**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


WASHINGTON,
      D.C. 20549





**FORM
      10-Q**





x
            QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934
              For
                the quarterly period ended September 30, 2006.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 a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check
      one):


Large
      accelerated filer [X]   Accelerated
      filer [
      ]   Non-accelerated
      filer
      [ ]





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


Yes   No X








Common
                stock outstanding as of September 30, 2006:
            135,437,000
            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
      1A.  Risk
      Factors





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





Item
      3.  Defaults
      Upon Senior Securities - (Not Applicable)





Item
      4.     S ubmission
      of Matters to a Vote of Security Holders - (Not Applicable)





Item
      5.  Other
      Information - (Not Applicable)





Item
      6.     E xhibits





Signatures





Index
      to
      Exhibits





PART
      I. FINANCIAL INFORMATION


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


**EXPRESS
                SCRIPTS, INC.****Unaudited
                Consolidated Balance Sheet****September
                30,**
            
            **December
                31,***(in
                millions, except share data)*
            **2006**
            
            **2005**AssetsCurrent
                assets:Cash
                and cash equivalents
            $
            68.1
            
            $
            477.9Receivables,
                net
            
            1,298.3
            
            
            1,393.2Inventories
            
            271.4
            
            
            273.4Deferred
                taxes
            
            62.8
            
            
            53.1Prepaid
                expenses and other current assets
            
            25.3
            
            
            59.8Total
                current assets
            
            1,725.9
            
            
            2,257.4Property
                and equipment, net
            
            189.8
            
            
            201.3Goodwill,
                net
            
            2,686.8
            
            
            2,700.1Other
                intangible assets, net
            
            389.5
            
            
            303.3Other
                assets
            
            31.4
            
            
            31.4Total
                assets
            $
            5,023.4
            
            $
            5,493.5Liabilities
                and Stockholders’ EquityCurrent
                liabilities:Claims
                and rebates payable
            $
            1,201.1
            
            $
            1,380.0Accounts
                payable
            
            595.6
            
            
            596.5Accrued
                expenses
            
            376.0
            
            
            308.7Current
                maturities of long-term debt
            
            150.0
            
            
            110.0Total
                current liabilities
            
            2,322.7
            
            
            2,395.2Long-term
                debt
            
            1,480.4
            
            
            1,400.5Other
                liabilities
            
            249.6
            
            
            233.0Total
                liabilities
            
            4,052.7
            
            
            4,028.7Stockholders’
                Equity:Preferred
                Stock, $0.01 par value per share, 5,000,000 shares
                authorized,and
                no shares issued and outstanding
            
            -
            
            
            -Common
                Stock, 650,000,000 and 275,000,000 shares authorized,
              respectively,
                $0.01 par value;shares
                issued: 159,439,000 and 159,499,000, respectively;shares
                outstanding: 135,437,000 and 145,993,000, respectively
            
            1.6
            
            
            1.6Additional
                paid-in capital
            
            524.2
            
            
            473.5Unearned
                compensation under employee compensation plans
            
            (29.6
            )
            
            (5.8
            )Accumulated
                other comprehensive income
            
            12.4
            
            
            9.8Retained
                earnings
            
            1,870.0
            
            
            1,542.82,378.6
            
            
            2,021.9Common
                Stock in treasury at cost, 24,002,000 and 13,506,000shares,
                respectively
            
            (1,407.9
            )
            
            (557.1
            )Total
                stockholders’ equity
            
            970.7
            
            
            1,464.8Total
                liabilities and stockholders’ equity
            $
            5,023.4
            
            $
            5,493.5


*See
      accompanying Notes to Unaudited Consolidated Financial Statements*








**EXPRESS
      SCRIPTS, INC.**


**Unaudited
      Consolidated Statement of Operations**





**Three
                Months Ended**
            
            **Nine
                Months Ended****September
                30,**
            
            **September
                30,***(in
                millions, except per share data)*
            **2006**
            
            **2005**
            
            **2006**
            
            **2005**Revenues1
            $
            4,330.2
            
            $
            3,847.6
            
            $
            13,131.3
            
            $
            11,631.0Cost
                of revenues1
            
            3,955.9
            
            
            3,554.4
            
            
            12,048.8
            
            
            10,796.1Gross
                profit
            
            374.3
            
            
            293.2
            
            
            1,082.5
            
            
            834.9Selling,
                general and administrative
            
            168.6
            
            
            132.1
            
            
            500.8
            
            
            387.1Operating
                income
            
            205.7
            
            
            161.1
            
            
            581.7
            
            
            447.8Other
                (expense) income:Undistributed
                loss from joint venture
            
