                        before income taxes
                    
                    
                    
                    
                    
                    
                    
                    105,980Capital
                        expenditures
                    
                    8,560
                    
                    
                    1,055
                    
                    
                    9,615**Six
                        months ended June 30, 2005**Product
                        revenuesNetwork
                        revenues
                    $
                    4,624,349
                    
                    
                    -
                    
                    $
                    4,624,349Home
                        delivery revenues
                    
                    2,953,159
                    
                    
                    -
                    
                    
                    2,953,159Other
                        revenues
                    
                    -
                    
                    
                    77,163
                    
                    
                    77,163Service
                        revenues
                    
                    72,179
                    
                    
                    56,526
                    
                    
                    128,705Total
                        revenues
                    
                    7,649,687
                    
                    
                    133,689
                    
                    
                    7,783,376Depreciation
                        and amortization expense
                    
                    36,498
                    
                    
                    2,805
                    
                    
                    39,303Operating
                        income
                    
                    270,619
                    
                    
                    16,108
                    
                    
                    286,727Undistributed
                        loss from joint venture
                    
                    
                    
                    
                    
                    
                    
                    (1,295
                    )Interest
                        income
                    
                    
                    
                    
                    
                    
                    
                    4,052Interest
                        expense
                    
                    
                    
                    
                    
                    
                    
                    (9,430
                    )Income
                        before income taxes
                    
                    
                    
                    
                    
                    
                    
                    280,054Capital
                        expenditures
                    
                    15,235
                    
                    
                    2,697
                    
                    
                    17,932
 *(in
                      thousands)*
                  PBM
                  
                  Non-PBM
                  
                  **Total****Six
                      months ended June 30, 2004**Product
                      revenue:Network
                      revenues
                  $
                  4,702,729
                  
                  
                  -
                  
                  $
                  4,702,729Home
                      delivery revenues
                  
                  2,550,317
                  
                  
                  -
                  
                  
                  2,550,317Other
                      revenues
                  
                  -
                  
                  
                  51,113
                  
                  
                  51,113Service
                      revenues
                  
                  40,986
                  
                  
                  62,175
                  
                  
                  103,161Total
                      revenues
                  
                  7,294,032
                  
                  
                  113,288
                  
                  
                  7,407,320Depreciation
                      and amortization expense
                  
                  30,784
                  
                  
                  2,041
                  
                  
                  32,825Operating
                      income
                  
                  236,100
                  
                  
                  17,242
                  
                  
                  253,342Undistributed
                      loss from joint venture
                  
                  
                  
                  
                  
                  
                  
                  (2,800
                  )Interest
                      income
                  
                  
                  
                  
                  
                  
                  
                  1,625Interest
                      expense
                  
                  
                  
                  
                  
                  
                  
                  (32,870
                  )Income
                      before income taxes
                  
                  
                  
                  
                  
                  
                  
                  219,297Capital
                      expenditures
                  
                  12,578
                  
                  
                  4,776
                  
                  
                  17,354**As
                      of June 30, 2005**Total
                      assets
                  $
                  3,678,628
                  
                  $
                  160,136
                  
                  $
                  3,838,764Investment
                      in equity method investees
                  
                  733
                  
                  
                  -
                  
                  
                  733**As
                      of December 31, 2004**Total
                      assets
                  $
                  3,460,426
                  
                  $
                  139,660
                  
                  $
                  3,600,086Investment
                      in equity method investees
                  
                  808
                  
                  
                  -
                  
                  
                  808
 
 PBM
        product revenue consists of revenues from the dispensing of prescription
        drugs
        from our home delivery pharmacies and revenues from the sale of prescription
        drugs by retail pharmacies in our retail pharmacy networks. Non-PBM product
        revenues consist of revenues from certain specialty distribution activities.
        PBM
        service revenue includes administrative fees associated with the administration
        of retail pharmacy networks contracted by certain clients, market research
        programs and informed decision counseling services. Non-PBM service revenue
        includes revenues from certain specialty distribution services, and sample
        distribution and accountability services.
 
 Revenues
        earned by our Canadian PBM totaled $7.4 million and $6.1 million for the
        three
        months ended June 30, 2005 and 2004, respectively, and $15.0 million and
        $13.0
        million for the six months ended June 30, 2005 and 2004, respectively. All
        other
        revenues are earned in the United States. Long-lived assets of our Canadian
        PBM
        (consisting primarily of fixed assets and goodwill) totaled $35.6 million
        and
        $36.1 million as of June 30, 2005 and December 31, 2004, respectively.
        All
        other long-lived assets are domiciled in the United States.
 
 
 **Note 10
        - Subsequent Events**
 
 On
        July
        21, 2005, we announced the signing of a definitive agreement to acquire Priority
        Healthcare Corporation (“Priority”) in a cash transaction for $28 per share, or
        approximately $1.3 billion. Priority, headquartered near Orlando, Fla., is
        among
        the nation’s largest specialty pharmacy and distributor companies. This
        transaction is expected to close in the fourth quarter of 2005, subject to
        expiration of the waiting period under the Hart-Scott-Rodino Antitrust
        Improvements Act, with customary closing conditions. This acquisition is
        expected to enhance our specialty pharmacy business. Under the terms of the
        agreement, each Priority share will be exchanged for $28 in cash. We
        expect
        to finance the acquisition with cash on hand and bank debt, via a new credit
        facility which will replace our existing credit facility (see “—Bank Credit
        Facility”). As a result of this refinancing, we expect to write-off
        approximately $3.5 million of deferred financing fees relating to our existing
        credit facility at the time the transaction is closed, which is expected
        to
        be late in the third quarter or during the fourth quarter of 2005.
  **Item
          2.****Management’s
          Discussion And Analysis Of Financial Condition And Results Of
          Operations**
 
 *Information
        that we have included or incorporated by reference in this Quarterly Report
        on
        Form 10-Q, and information that may be contained in our other filings with
        the
        Securities and Exchange Commission (the “SEC”) and our press releases or other
        public statements, contain or may contain forward-looking statements. These
        forward-looking statements include, among others, statements of our plans,
        objectives, expectations or intentions.*
 
 *Our
        forward-looking statements involve risks and uncertainties. Our actual results
        may differ significantly from those projected or suggested in any
        forward-looking statements. We do not undertake any obligation to release
        publicly any revisions to such forward-looking statements to reflect events
        or
        circumstances occurring after the date hereof or to reflect the occurrence
        of
        unanticipated events. Factors that might cause such a difference to occur
        include, but are not limited to:*
 
 
 •
              *risks
                  in closing the proposed merger with Priority Healthcare, and other
                  risks
                  associated with our acquisitions, which include integration risks
                  and
                  costs, risks of client retention and repricing of client contracts,
                  and
                  risks associated with the operations of acquired
                  businesses*
 •
              *costs
                  of and**adverse
                  results in litigation, including a number of pending class action
                  cases
                  that challenge certain of our business
                  practices*
 •
              *risks
                  arising from investigations of certain PBM practices and pharmaceutical
                  pricing, marketing and distribution practices currently being conducted
                  by
                  the U.S. Attorney offices in Philadelphia and Boston, and by other
                  regulatory agencies including the Department of Labor, and various
                  state
                  attorneys general*
 •
              *risks
                  and**uncertainties
                  regarding the implementation and the ultimate terms of the Medicare
                  Part D
                  prescription drug benefit, including financial risks to us if we
                  participate in the program on a risk-bearing basis and risks of
                  client or
                  member losses to other providers under Medicare Part
                  D*
 •
              *risks
                  associated with our ability to maintain growth rates, or to control
                  operating or capital costs*
 •
              *continued
                  pressure on margins resulting from client demands for lower prices,
                  enhanced service offerings and/or higher service levels, and the
                  possible
                  termination of, or unfavorable modification to, contracts with
                  key clients
                  or providers*
 •
              *competition
                  in the PBM industry, and our ability to consummate contract negotiations
                  with prospective clients, as well as competition from new competitors
                  offering services that may in whole or in part replace services
                  that we
                  now provide to our customers*
 •
              *adverse
                  results in regulatory matters, the adoption of new legislation
                  or
                  regulations (including increased costs associated with compliance
                  with new
                  laws and regulations), more aggressive enforcement of existing
                  legislation
                  or regulations, or a change in the interpretation of existing legislation
                  or regulations*
 •
              *increased
                  compliance risks relating to our contracts with the DoD TRICARE
                  Plan and
                  various state governments and
                  agencies*
 •
              *the
                  possible loss, or adverse modification of the terms, of relationships
                  with
                  pharmaceutical manufacturers, or changes in pricing, discount or
                  other
                  practices of pharmaceutical manufacturers*
 •
              *risks
                  associated with the possible loss, or adverse modification of the
                  terms
                  of, contracts with pharmacies in our retail pharmacy
                  network*
 •
              *risks
                  associated with the use and protection of the intellectual property
                  we use
                  in our business*
 •
              *risks
                  associated with our leverage and debt service obligations, including
                  the
                  effect of certain covenants in our borrowing agreements*
 •
              *risks
                  associated with our ability to continue to develop new products,
                  services
                  and delivery channels*
 •
              *general
                  developments in the health care industry, including the impact
                  of
                  increases in health care costs, changes in drug utilization and
                  cost
                  patterns and introductions of new drugs*
 •
              *increase
                  in credit risk relative to our clients due to adverse economic
                  trends*
 •
              *risks
                  associated with changes in average wholesale prices, which could
                  reduce
                  prices and margins*•
 •
                *risks
                    associated with our inability to attract and retain qualified
                    personnel*
 •
                *other risks described from time to time
                  in our
                  filings with the SEC*
  