            (0.4
            )
            
            (0.6
            )
            
            (1.2
            )
            
            (1.9
            )Interest
                income
            
            2.3
            
            
            3.5
            
            
            11.3
            
            
            7.6Interest
                expense
            
            (26.4
            )
            
            (5.1
            )
            
            (70.6
            )
            
            (14.5
            )(24.5
            )
            
            (2.2
            )
            
            (60.5
            )
            
            (8.8
            )Income
                before income taxes
            
            181.2
            
            
            158.9
            
            
            521.2
            
            
            439.0Provision
                for income taxes
            
            66.5
            
            
            57.2
            
            
            194.0
            
            
            150.0Net
                income
            $
            114.7
            
            $
            101.7
            
            $
            327.2
            
            $
            289.0Basic
                earnings per share:
            $
            0.84
            
            $
            0.70
            
            $
            2.32
            
            $
            1.96Weighted
                average number of common sharesOutstanding
                during the period - Basic EPS
            
            136.1
            
            
            146.3
            
            
            141.2
            
            
            147.3Diluted
                earnings per share:
            $
            0.83
            
            $
            0.68
            
            $
            2.28
            
            $
            1.93Weighted
                average number of common sharesOutstanding
                during the period - Diluted EPS
            
            138.2
            
            
            148.9
            
            
            143.5
            
            
            149.7








*1* *Excludes
      estimated retail pharmacy co-payments of $942.8 and $1,413.3 million for the
      three months ended September 30, 2006 and 2005, respectively, and $3,209.2
      and
      $4,357.2 for the nine months ended September 30, 2006 and 2005, 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
                millions)*
            Common
              Stock
            
            Common
                Stock
            Additional
              Paid-in
              Capital
            Unearned
              Compensation
              Under
                Employee Compensation
              Plans
            Accumulated
              Other
              Comprehensive
              Income
            Retained
              Earnings
            Treasury
              Stock
            TotalBalance
                at December 31, 2005
            
            159.5
            
            $
            1.6
            
            $
            473.5
            
            $
            (5.8)
            
            $
            9.8
            
            $
            1,542.8
            
            $
            (557.1
            )
            $
            1,464.8Comprehensive
                income:Net
                income
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            327.2
            
            
            -
            
            
            327.2Other
                comprehensive
                income:Foreign
                currencytranslation
                adjustment
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            2.6
            
            
            -
            
            
            -
            
            
            2.6Comprehensive
                income
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            2.6
            
            
            327.2
            
            
            -
            
            
            329.8Treasury
                stock
                acquired
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (906.8
            )
            
            (906.8
            )Changes
                in stockholders’
                equityrelated
                to employee stock
                plans
            
            (0.1
            )
            
            -
            
            
            50.7
            
            
            (23.8)
            
            
            -
            
            
            -
            
            
            56.0
            
            
            82.9Balance
                at September 30, 2006
            
            159.4
            
            $
            1.6
            
            $
            524.2
            
            $
            (29.6)
            
            $
            12.4
            
            $
            1,870.0
            
            $
            (1,407.9
            )
            $
            970.7




*See
      accompanying Notes to Unaudited Consolidated Financial Statements*









**EXPRESS
                SCRIPTS, INC.****Unaudited****Consolidated
                Statement of Cash Flows****Nine
                Months Ended****September
                30,***(in
                millions)*
            **2006**
            
            **2005**Cash
                flows from operating activities:Net
                income
            $
            327.2
            
            $
            289.0Adjustments
                to reconcile net income to net cashprovided
                by operating activities, excludingthe
                effect of the acquisition:Depreciation
                and amortization
            
            75.7
            
            
            59.6Non-cash
                adjustments to net income
            
            44.4
            
            
            27.5Tax
                benefit relating to employee stock compensation
            
            -
            
            
            28.4Net
                changes in operating assets and liabilities
            
            (94.7
            )
            
            126.6Net
                cash provided by operating activities
            
            352.6
            
            
            531.1Cash
                flows from investing activities:Purchases
                of property and equipment
            
            (38.2
            )
            
            (34.2
            )Other
            
            0.1
            
            
            (0.3
            )Net
                cash used in investing activities
            
            (38.1
            )
            
            (34.5
            )Cash
                flows from financing activities:Repayment
                of long-term debt
            
            (80.1
            )
            