 *See
        the more comprehensive description of risk factors under the captions “Forward
        Looking Statements and Associated Risks” contained in Item 1 - “Business” of our
        Annual Report on Form 10-K for the year ended December 31,
        2004.*
 
  
  
 **OVERVIEW**
 
 As
        one of
        the largest full-service pharmacy benefit management (“PBM”) companies, we
        provide health care management and administration services on behalf of our
        clients, which include health maintenance organizations, health insurers,
        third-party administrators, employers, union-sponsored benefit plans and
        government health programs. Our integrated PBM services include network claims
        processing, home delivery services, specialty home delivery claim fulfillment,
        benefit design consultation, drug utilization review, formulary management,
        disease management, and drug data analysis services. We also provide non-PBM
        services, through our Pharma Business Solutions unit, which include distribution
        of specialty pharmaceuticals requiring special handling or packaging where
        we
        have been selected by the pharmaceutical manufacturer as part of a limited
        distribution network; distribution of pharmaceuticals to low-income patients
        through manufacturer-sponsored and company-sponsored generic patient assistance
        programs, and distribution of sample units to physicians and verification
        of
        practitioner licensure.
 
 We
        report
        two segments, PBM and non-PBM. We derive revenues primarily from the sale
        of PBM
        services in the United States and Canada. Revenue generated by our segments
        can
        be classified as either tangible product revenue or service revenue. We earn
        tangible product revenue from the sale of prescription drugs by retail
        pharmacies in our retail pharmacy networks and from dispensing prescription
        drugs from our home delivery pharmacies. Service revenue includes administrative
        fees associated with the administration of retail pharmacy networks contracted
        by certain clients, market research programs, informed decision counseling
        services, certain specialty distribution services, and sample fulfillment
        and
        sample accountability services. Tangible product revenue generated through
        both
        our PBM and non-PBM segments represented 98.3% and 98.4% of revenues for
        the
        three and six months ended June 30, 2005 as compared to 98.8% for the three
        and
        six months ended June 30, 2004.
 
 On
        January 30, 2004, we acquired the outstanding capital stock of CuraScript
        Pharmacy, Inc. and CuraScript PBM Services, Inc. (collectively, “CuraScript”),
        for approximately $333.4 million which includes a purchase price adjustment
        for
        working capital and transaction costs. Consequently, our PBM operating results
        include those of CuraScript from January 30, 2004.
 
 **RECENT
        DEVELOPMENTS**
  On
        July 21, 2005, we
        announced the signing of a definitive agreement to acquire Priority Healthcare
        Corporation ("Priority") in a cash transaction for $28 per share, or
        approximately $1.3 billion.  Priority, headquartered near Orlando,
        FL, is
        among the nation's largest specialty pharmacy and distributor companies. 
        This transaction is expected to close in the fourth quarter of 2005, subject
        to
        expiration of the waiting period under the Hart-Scott-Rodino Antitrust
        Improvements Act, with customary closing conditions.  This
        acquisition is expected to enhance our specialty pharmacy business. 
        Under the terms of the agreement, each Priority share will be exchanged for
        $28
        in cash.  We expect to finance the acquisition with cash on hand and
        bank
        debt, via a new credit facility which will replace our existing credit facility
        (see “—Bank Credit Faciltity").  As a result of this refinancing, we expect
        to write-off approximately $3.5 million of deferred financing fees relating
        to
        our existing credit facility at the time the transaction is closed, which
        is
        expected to be late in the third quarter of during the fourth quarter of
        2005.
  **CRITICAL
        ACCOUNTING POLICIES**
 
 The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States requires management to make estimates
        and assumptions that affect the reported amounts of assets and liabilities
        at
        the date of the financial statements and the reported amounts of revenues
        and
        expenses during the reporting period. Our estimates and assumptions are based
        upon a combination of historical information and various other assumptions
        believed to be reasonable under the particular circumstances. Actual results
        may
        differ from our estimates. Certain of the accounting policies that most impact
        our consolidated financial statements and that require our management to
        make
        difficult, subjective or complex judgments are described below. This should
        be
        read in conjunction with Note 1, “Summary of Significant Accounting Policies”
        and with the notes to the consolidated financial statements included in our
        Annual Report on Form 10-K for the year ended December 31, 2004, filed with
        the
        SEC on March 3, 2005.
 
 ***REBATE
        ACCOUNTING***
 
 ACCOUNTING
        POLICY
 We
        administer a rebate program based on actual market share performance in which
        rebates and the associated receivable from pharmaceutical manufacturers are
        estimated quarterly based on our estimate of the number of rebatable
        prescriptions and the rebate per prescription. The portion of rebates payable
        to
        clients is estimated quarterly based on historical allocation percentages
        and
        our estimate of rebates receivable from pharmaceutical manufacturers. With
        respect to our market share rebate program, estimates are adjusted to actual
        when amounts are received from manufacturers and the portion payable to clients
        is paid.  With respect to rebates that are not based on market share
        performance, the portion of rebates payable to clients is estimated based
        on
        historical and/or anticipated sharing percentages.  These estimates
        are
        adjusted to actual when amounts are paid to clients.
 
 FACTORS
        AFFECTING ESTIMATE
 The
        factors that could impact our estimates of rebates, rebates receivable and
        rebates payable are as follows:
 ·
              Differences
                  between the actual and the estimated number of rebatable
                  prescriptions;
 ·
              Differences
                  between estimated aggregate allocation percentages and actual rebate
                  allocation percentages calculated on a client-by-client
                  basis;
 ·
              Differences
                  between actual and estimated market share of a manufacturer’s brand drug
                  for our clients as compared to the national market
                  share;
 ·
              Drug
                  patent expirations; and
 ·
              Changes
                  in drug utilization patterns.
 Historically,
        adjustments to our original estimates have been relatively
        immaterial.
 
 ***UNBILLED
        REVENUE AND RECEIVABLES***
 
 ACCOUNTING
        POLICY
 We
        bill
        our clients based upon the billing schedules established in client contracts.
        At
        the end of a period, any unbilled revenues related to the sale of prescription
        drugs that have been adjudicated with retail pharmacies are estimated based
        on
        the amount we will pay to the pharmacies and historical gross
        margin.
 
 FACTORS
        AFFECTING ESTIMATE
 Unbilled
        amounts are estimated based on historical margin. Historically, adjustments
        to
        our original estimates have been immaterial. Significant differences between
        actual and estimated margin could impact subsequent adjustments.
 
 ***ALLOWANCE
        FOR DOUBTFUL ACCOUNTS***
 
 ACCOUNTING
        POLICY
 We
        provide an allowance for doubtful accounts equal to estimated uncollectible
        receivables. This estimate is based on the current status of each customer's
        receivable balance.
 
 FACTORS
        AFFECTING ESTIMATE
 We
        record
        allowances for doubtful accounts based on a variety of factors including
        the
        length of time the receivables are past due, the financial health of the
        customer and historical experience. Our estimate could be impacted by changes
        in
        economic and market conditions as well as changes to our customers' financial
        condition.
 
 
 ***SELF-INSURANCE
        RESERVES***
 
 ACCOUNTING
        POLICY
 We
        accrue
        self-insurance reserves based upon estimates of the aggregate liability of
        claim
        costs in excess of our insurance coverage. Reserves are estimated using certain
        actuarial assumptions followed in the insurance industry and our historical
        experience. The majority of these claims are legal claims and our liability
        estimate is primarily related to the cost to defend these claims. We do not
        accrue for settlements, judgments, monetary fines or penalties until such
        amounts are probable and estimable, in compliance with Financial Accounting
        Standard (“FAS”) No. 5, “Accounting for Contingencies.” Under FAS 5, if the
        range of possible loss is broad, the liability accrual should be based on
        the
        lower end of the range.
 
 FACTORS
        AFFECTING ESTIMATE
 Self-insurance
        reserves are based on management’s estimates of the costs to defend legal
        claims. We do not have significant experience with certain of these types
        of
        cases. As such, differences between actual costs and management’s estimates
        could be significant. In addition, actuaries do not have a significant history
        with the PBM industry. Changes to assumptions used in the development of
        these
        reserves can affect net income in a given period. In addition, changes in
        the
        legal environment and number and nature of claims could impact our
        estimate.
 
 
 ***OTHER
        ACCOUNTING POLICIES***
 
 We
        consider the following information about revenue recognition policies important
        for an understanding of our results of operations:
 
 ·
              Revenues
                  from dispensing prescriptions from our home delivery pharmacies
                  are
                  recorded when prescriptions are shipped. These revenues include
                  the
                  co-payment received from members of the health plans we
                  serve.
 ·
              Revenues
                  from the sale of prescription drugs by retail pharmacies are recognized
                  when the claim is processed. We do not include member co-payments
                  to
                  retail pharmacies in revenue or cost of
                  revenue.
 ·
              When
                  we independently have a contractual obligation to pay our network
                  pharmacy
                  providers for benefits provided to our clients’ member, we act as a
                  principal in the arrangement and we include the total payments
                  we have
                  contracted to receive from these clients as revenue and the total
                  payments
                  we make to the network pharmacy providers as cost of
                  revenue.
 ·
              When
                  we merely administer a client’s network pharmacy contracts to which we are
                  not a party and under which we do not assume credit risk, we earn
                  an
                  administrative fee for collecting payments from the client and
                  remitting
                  the corresponding amount to the pharmacies in the client’s network. In
                  these transactions, drug ingredient cost is not included in our
                  revenues
                  nor in our cost of revenues.
 ·
              We
                  administer two rebate programs through which we receive rebates
                  and
                  administrative fees from pharmaceutical manufacturers.
 ·
              Gross
                  rebates and administrative fees earned for the administration of
                  our
                  rebate programs, performed in conjunction with claim processing
                  services
                  provided to clients, are recorded as a reduction of cost of revenue
                  and
                  the portion of the rebate payable to customers is treated as a
                  reduction
                  of revenue.
 ·
              When
                  we earn rebates and administrative fees in conjunction with formulary
                  management services, but do not process the underlying claims,
                  we record
                  rebates received from manufacturers, net of the portion payable
                  to
                  customers, in revenue.
 ·
              We
                  distribute pharmaceuticals in connection with our management of
                  patient
                  assistance programs and earn a fee from the manufacturer for
                  administrative and pharmacy services for the delivery of certain
                  drugs
                  free of charge to doctors for their indigent
                  patients.
 ·
              We
                  earn a fee for the distribution of consigned pharmaceuticals requiring
                  special handling or packaging where we have been selected by the
                  pharmaceutical manufacturer as part of a limited distribution
                  network.
 ·
              Non-PBM
                  product revenues include revenues earned through administering
                  sample card
                  programs for certain manufacturers. We include ingredient cost
                  of those
                  drug samples dispensed from retail pharmacies in our Non-PBM revenues
                  and
                  the associated costs for these sample card programs in cost of
                  revenues.
 ·
              Non-PBM
                  service revenues include administrative fees for the verification
                  of
                  practitioner licensure and the distribution of consigned drug samples
                  to
                  doctors based on orders received from pharmaceutical sales
                  representatives.
 
 
  
  
 **RESULTS
        OF OPERATIONS**
 
 *PBM
        OPERATING INCOME*
 
 **Three
                  Months Ended June 30,**
              
              **Six
                  Months Ended June 30,*****(in
                  thousands)***
              
              **2005**
              
              ***Increase/***
                ***(Decrease)***
              **2004**
              
              **2005**
              
              ***Increase/***
                ***(Decrease)***
              **2004**Product
                  revenuesNetwork
                  revenues
              
              $
              2,323,085
              
              
              *(1
                  .8*
              *)%*
              $
              2,365,476
              
              $
              4,624,349
              
              
              *(1.7*
              *)%*
              $
              4,702,729Home
                  delivery revenues
              
              
              1,513,073
              
              
              *13
                  .1*
              *%*
              
              1,337,237
              
              
              2,953,159
              
              
              *15.
                  8*
              *%*
              
              2,550,317Service
                  revenues
              
              
              38,352
              
              
              *101.6*
              *%*
              
              19,022
              
              
              72,179
              
              
              *76.1*
              *%*
              
              40,986Total
                  PBM revenues
              
              
              3,874,510
              
              
              *4.1*
              *%*
              
              3,721,735
              
              
              7,649,687
              
              
              *4.9*
              *%*
              
              7,294,032Cost
                  of PBM revenues
              
              
              3,610,980
              
              
              *2.8*
              *%*
              
              3,511,510
              
              
              7,132,949
              
              
              *3.8*
              *%*
              
              6,873,013PBM
                  Gross Profit
              
              
              263,530
              
              
              *25.4*
              *%*
              
              210,225
              
              
              516,738
              
              
              *22.7*
              *%*
              
              421,019PBM
                  SG&A expenses
              
              
              123,909
              
              
              *33.3*
              *%*
              
              92,944
              
              
              246,119
              
              
              *33.1*
              *%*
              
              184,919PBM
                  operating income
              
              $
              139,621
              
              
              *19.0*
              *%*
              $
              117,281
              
              $
              270,619
              
              
              *14.6*
              *%*
              $
              236,100
 
 Network
        claims increased by 13.8 million and 31.4 million claims, respectively, in
        the
        three and six months ended June 30, 2005 over the three and six months ended
        June 30, 2004. The increase in network claims for the three and six months
        ended
        June 30, 2005 as compared to 2004 is primarily due to the implementation
        of our
        contract with the DoD TRICARE Retail Pharmacy (“TRICARE”) program in June 2004.
        Note that revenues for the TRICARE program are included in service revenue
        (see
        discussion below).
 
 Network
        pharmacy revenues decreased $42.4 million, or 1.8%, during the three months
        ended June 30, 2005 as compared to the same period of 2004, primarily due
        to a
        higher mix of generic claims and a 1.5% increase in the average co-payment
        per
        retail pharmacy claim. Generic claims made up 54.9% of total network claims
        for
        the second quarter of 2005 as compared to 50.6% of total network claims for
        the
        same period of 2004. As mentioned in our Critical Accounting Policies above,
        we
        do not include member co-payments to retail pharmacies in revenue or cost
        of
        revenue.
 
 The
        $78.4
        million, or 1.7%, decrease in network pharmacy revenues in the six months
        ended
        June 30, 2005 as compared to the same period of 2004 is attributable
        to the
        following factors:
  ·
              Network
                  pharmacy revenues decreased $172.4 million in the six months ended
                  June
                  30, 2005, as compared to the same period of 2004 as a result of
                  a higher
                  mix of generic claims and a 1.8% increase in the average co-payment
                  per
                  retail pharmacy claim. Generic claims made up 54.7% of total network
                  claims in the six months ended June 30, 2005 as compared to 50.0%
                  of total
                  network claims for the same period of 2004. As mentioned in our
                  Critical
                  Accounting Policies above, we do not include member co-payments
                  to retail
                  pharmacies in revenue or cost of
                  revenue.
 ·
              These
                  factors were partially offset by an increase in pharmacy claims,
                  resulting
                  in a $94.0 million increase in overall network pharmacy
                  revenues.
 