            (16.6
            )Proceeds
                from (repayment of) revolving credit line, net
            
            200.0
            
            
            (50.0
            )Tax
                benefit relating to employee stock compensation
            
            33.0
            
            
            -Treasury
                stock acquired
            
            (906.8
            )
            
            (219.9
            )Net
                proceeds from employee stock plans
            
            28.5
            
            
            28.5Net
                cash used in financing activities
            
            (725.4
            )
            
            (258.0
            )Effect
                of foreign currency translation adjustment
            
            1.1
            
            
            0.4Net
                (decrease) increase in cash and cash equivalents
            
            (409.8
            )
            
            239.0Cash
                and cash equivalents at beginning of period
            
            477.9
            
            
            166.1Cash
                and cash equivalents at end of period
            $
            68.1
            
            $
            405.1


*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, 2005 filed with
      the Securities and Exchange Commission on February 22, 2006. 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, 2005.





We
      believe the accompanying unaudited consolidated financial statements reflect
      all
      adjustments (consisting of only normal recurring adjustments except as otherwise
      disclosed) necessary to present fairly the Unaudited Consolidated Balance Sheet
      at September 30, 2006, the Unaudited Consolidated Statements of Operations
      for
      the three and nine months ended September 30, 2006 and 2005, the Unaudited
      Consolidated Statement of Changes in Stockholders’ Equity for the nine months
      ended September 30, 2006, and the Unaudited Consolidated Statements of Cash
      Flows for the nine months ended September 30, 2006 and 2005. Operating results
      for the three and nine months ended September 30, 2006 are not necessarily
      indicative of the results that may be expected for the year ending
      December  31,  2006.





*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 $0.9 billion and $1.4 billion for the three months ended
      September 30, 2006 and 2005, respectively, and $3.2 billion and
      $4.4 billion for the nine months ended September 30, 2006 and 2005,
      respectively, are excluded from revenues and cost of revenues. Many of our
      clients’ members who previously participated in higher copayment discount
      programs have transitioned to Medicare Part D programs in 2006. As a result,
      retail pharmacy copayments decreased in the three and nine months ended
      September 30, 2006 as compared to the same periods of 2005.





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.





Revenues
      from our Specialty and Ancillary Services Segment ("SAAS") which
      consists of our previously reported specialty line of business (“Specialty”)
      and Pharma Business Solutions (“PBS”) line of business, are earned in a
      variety of ways. Revenues are earned from providing medications/pharmaceuticals
      for diseases that rely upon high-cost injectible, infused, oral, or inhaled
      drugs which have sensitive handling and storage needs, the distribution of
      pharmaceuticals and medical supplies to providers and clinics, third-party
      logistics services for contracted pharmaceutical manufacturer clients, fertility
      services to providers and patients and bio-pharmaceutical services including
      marketing, reimbursement and customized logistics solutions. These revenues
      are
      recognized at the point of shipment. At the time of shipment, the Company has
      performed substantially all of its obligations under its customer contracts
      and
      does not experience a significant level of reshipments. Appropriate reserves
      are
      recorded for discounts and contractual allowances which are estimated based
      on
      historical collections over a recent period. Any differences between our
      estimates and actual collections are reflected in operations in the period
      in
      which payment is received. Differences may result in the amount and timing
      of
      our revenues for any period if actual performance varies from our estimates.
      Allowances for returns are estimated based on historical return trends.





Revenues
      are also 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 low-income
      patients, sample fulfillment and sample accountability services. Revenues also
      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 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 a rebate program through which we receive rebates and administrative
      fees from pharmaceutical manufacturers. Rebates earned for the administration
      of
      this program, 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. The portion of rebates payable to clients is estimated quarterly based
      on historical and/or anticipated sharing percentages. These estimates are
      adjusted to actual when amounts are paid to clients. 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.
      Rebates and administrative fees billed to manufacturers are determinable when
      the drug is dispensed. We pay all or a contractually agreed upon portion of
      such
      rebates to our 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 $129.0 million and $170.5 million (representing
      outstanding checks not yet presented for payment) have been reclassified to
      claims and rebates payable, accounts payable and accrued expenses at September
      30, 2006 and December 31, 2005, 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.





As
      of
      September 30, 2006 and December 31, 2005, unbilled receivables were $665.6
      million and $686.0 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.




Included
      in receivables, net, as of September 30, 2006 and December 31, 2005, is an
      allowance for doubtful accounts of $72.8 million and $57.9 million,
      respectively. This increase is primarily due to a one-time adjustment to the
      allowance for doubtful accounts in our SAAS segment in the third quarter of
      2006, specifically related to the legacy Priority Healthcare Corporation
      (“Priority”) business. The majority of this adjustment resulted in an increase
      of goodwill as the allowance related to pre-acquisition accounts receivable
      (see
      Note 2).





*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. No impairments existed as of September 30,
      2006
      and December 31, 2005.





*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 6). 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*





On
      January 1, 2006, we adopted Financial Accounting Standard (“FAS”) No. 123R,
“Share-Based Payment”, which replaces FAS 123, “Accounting for Stock-Based
      Compensation,” and supersedes Accounting Principles Board No. (“APB”) 25,
“Accounting for Stock Issued to Employees.” We adopted FAS 123R using the
      modified prospective method. Under this method of adoption, prior periods are
      not restated. For awards granted prior to the adoption of FAS 123R, compensation
      cost is recognized for the unvested portion of outstanding awards based on
      the
      grant-date fair value calculated under FAS 123 for pro forma
      disclosures.





Grant-date
      fair value of stock options and “stock-settled” stock appreciation rights
      (“SSRs”) is estimated using a Black-Scholes valuation model. Compensation
      expense is reduced based on estimated forfeitures with adjustments to actual
      recorded at the time of vesting. Forfeitures are estimated based on historical
      experience. We use an accelerated method of recognizing compensation cost for
      awards with graded vesting, which essentially treats the grant as three separate
      awards, with vesting periods of 12, 24 and 36 months for those grants that
      vest
      over three years. The majority of our stock-based awards have three-year
      vesting.





See
      Note
      5 for more information regarding stock-based compensation.





*NEW
      ACCOUNTING GUIDANCE*





In
      July
      2006, the FASB issued FASB Interpretation (“FIN”) 48, “Accounting for
      Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109.” This
      interpretation requires that realization of an uncertain income tax position
      must be “more likely than not” (i.e., greater than 50% likelihood of receiving a
      benefit) before it can be recognized in the financial statements. Further,
      this
      interpretation prescribes the benefit to be recorded in the financial statements
      as the amount most likely to be realized assuming a review by tax authorities
      having all relevant information and applying current conventions. This
      interpretation also clarifies the financial statement classification of
      tax-related penalties and interest and sets forth new disclosures regarding
      unrecognized tax benefits. This interpretation is effective for fiscal years
      beginning after December 15, 2006, and we will be required to adopt this
      interpretation in the first quarter of 2007. We are currently evaluating
      the requirements of FIN 48.   At this time, we believe we have
      properly and adequately provided for all income tax positions.





**Note
      2 - Changes in business**




On
        October 14, 2005, we acquired the capital stock of Priority in a cash
        transaction for $28 per share, or approximately $1.3 billion. The acquisition
        was accomplished through the merger of one of our wholly-owned subsidiaries
        with
        and into Priority. Priority, headquartered in Lake Mary, Florida, was among
        the
        nation’s largest Specialty and distribution companies, with approximately $1.7
        billion in annual revenue during 2004 and approximately $1.1 billion in revenue
        for the nine months ended July 2, 2005. The $1.3 billion purchase
        price was financed with approximately $167.0 million of cash on hand and
        the
        remainder by adding $1.6 billion in term loans under a new credit facility
        which replaced our prior credit facility.
  The
        following table summarizes the estimated fair values of the Priority assets
        acquired and liabilities assumed at the date of acquisition (in millions).
        The
        adjustments made to these fair values since December 31, 2005 consist of
        an
        increase in accounts receivable reserves, a revaluation of customer relationship
        intangibles, and an increase in current liabilities.








**As
                of**
              **September
                30,**
              **2006**Current
                assets
            $
            501.0Property
                and equipment
            
            23.7Goodwill
            
            976.9Other
                identifiable intangible assets
            
            203.0Other
                assets
            
            0.7Total
                assets acquired
            
            1,705.3Current
                liabilities
            
            351.5Deferred
                tax liabilities
            
            37.2Total
                liabilities assumed
            
            388.7Net
                Assets Acquired
            $
            1,316.6




Aetna
      Specialty Pharmacy, a joint venture existing between Priority and Aetna, Inc.
      (“Aetna”), was 60% owned by Priority and 40% by Aetna. Upon a change in control
      of Priority, the joint venture agreement provided Aetna with an option to
      purchase Priority’s 60% ownership share of the joint venture. Aetna exercised
      its option and on December 30, 2005 purchased Priority’s 60% ownership share of
      Aetna Specialty Pharmacy. The gain on the assets sold, which was not material,
      reduced the amount of goodwill we recorded through the Priority acquisition.
      In
      the table above, the net assets of Aetna Specialty Pharmacy are excluded from
      the assets acquired and liabilities assumed.