 The
        $175.8 million, or 13.1%, increase in home delivery revenues in the three
        months
        ended June 30, 2005 as compared to the same period of 2004 is attributable
        to
        the following factors:
  ·
              Growth
                  of our specialty pharmacy business contributed to a $100.6 million
                  increase in home delivery revenue for the three months ended June
                  30, 2005
                  over the same period of 2004.
 ·
              Excluding
                  our specialty pharmacy business, we processed an additional 0.6
                  million
                  claims in the three months ended June 30, 2005 as compared to the
                  same
                  period of 2004. The increase in home delivery claim volume is primarily
                  due to greater usage of our home delivery pharmacies by members
                  of
                  existing clients. This increase in volume resulted in a $75.4 million
                  increase in home delivery revenues.
 ·
              Excluding
                  our specialty pharmacy business, average revenue per home delivery
                  claim
                  decreased slightly in the three months ended June 30, 2005
                  as
                  compared to the same period of 2004, as inflationary increases
                  in
                  ingredient cost were more than offset by an increase in our generic
                  fill
                  rate from 38.8% in the second quarter of 2004 to 43.4% for
                  the
                  current quarter. Our home delivery generic fill rate is lower than
                  the
                  retail generic fill rate as fewer generic substitutes are available
                  among
                  maintenance medications (i.e. therapies for diabetes, high cholesterol,
                  etc.) commonly dispensed from home delivery pharmacies compared
                  to acute
                  medications that are dispensed primarily by pharmacies in our retail
                  networks.
  The
        $402.8 million, or 15.8%, increase in home delivery revenues in the first
        six
        months of 2005 as compared to the same period of 2004, is attributable to
        the
        following factors:
  ·
              Growth
                  of our specialty pharmacy business contributed to a $251.8 million
                  increase in home delivery revenue for the six months ended June
                  30, 2005
                  over the same period of 2004. This increase is partially due to
                  an
                  additional month of claims and revenues in 2005, as well as the
                  growth of
                  CuraScript as it increases its penetration into the existing ESI
                  book of
                  business.
 ·
              Excluding
                  our specialty pharmacy business, we processed an additional 1.2
                  million
                  claims in the six months ended June 30, 2005 as compared to the
                  same
                  period in 2004, resulting in a $154.4 million increase in home
                  delivery
                  revenues. The increase in home delivery volume is primarily due
                  to the
                  increased usage of our home delivery pharmacies by members of existing
                  clients.
 ·
              Excluding
                  our specialty pharmacy business, average revenue per home delivery
                  claim
                  for the six months ended June 30, 2005 decreased slightly from
                  the same
                  period of 2004, representing a decrease of $3.4 million. Increases
                  in home
                  delivery revenue per claim from inflation more than offset increases
                  in
                  our generic fill rate which grew to 43.3% for the six months ended
                  June
                  30, 2005 from 39.0% for the same period of
                  2004.
 
 PBM
        service revenues include amounts received from clients for therapy management
        services such as prior authorization and step therapy protocols and
        administrative fees earned for processing claims for clients utilizing their
        own
        retail pharmacy networks. The $19.3 million, or 101.6%, and $31.2 million,
        or
        76.1% increase in PBM service revenues for the three and six months ended
        June
        30, 2005, as compared to the same period in 2004, is primarily due to the
        implementation of the TRICARE contract in June 2004. The increase for the
        six
        months ended June 30, 2005 would have been 103.4%, had the first quarter
        of 2004
        not included a one-time receipt of $5.5 million in connection with the early
        termination by a client.
 
 PBM
        cost
        of revenues increased $99.5 million, or 2.8%, and $259.9 million, or 3.8%,
        in
        the three and six months ended June 30, 2005 as compared to the same periods
        in
        2004 as a result of the following:
  ·
              The
                  addition of CuraScript’s specialty home delivery pharmacy in January 2004
                  resulted in increases of $96.3 million and $239.5 million
                  for the
                  three and six months ended June 30, 2005, respectively, as compared
                  to the
                  same periods of 2004, primarily due to the growth of CuraScript.
                  In
                  addition, an additional month of Curascript claims and revenues
                  was
                  included in the six months ended June 30, 2005, as compared to
                  the same
                  period of 2004.
 ·
              Excluding
                  CuraScript, increases in network and home delivery claims volume
                  (on an
                  unadjusted basis), resulted in higher PBM cost of revenues of $18.7
                  million and $160.9 million for the three and six months ended June
                  30,
                  2005, respectively, as compared to the same periods of
                  2004.
 ·
              These
                  increases were partially offset by the net decreases in the average
                  cost
                  per claim and a higher mix of generic claims, which decreased cost
                  of
                  revenues by approximately $15.4 million and $140.4 million in the
                  three
                  and six months ended June 30, 2005, respectively, as compared to
                  the same
                  periods of 2004.
 
 We
        expect
        our PBM cost of revenues will increase slightly due to the opening of the
        new
        Pueblo, Colorado Patient Care Contact Center during the second half of 2005
        (see
“—Liquidity and Capital Resources”). These opening costs should be offset by our
        continued effort to streamline our home delivery operations.
 
 Our
        PBM
        gross profit increased $53.3 million, or 25.4%, and $95.7 million, or 22.7%,
        respectively, for the three and six months ended June 30, 2005, over the
        same
        periods in 2004. Increases in gross profit resulted from the growth in home
        delivery and retail prescriptions and higher generic utilization, as well
        as the
        growth of CuraScript, which was acquired January 30, 2004. In addition, gross
        profit was favorably impacted by cost management initiatives which resulted
        in
        lower retail and home delivery drug purchasing costs and by higher rebate
        revenues, which were partially offset by increases in the portion of rebates
        that we share with our clients. These net increases in gross profit were
        partially offset by margin pressures arising from the current competitive
        environment. In addition, the increase in gross profit for the six months
        ended
        June 30, 2005 was reduced by the $5.5 million termination payment received
        in
        the first quarter of 2004 as mentioned above.
 
 Selling,
        general and administrative expenses (“SG&A”) increased $31.0 million, or
        33.3%, and $61.2 million, or 33.1%, respectively, in the three and
        six
        months ended June 30, 2005 over the same periods of 2004. This is primarily
        attributable to the following factors:
 
 ·
              Increased
                  spending of $16.8 million and $33.2 million in the three and six
                  months
                  ended June 30, 2005 as compared to the same periods of 2004, on
                  costs to
                  improve the operation and the administrative functions supporting
                  the
                  management of the pharmacy benefit, primarily through increased
                  management
                  incentive compensation in the three and six months ended June 30,
                  2005,
                  respectively, as compared to the same periods of
                  2004.
 ·
              Increased
                  professional fees of $9.8 and $15.3 million in the three and six
                  months
                  ended June 30, 2005 as compared to the same periods of 2004, respectively,
                  partially due to increased spending on legal matters, as well as
                  higher
                  costs of compliance with the Sarbanes-Oxley
                  Act.
 ·
              Increased
                  bad debt expense of $3.3 million and $5.2 million in the three
                  and six
                  months ended June 30, 2005 as compared to the same periods of 2004,
                  related to an increase in the allowance for receivables from our
                  clients’
                  members.
  In
        addition to the increases in SG&A above, we also incurred expenses related
        to our Medicare Part D Program in the second quarter of 2005, and we expect
        spending to increase in the second half of 2005.
 
 PBM
        operating income increased $22.3 million, or 19.0%, and $34.5 million, or
        14.6%,
        respectively, in the three and six months ended June 30, 2005 over the same
        period of 2004.
  
  *NON-PBM
        OPERATING INCOME*
 
 **Three
                  Months Ended June 30,**
              
              **Six
                  Months Ended June 30,*****(in
                  thousands)***
              
              **2005**
              
              ***Increase/***
                ***(Decrease)***
              **2004**
              
              **2005**
              
              ***Increase/***
                ***(Decrease)***
              **2004**Product
                  revenues
              
              $
              41,744
              
              
              *34.0*
              *%*
              $
              31,151
              
              $
              77,163
              
              
              *24.1*
              *%*
              $
              62,175Service
                  revenues
              
              
              28,000
              
              
              *5.2*
              *%*
              
              26,619
              
              
              56,526
              
              
              *10.6*
              *%*
              
              51,113Total
                  Non-PBM revenues
              
              
              69,744
              
              
              *20.7*
              *%*
              
              57,770
              
              
              133,689
              
              
              *18.0*
              *%*
              
              113,288Non-PBM
                  cost of revenues
              
              
              56,527
              
              
              *27.1*
              *%*
              
              44,473
              
              
              108,716
              
              
              *22.2*
              *%*
              
              88,998Non-PBM
                  Gross Profit
              
              
              13,217
              
              
              *(0.6*
              *)%*
              
              13,297
              
              
              24,973
              
              
              *2.8*
              *%*
              
              24,290Non-PBM
                  SG&A expense
              
              
              4,444
              
              
              *17.6*
              *%*
              
              3,779
              
              
              8,865
              
              
              *25.8*
              *%*
              
              7,048Non-PBM
                  operating income
              
              $
              8,773
              
              
              *(7.8*
              *)%*
              $
              9,518
              
              $
              16,108
              
              
              *(6.6*
              *)%*
              $
              17,242
 
 
 Non-PBM
        product revenues increased $10.6 million, or 34.0%, and $15.0 million, or
        24.1%,
        respectively, for the three and six months ended June 30, 2005 over the same
        periods of 2004. This is mainly due to a higher mix of specialty distribution
        volumes in which we include ingredient cost of pharmaceuticals dispensed
        in our
        revenues, including two new specialty distribution contracts in 2005.
        N on-PBM
        service revenues increased $1.4 million, or 5.2%, and $5.4 million, or 10.6%,
        respectively, for the three and six months ended June 30, 2005. The increase
        is
        due in large part to an increase in existing client volumes.
 
 Non-PBM
        cost of revenues increased $12.1 million, or 27.1%, and $19.7 million, or
        22.2%,
        respectively, in the three and six months ended June 30, 2005 as compared
        to the
        same periods of 2004, mainly due to the additional volume in programs where
        we
        include the ingredient costs of pharmaceuticals dispensed from retail pharmacies
        in our Non-PBM revenues and cost of revenues (as discussed above). Gross
        profit
        for the three and six months ended June 30, 2005 changed only slightly as
        compared to the same periods of 2004.
 
 Non-PBM
        SG&A increased $0.7 million, or 17.6%, and $1.8 million, or 25.8%,
        respectively, for the three and six months ended June 30, 2005 as compared
        to
        the same time periods of 2004. This is primarily due to an increase in marketing
        expenditures related to the RxOutreach program and increased sales
        expenses.
  Non-PBM
        operating income decreased $0.7 million, or 7.8%, and $1.1 million, or 6.6%,
        respectively, during the three and six months ended June 30, 2005 as compared
        to
        the same periods of 2004.
 
 *OTHER
        (EXPENSE) INCOME*
 
 In
        February 2001, we entered into an agreement with AdvancePCS (now owned by
        Caremark RX, Inc.) and Medco Health Solutions, Inc. (formerly, “Merck-Medco,
        L.L.C.”) to form RxHub, an electronic exchange enabling physicians who use
        electronic prescribing technology to link to pharmacies, PBMs and health
        plans.
        We own one-third of the equity of RxHub (as do each of the other two founders)
        and have committed to invest up to $20 million over five years, with
        approximately $18.6 million invested through June 30, 2005. We have recorded
        our
        investment in RxHub under the equity method of accounting, which requires
        our
        percentage interest in RxHub’s results to be recorded in our Unaudited
        Consolidated Statement of Operations. Our percentage of RxHub’s loss for the
        three and six months ended June 30, 2005 was $0.6 million ($0.4 million,
        net of
        tax) and $1.3 million ($0.9 million, net of tax), respectively, compared
        to $1.5
        million ($0.9 million, net of tax) and $2.8 million ($1.7 million, net of
        tax)
        for the same periods of 2004.
 
 For
        the
        three and six months ended June 30, 2005, net interest expense decreased
        $17.1
        million, or 88.5%, and $25.9 million, or 82.8%, respectively, as compared
        to the
        same periods in 2004, resulting from the refinancing of our entire credit
        facility during the first quarter of 2004 (see “—Bank Credit Facility”).
 
 *PROVISION
        FOR INCOME TAXES*
 
 Our
        effective tax rate decreased to 29.9% and 33.1% for the three and six months
        ended June 30, 2005, as compared to 38.3% for the same periods of 2004. The
        decrease in effective tax rate for the three months ended June 30, 2005 reflects
        a net tax benefit of $11.9 million, of which $11.0 million is non-recurring,
        relating to a change in the apportionment of our income for state income
        tax
        purposes. The decrease in the effective tax rate for the six months ended
        June
        30, 2005 reflects a net tax benefit of $14.2 million, of which $12.5 million
        is
        non-recurring. The decrease in the effective tax rate for the six months
        ended
        June 30, 2005 reflects both the $11.9 million net tax benefit relating to
        a
        change in the apportionment of our income for state income tax purposes and
        a
        $2.3 million net tax benefit resulting from the recognition of the expected
        state tax benefit associated with certain subsidiary losses generated in
        2004.  Excluding the $12.5 million non-recurring net tax benefit,
        the
        effective tax rate for the six months ended June 30, 2005 would have been
        37.6%.
 
 *NET
        INCOME AND EARNINGS PER SHARE*
 
 Net
        income for the three months ended June 30, 2005 increased $36.5 million,
        or
        55.9%, over the same period of 2004. Net income increased $51.9 million,
        or
        38.3%, for the six months ended June 30, 2005 over the same period of 2004.
 
 Basic
        and
        diluted earnings per share increased 64.3% and 61.9%, respectively, for the
        three months ended June 30, 2005 over the same period of 2004. For the six
        months ended June 30, 2005, basic and diluted earnings per share increased
        44.3%
        and 45.3%, respectively, over the six months ended June 30, 2004.
 
 On
        May
        24, 2005, we announced a two-for-one stock split for stockholders of record
        on
        June 10, 2005, effective June 24, 2005. The split was effected in the form
        of a
        dividend by issuance of one additional share of common stock for each share
        of
        common stock outstanding. The earnings per share and the weighted average
        number
        of shares outstanding for basic and diluted earnings per share for each period
        have been adjusted for the stock split.
 
 **LIQUIDITY
        AND CAPITAL RESOURCES**
 
 *OPERATING
        CASH FLOW AND CAPITAL EXPENDITURES*
 
 For
        the
        six months ended June 30, 2005, net cash provided by operations increased
        $163.1
        million to $316.4 million from $153.3 million during the six months ended
        June
        30, 2004. This increase reflects a $116.5 million increase from net changes
        in
        our working capital components, increased earnings of $51.9 million, and
        a
        $6.5 million increase in depreciation and amortization, partially
        due to
        the acquisition of CuraScript in January 2004. The increase in working capital
        components includes an $84.1 million increase resulting from the timing of
        payments on liabilities, an increase of $21.8 million from improved inventory
        management, and an increase of $12.4 million from changes in other assets.
        These
        increases were partially offset by a $1.8 million use of cash due to higher
        accounts receivable balance. Net cash provided by operations was also negatively
        impacted by a decrease of $11.8 million in non-cash adjustments, mainly due
        to a
        decrease of $14.3 million in deferred taxes for the six months ended June
        30,
        2005 as compared to the six months ended June 30, 2004.
 
 Our
        capital expenditures for the six months ended June 30, 2005 decreased $0.6
        million, or 3.3%, as compared to the same period of 2004. We intend to continue
        to invest in technology that we believe will provide efficiencies in operations
        and facilitate growth and enhance the service we provide to our clients.
        We
        expect future anticipated capital expenditures will be funded primarily from
        operating cash flow or, to the extent necessary, with borrowings under our
        revolving credit facility, discussed below.
 
 We
        have
        begun development of a new Patient Care Contact Center in Pueblo, Colorado
        which
        will be completed during the fourth quarter of 2005. Total 2005 expenditures
        for
        the project, the majority of which will be incurred in the second half the
        year,
        are expected to range from $11.0 million to $13.0 million, of which
        approximately $5.0 million to $7.0 million will be expensed and approximately
        $6.0 million will be capitalized. We expect that a portion of these expenditures
        will be reimbursed by the city of Pueblo and the state of Colorado, and that
        such reimbursements will reduce the amount capitalized for this project.
 
 *CHANGES
        IN BUSINESS*
 
 On
        January 30, 2004, we acquired the outstanding capital stock of CuraScript,
        for
        approximately $333.4 million, which includes a purchase price adjustment
        for working capital and transaction costs. CuraScript is one of the nation’s
        largest specialty pharmacy services companies and has enhanced our ability
        to
        provide comprehensive pharmaceutical management services to our clients and
        their members. CuraScript operates seven specialty pharmacies throughout
        the
        United States and serves over 175 managed care organizations, 30 Medicaid
        programs and the Medicare program. The transaction was accounted for under
        the
        provisions of FAS 141, “Business Combinations.” The purchase price has been
        allocated based upon the estimated fair value of net assets acquired at the
        date
        of the acquisition. A portion of the excess of purchase price over tangible
        net
        assets acquired has been allocated to intangible assets, consisting of customer
        contracts in the amount of $28.7 million and non-competition agreements in
        the
        amount of $2.7 million, which are being amortized using the straight-line
        method
        over estimated useful lives of ten years and three years, respectively, and
        trade names in the amount of $1.3 million, which are not being amortized.
        These
        assets are included in other intangible assets. In addition, the excess of
        purchase price over tangible net assets and identified intangible assets
        acquired has been allocated to goodwill in the amount of $284.9 million,
        which
        is not being amortized.
 Goodwill
        is evaluated for impairment annually or when events or circumstances occur
        indicating that goodwill might be impaired. In addition, we evaluate whether
        events or circumstances have occurred that indicate the remaining estimated
        useful lives of other intangible assets may warrant revision or that the
        remaining balance of an asset may not be recoverable. The measurement of
        possible impairment is based on the ability to recover the balance of assets
        from expected future operating cash flows on an undiscounted basis. Impairment
        losses, if any, would be determined based on the present value of the cash
        flows
        using discount rates that reflect the inherent risk of the underlying business.
        No such impairment existed at June 30, 2005 or December 31, 2004.
 
 We
        regularly review potential acquisitions and affiliation opportunities. We
        believe available cash resources, bank financing or the issuance of additional
        common stock or other securities could be used to finance future acquisitions
        or
        affiliations. There can be no assurance we will make new acquisitions or
        establish new affiliations in 2005 or thereafter.
 
 In
        January 2004, we entered into an agreement to provide PBM services for the
        Medicare discount program of Pharmacy Care Alliance, Inc. (“PCA”), a nonstock,
        not-for-profit entity jointly controlled by the National Association of Chain
        Drugstores (“NACDS”) and us. Our PBM services include the negotiation of
        discounts from individual retailers and pharmaceutical manufacturers, the
        enrollment of cardholders and the processing of prescription claims.
 
 During
        2004, we entered into a lending agreement with PCA, whereby we committed
        to lend
        up to $17.0 million to PCA in the form of a revolving line of credit
        available through December 31, 2005. Requests for borrowings on the revolving
        line of credit require the unanimous consent of PCA’s board of directors, which
        consists of representatives from NACDS and from our management team, or its
        designated representatives. PCA will utilize the revolving line of credit
        to
        fund its operating expenditures. NACDS has agreed to guarantee $2.0 million
        on
        the revolving line of credit. As of June 30, 2005, we have loaned PCA
        $14.6 million, and have received $2.9 million in interest and principal
        payments.
  In
        regard
        to the revolving line of credit extended to PCA, the collectibility of any
        unsecured borrowings will be a function of PCA’s success in enrolling new
        members for its Medicare discount program. Enrollment as of
        June 30, 2005 is approximately 228,000 members. Because 2004
        enrollment and utilization was lower than expected, the outstanding balance
        of
        our receivable from PCA was fully reserved at the end of 2004.
 
 *BANK
        CREDIT FACILITY*
 
 On
        February 13, 2004, we refinanced our entire credit facility, negotiating
        an
        $800.0 million credit facility with a bank syndicate which includes
        $200.0
        million of Term A loans, $200.0 million of Term B loans and a $400.0
        million revolving credit facility. At June 30, 2005, our credit facility
        consisted of $180.0 million of Term A loans, $198.0 million of Term B loans
        and
        a $400.0 million revolving credit facility (of which no debt was outstanding
        at
        June 30, 2005). During the second quarter of 2005, we made scheduled payments
        on
        our Term A and Term B loans totaling $5.0 million and $0.5 million,
        respectively.
 
 Our
        credit facility requires us to pay interest periodically on the London Interbank
        Offered Rates (“LIBOR”) or base rate options, plus a margin. The margin on the
        Term A loans and on amounts outstanding under the revolving credit facility
        is
        dependent on our credit rating and our ratio of debt to earnings before
        interest, taxes, depreciation and amortization (“EBITDA”). The Term B loan
        interest is based on the LIBOR or alternative base rate options plus a margin
        of
        1.5% or 0.25% per annum, respectively. Under our credit facility we are required
        to pay commitment fees on the unused portion of the $400.0 million revolving
        credit facility ($400.0 million at June 30, 2005). The commitment
        fee will
        range from 0.2% to 0.5% depending on our credit rating and our consolidated
        leverage ratio. The commitment fee is currently 0.25% per annum.
 
 At
        June 30, 2005, the weighted average interest rate on
        the facility was 4.53%. Our credit facility contains covenants
        that
        limit the indebtedness we may incur, the common shares we may repurchase
        and
        dividends we may pay. The covenants also include a minimum interest coverage
        ratio and a maximum leverage ratio. At June 30, 2005, we are in compliance
        with
        all covenants associated with our credit facility.
 
 *CONTRACTUAL
        OBLIGATIONS*
 
 The
        following table sets forth our schedule of maturities of our long-term debt
        and
        future minimum lease payments due under noncancellable operating leases as
        of
        June 30, 2005 (in thousands):
  **Payments
                    Due by Period as of June 30,****Contractual
                    obligations**
                **Total**
                
                **2005**
                
                **2006
                    - 2007**
                
                **2008
                    - 2009**
                
                **After
                    2009**Long-term
                    debt
                $
                373,007
                
                $
                11,000
                
                $
                69,112
                
                $
                245,112
                
                $
                47,783Future
                    minimum lease
                  payments(1)
                
                100,073
                
                
                11,920
                
                
                41,585
                
                
                19,937
                
                
                26,631Total
                    contractual cash
                  obligations
                $
                473,080
                
                $
                22,920
                
                $
                110,697
                
                $
                265,049
                
                $
                74,414
 (1)
        In
        July 2004, we entered into a capital lease with the Camden County Joint
        Development Authority in association with the development of our new Patient
        Care Contact Center in St. Marys, Georgia. At June 30, 2005, our lease
        obligation is $13.5 million. In accordance with Financial Accounting Standards
        Board ("FASB") Interpretation Number 39, “Offsetting of Amounts Related to
        Certain Contracts,” our lease obligation has been offset against $13.5 million
        of industrial revenue bonds issued to us by the Camden County Joint Development
        Authority.
 
 **OTHER
        MATTERS**
  In
        June
        2005, the FASB issued Financial Accounting Standard ("FAS") No. 154,
        "Accounting Changes and Error Corrections," which superceded Accounting
        Principles Board ("APB") No. 20, "Accounting Changes."  APB No. 20
        previously required that most voluntary changes in accounting principle be
        recognized by including in the current period's net income the cumulative
        effect
        of changing to the new accounting principle.  In contrast, FAS 154
        requires
        entities that voluntarily make a change in accounting principle to apply
        that
        change retrospectively to prior periods' financial statements, unless this
        would
        be impracticable.  In addition, FAS 154 makes a distinction between
        retrospective application of an accounting principle and the restatement
        of
        financial statements to reflect the correction of an error.  FAS 154
        is
        effective for accounting changes and corrections of errors made in fiscal
        years
        beginning after December 15, 2005.  We do not expect the implementation
        of
        FAS 154 to have an impact on our consolidated results of
        operations.
  In
        December 2004, the FASB revised FAS 123, “Share-Based Payment” (“FAS 123R”),
        which replaced FAS 123, “Accounting for Stock-Based Compensation”, and
        superseded APB No. 25, “Accounting for Stock Issued to Employees.” FAS 123R will
        require compensation cost related to share-based payment transactions to
        be
        recognized in the financial statements. As permitted by FAS 123, we currently
        follow the guidance of APB 25, which allows the use of the intrinsic value
        method of accounting to value share-based payment transactions with employees.
        FAS 123R requires measurement of the cost of share-based payment transactions
        to
        employees at the fair value of the award on the grant date and recognition
        of
        expense over the requisite service or vesting period. FAS 123R allows
        implementation using a modified version of prospective application, under
        which
        compensation expense for the unvested portion of previously granted awards
        and
        all new awards will be recognized on or after the date of adoption. FAS 123R
        also allows companies to implement by restating previously issued financial
        statements, basing the amounts on the expense previously calculated and reported
        in their pro forma footnote disclosures required under FAS 123. We will adopt
        FAS 123R using the modified prospective method beginning January 1, 2006.
        The
        impact of adopting FAS 123R on our consolidated results of operations is
        not
        expected to differ materially from the pro forma disclosures currently required
        by FAS 123 (see note 7 to our unaudited consolidated financial
        statements).
 
 We
        make
        available through our website (www.express-scripts.com), access to our annual
        report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
        8-K, all amendments to those reports (when applicable), and other filings
        with
        the SEC. Such access is free of charge and is available as soon as reasonably
        practicable after such information is filed with the SEC. In addition, the
        SEC
        maintains an internet site (www.sec.gov) containing reports, proxy and
        information statements, and other information regarding issuers filing
        electronically with the SEC (which includes us). Information included on
        our
        website is not part of this quarterly report.
 
 **IMPACT
        OF INFLATION**
 
 Changes
        in prices charged by manufacturers and wholesalers for pharmaceuticals affect
        our revenues and cost of revenues. Most of our contracts provide that we
        bill
        clients based on a generally recognized price index for pharmaceuticals,
        and
        accordingly we have been able to recover price increases from our clients
        under
        the terms of our agreements.
  **Item
        3.****Quantitative
        and Qualitative Disclosures About Market Risk**
 
 We
        are
        exposed to market risk from changes in interest rates related to debt
        outstanding under our credit facility. Our earnings are subject to change
        as a
        result of movements in market interest rates. At June 30, 2005, we had $372.5
        million of obligations which were subject to variable rates of interest under
        our credit facility. A hypothetical increase in interest rates of 1% would
        result in an increase in annual interest expense of approximately $3.7 million
        (pre-tax), presuming that obligations subject to variable interest rates
        remained constant.
  **Item
        4.****Controls
        and Procedures** ****
 
 We
        maintain a comprehensive set of disclosure controls and procedures (as defined
        in Rules 13a-15(e) and under the Securities Exchange Act of 1934 (“Exchange
        Act”)) designed to provide reasonable assurance that information required to
        be
        disclosed in our filings under the Exchange Act is recorded, processed,
        summarized and reported accurately and within the time periods specified
        in the
        SEC’s rules and forms. Under the supervision and with the participation of our
        management, including our President and Chief Executive Officer and our Senior
        Vice President and Chief Financial Officer, we have evaluated the effectiveness
        of the design and operation of our disclosure controls and procedures as
        of the
        end of the period covered by this report. Based upon this evaluation, the
        President and Chief Executive Officer and the Senior Vice President and Chief
        Financial Officer concluded that the design and operation of these disclosure
        controls and procedures are effective in providing reasonable assurance of
        the
        achievement of the objectives described above.
 
 During
        the second quarter ended June 30, 2005, there was no change in our internal
        control over financial reporting that has materially affected, or is reasonably
        likely to materially affect, our internal control over financial reporting.
  
  
 PART
                    II. OTHER
                    INFORMATION
 
 **Item
        1.  Legal Proceedings**
 
 We
        and/or
        our subsidiary, NPA, are defendants in several lawsuits that purport to be
        class
        actions, which were described in our Annual Report on Form 10-K for the year
        ended December 31, 2004. Each case seeks damages in an unspecified amount,
        and
        the allegations are such that the Company cannot at this time estimate with
        any
        certainty the damages that the plaintiffs seek to recover. We are unable
        at the
        present time to evaluate the effect that unfavorable outcomes might have
        on our
        financial condition or consolidated results of operations. The following
        developments have occurred since the last quarterly report:
 
 ·
              Multi-District
                  Litigation - The Judicial Panel on Multi-District Litigation has
                  transferred a number of previously disclosed cases to the Eastern
                  District
                  of Missouri for coordinated or consolidated pretrial proceedings
                  including
                  the following:Minshew
                  v. Express Scripts(Cause No. Civ.4:02-CV-1503, United States District Court for the
                  Eastern
                  District of Missouri);Lynch
                  v. National Prescription Administrators, et al.
                  (Cause No. 03 CV 1303, United States District Court for the Southern
                  District of New York);Mixon
                  v. Express Scripts, Inc.(Civil Action No. 4:03CV1519, United States District Court for
                  the Eastern
                  District of Missouri);Wagner
                  et al. v. Express Scripts(Cause No. 04cv01018 (WHP))United States District Court for the
                  Southern
                  District of New York);Scheuerman,
                  et al v. Express Scripts(Cause No. 04-CV-0626 (FIS) (RFT)) United States District Court
                  for the
                  Southern District of New York);Correction
                  Officers’ Benevolent Association of the City of New York, et al v. Express
                  Scripts, Inc.(Cause No. 04-Civ-7098 (WHP)), United States District Court for
                  the
                  Southern District of New York);United
                  Food and Commercial Workers Unions and Employers Midwest Health
                  Benefits
                  Fund, et al v. National Prescription Administrators, Inc., et
                  al(Cause No. 04-CV-7472, United States District Court for the Southern
                  District of New York);Central
                  Laborers’ Welfare Fund, et al v. Express Scripts, Inc., et
                  al(Cause No. B04-1002240, United States District Court for the Southern
                  District of Illinois).
 
 ·
              International
                  Association of Firefighters, Local No. 22, et al. v. National Prescription
                  Administrators and Express Scripts, Inc.(Cause No. L03216-02, Superior Court of New Jersey, Law Division,
                  Camden
                  County). On or about August 16, 2002, we were served with this
                  lawsuit
                  alleging that our subsidiary, NPA, had breached agreements with
                  two
                  benefit plans to whom NPA had provided services under an umbrella
                  agreement with a labor coalition client. Plaintiff’s motion to certify a
                  class of all members of the labor coalition was denied.
 
 ·
              Anthony
                  Bradley, et al v. First Health Services Corporation, et al(Cause No. BC319292, Superior Court for the State of California,
                  County of
                  Los Angeles) The complaint alleges that we, and the other defendants,
                  failed to comply with statutory obligations under California Civil
                  Code
                  Section 2527 to provide our California clients with the results
                  of a
                  bi-annual survey of retail drug prices. Express Scripts’ motion to dismiss
                  was granted.
 
 **·**
              Irwin
                  v. AdvancePCS, et al.(Cause No. RG030886393, Superior Court of the State of California
                  for
                  Alameda County). This case purports to be a class action against
                  us and
                  other PBM defendants on behalf of self-funded, non-ERISA health
                  plans; and
                  individuals with no prescription drug benefits that have purchased
                  drugs
                  at retail rates. The complaint alleges that certain business practices
                  engaged in by us and by other PBM defendants violated California’s Unfair
                  Competition Law. Our motion for judgment on the pleadings in our
                  favor was
                  granted, with plaintiffs given leave to file an amended complaint.
 
 ·
              People
                  of the State of New York, et al v. Express Scripts, Inc.(Cause No. 4669-04, Supreme Court of the State of New York, County
                  of
                  Albany) On August 4, 2004, the State of New York filed a complaint
                  against
                  ESI and Cigna Life Insurance Co.  The complaint alleges
                  certain
                  breaches of contract and violations of civil law in connection
                  with our
                  management of the prescription drug plan for the State of New York
                  and its
                  employees.  The complaint also alleges certain violations
                  of civil
                  law in connection with the Company’s therapeutic interchange programs. The
                  State has requested injunctive relief, unspecified monetary damages
                  and
                  attorney’s fees. The court has stayed this action pending the outcome of
                  theWagnerandScheuermancases, referred to above, both of which assert claims relating
                  to the New
                  York State prescription drug plan.
 
 ·
              Local
                  153 Health Fund, et al. v. Express Scripts Inc. and ESI Mail Pharmacy
                  Service, Inc.(Cause No. B05-1004036, United States District Court for the Eastern
                  District of Missouri).  On May 27, 2005, plaintiff filed
                  a complaint
                  against Express Scripts. The complaint alleges that certain of
                  our
                  business practices constitute a breach of fiduciary duty, breach
                  of
                  contract, deceptive trade practices, conversion, breach of the
                  covenant of
                  good faith and fair dealing, and violations of New York state law.
                  The
                  complaint purports to be a class action on behalf of current and
                  former
                  self-funded ERISA and non-ERISA plans.
  ·
                City
                    of Paterson, et al. v. Benecard Prescription Services, et. al.
                    (Cause No. L-005908-02, Superior Court of New Jersey, Law Division,
                    Camden
                    County). The Township of Hamilton has reached a confidential
                    settlement
                    with co-defendant Benecard, pursuant to which the parties have
                    filed a
                    stipulation of dismissal of the plaintiff’s claims against ESI and NPA.
                    Neither NPA nor ESI contributed to the settlement or paid any
                    consideration for the dismissal. This case is now completely
                    resolved.
 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.
 
 
 
 
  **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, 2005 (share data in thousands):
 
 Period
              Shares
                purchased
              
              Average
                price
                per
                  share
              
              Shares
                  purchased
                as
                  part of a
                publicly
                announced
                program
              
              Maximum
                  shares
                that
                  may yet be purchased under
                the
                  program4/1/2005
                  - 4/30/2005
              
              -
              
              $
              -
              
              
              -
              
              
              12,1045/1/2005
                  - 5/31/2005
              
              -
              
              
              -
              
              
              -
              
              
              12,1046/1/2005
                  - 6/30/2005
              
              -
              
              
              -
              
              
              -
              
              
              12,1042005
                  Total
              
              -
              
              $
              -
              
              
              -
 
  We
        have a
        stock repurchase program, originally announced on October 25, 1996,
        under
        which our Board of Directors has approved the repurchase of a total of 38.0
        million shares. There is no limit on the duration of the program.
        Approximately 25.9 million of the 38.0 million total shares have been
        repurchased through June 30, 2005. Additional share purchases, if any, will
        be
        made in such amounts and at such times as we deem appropriate based upon
        prevailing market and business conditions, subject to restrictions on the
        amount
        of stock repurchases contained in our bank credit facility.
  **Item
        4.****Submission
        of Matters to a Vote of Security Holders** ****
 
 (a)  The
        Company's annual meeting of stockholders was held on May 25, 2005.
 
 (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, John O. Parker, Jr., George
        Paz, Samuel K. Skinner, Seymour Sternberg, Barrett A. Toan, and Howard L.
        Waltman.
 
 (c)  The
        stockholder vote for each director was as follows:
 
 Votes
                Cast
                  for
              Votes
                WithheldGary
                  G. Benanav
              63,823,098
              1,994,754Frank
                  J. Borelli
              63,814,309
              2,003,543Maura
                  C. Breen
              63,820,932
              1,996,920Nicholas
                  LaHowchic
              63,828,653
              1,989,199Thomas
                  P. Mac Mahon
              63,825,974
              1,991,878John
                  O. Parker, Jr.
              63,825,797
              1,992,055George
                  Paz
              62,556,647
              3,261,205Samuel
                  K. Skinner
              59,532,645
              6,285,207Seymour
                  Sternberg
              60,477,053
              5,340,799Barrett
                  A. Toan
              62,094,167
              3,723,685Howard
                  L. Waltman
              61,104,772
              4,713,080
 
 The
        stockholders also voted to ratify the appointment of PricewaterhouseCoopers
        LLP
        as the Company's Independent Accountants for 2005 (63,559,671 affirmative
        votes;
        1,876,358 negative votes; 381,823 abstention votes).
 
 
 
 
 
  **Item
          6.****Exhibits**
 
 (a) 
        See Index to Exhibits below.
 
  
  
  
  
  **SIGNATURES**
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, the Registrant
        has
        duly caused this report to be signed on its behalf by the undersigned thereunto
        duly authorized.
 
 
 
 EXPRESS
                  SCRIPTS, INC.(Registrant)Date:July
                  27, 2005
              By: /s/
                George
                PazGeorge
                  Paz, Chief Executive Officer and PresidentDate:July
                  27, 2005
              By:/s/ Edward
                StiftenEdward
                  Stiften, Sr. Vice President and
                Chief
                  Financial Officer
 
 
  
  INDEX
        TO
        EXHIBITS—TO BE UPDATED
 (Express
        Scripts, Inc. - Commission File Number 0-20199)
 Exhibit
                Number
              Exhibit2.11
              Stock
                  Purchase Agreement, dated December 19, 2003, by and among the Company,
                  CPS
                  Holdings, LLC, CuraScript Pharmacy, Inc. and CuraScript PBM Services,
                  Inc,
                  incorporated by reference to Exhibit No. 2.1 to the Company’s Current
                  Report on Form 8-K filed December 24, 2003.2.21
              Agreement
                  and Plan of Merger, dated July 21, 2005, by and among the Company,
                  Pony
                  Acquisition Corporation, and Priority Healthcare Corporation, incorporated
                  by reference to Exhibit No. 2.1 to the Company’s Current Report on Form
                  8-K filed July 22, 2005.3.1
              Amended
                  and Restated Certificate of Incorporation of the Company, incorporated
                  by
                  reference to the Company’s Annual Report on Form 10-K for the year ending
                  December 31, 2001, incorporated by reference to Exhibit No. 3.2
                  to the
                  Company’s Quarterly Report on Form 10-Q for the quarter ending June 30,
                  2004.3.2
              Certificate
                  of Amendment to the Certificate of Incorporation of the Company
                  dated June
                  2, 2004, incorporated by reference to Exhibit No. 3.3 to the Company’s
                  Quarterly Report on Form 10-Q for the quarter ending June 30,
                  2004.3.3
              Third
                  Amended and Restated Bylaws, incorporated by reference to Exhibit
                  No. 3.2
                  to the Company’s Annual Report on Form 10-K for the year ending December
                  31, 2000.4.1
              Form
                  of Certificate for Common Stock, incorporated by reference to Exhibit
                  No.
                  4.1 to the Company’s Registration Statement on Form S-1 filed June 9, 1992
                  (No. 33-46974) (the “Registration Statement”).4.2
              Stockholder
                  and Registration Rights Agreement dated as of October 6, 2000 between
                  the
                  Company and New York Life Insurance Company, incorporated by reference
                  to
                  Exhibit No. 4.2 to the Company's Amendment No. 1 to Registration
                  Statement
                  on Form S-3 filed October 17, 2000 (Registration Number
                  333-47572).4.3
              Asset
                  Acquisition Agreement dated October 17, 2000, between NYLIFE Healthcare
                  Management, Inc., the Company, NYLIFE LLC and New York Life Insurance
                  Company, incorporated by reference to Exhibit No. 4.3 to the Company's
                  amendment No. 1 to the Registration Statement on Form S-3 filed
                  October
                  17, 2000 (Registration Number 333-47572).4.4
              Rights
                  Agreement, dated as of July 25, 2001, between the Corporation and
                  American
                  Stock Transfer & Trust Company, as Rights Agent, which includes the
                  Certificate of Designations for the Series A Junior Participating
                  Preferred Stock as Exhibit A, the Form of Right Certificate as
                  Exhibit B
                  and the Summary of Rights to Purchase Preferred Shares as Exhibit
                  C,
                  incorporated by reference to Exhibit No. 4.1 to the Company's Current
                  Report on Form 8-K filed July 31, 2001.4.5
              Amendment
                  dated April 25, 2003 to the Stockholder and Registration Rights
                  Agreement
                  dated as of October 6, 2000 between the Company and New York Life
                  Insurance Company, incorporated by reference to Exhibit No. 4.8
                  to the
                  Company’s Quarterly Report on Form 10-Q for the period ending March 31,
                  2003.4.6
              Amendment
                  No. 1 to theRights
                  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, 2005.31.12
              Certification
                  by George Paz, as President and Chief Executive Officer of Express
                  Scripts, Inc., pursuant to Exchange Act Rule 13a-14(a).31.22
              Certification
                  by Edward Stiften, as Senior Vice President and Chief Financial
                  Officer of
                  Express Scripts, Inc., pursuant to Exchange Act Rule
                  13a-14(a).32.12
              Certification
                  by George Paz, as President and Chief Executive Officer of Express
                  Scripts, Inc., pursuant to 18 U.S.C. § 1350 and Exchange Act Rule
                  13a-14(b).32.22
              Certification
                  by Edward Stiften, as Senior Vice President and Chief Financial
                  Officer of
                  Express Scripts, Inc., pursuant to 18 U.S.C. § 1350 and Exchange Act Rule
                  13a-14(b).
 1
                The
                    Company agrees to furnish supplementally a copy of any omitted
                    schedule to
                    this agreement to the Commission upon
                    request.
 2
              Filed
                  herein.