The
      results of operations of Priority are included in our consolidated results
      of
      operations beginning October 14, 2005. The following unaudited pro forma
      information presents a summary of our combined results of operations and those
      of Priority as if the acquisition had occurred at the beginning of the period
      presented, along with certain pro forma adjustments to give effect to
      amortization of other intangible assets, interest expense on acquisition debt
      and other adjustments. The following pro forma financial information is not
      necessarily indicative of the results of operations as they would have been
      had
      the transactions been effected on the assumed date, nor is it necessarily an
      indication of trends in future results (in millions, except per share
      data):


**Three
                    Months Ended**
                  **September
                    30, 2005**
                
                **Nine
                    Months Ended**
                  **September
                    30, 2005**Total
                    revenues
                $
                4,352.0
                
                
                $
                13,125.3Net
                    income
                
                96.1
                
                
                
                286.5Basic
                    earnings per share
                
                0.66
                
                
                
                1.95Diluted
                    earnings per share
                
                0.64
                
                
                
                1.91


**Note
      3 - Goodwill and other intangibles**





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





**September
                30, 2006**
            **December
                31, 2005****Gross**
              **Carrying**
              **Amount**
            **Accumulated**
              **Amortization**
            **Gross**
              **Carrying**
              **Amount**
            **Accumulated**
              **Amortization**GoodwillPBM
            $
            1,510.1
            
            $
            107.2
            
            
            $
            1,509.0
            
            $
            107.0SAAS(1)
            
            1,283.9
            
            
            -
            
            
            
            1,298.1
            
            
            -$
            2,794.0
            
            $
            107.2
            
            
            $
            2,807.1
            
            $
            107.0Other
                intangible assetsPBM(2)Customer
                relationships
            $
            244.4
            
            $
            82.3
            
            
            $
            265.4
            
            $
            94.5Other
            
            61.7
            
            
            47.0
            
            
            
            72.8
            
            
            52.2306.1
            
            
            129.3
            
            
            
            338.2
            
            
            146.7SAASCustomer
                relationships(1)
            
            231.5
            
            
            25.9
            
            
            
            114.7
            
            
            10.9Other(1)
            
            9.9
            
            
            2.8
            
            
            
            9.9
            
            
            1.9241.4
            
            
            28.7
            
            
            
            124.6
            
            
            12.8Total
                other intangible assets
            $
            547.5
            
            $
            158.0
            
            
            $
            462.8
            
            $
            159.5







(1) As
      a
      result of our acquisition of the capital stock of Priority in October 2005,
      we
      recorded goodwill, customer relationships, trade names, and other intangible
      assets of $976.9 million,
      $198.7 million, $2.4 million, and $1.9 million, respectively (See Note 2).
      Final
      adjustments were made to the purchase price allocation in the third quarter
      of
      2006.


(2)   
      Changes in other intangible assets are a result of the write-off of
      fully-amortized contractual assets, consisting of non-compete agreements and
      customer contracts, that are no longer in effect.




The
        aggregate amount of amortization expense of other intangible assets was $9.8
        million and $7.4 million for the three months ended September 30, 2006 and
        2005, respectively, and $29.3 million and $22.3 million for the nine months
        ended September 30, 2006 and 2005, respectively. The future aggregate amount
        of
        amortization expense of other intangible assets is approximately $10.7 million
        for the remainder of 2006, $39.3 million for 2007, $35.9 million for 2008,
        $34.9
        million for 2009, and $33.7 million for 2010. The weighted average amortization
        period of intangible assets subject to amortization is 15 years in total,
        and by
        major intangible class is 16 years for customer contracts and four years
        for
        other intangible assets.


**Note
      4 - Earnings per share**





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
      millions):




**Three
                Months Ended**
              **September
                30,**
            **Nine
                Months Ended**
              **September
                30,****2006**
            **2005**
            **2006**
            **2005**Weighted
                average number of common sharesoutstanding
                during the period - Basic EPS**(1)**
            
            136.1
            
            
            146.3
            
            
            141.2
            
            
            147.3Dilutive
                common stock equivalents:Outstanding
                stock options, SSRs,restricted
                stock units, and executivedeferred
                compensation units**(2)**
            
            2.1
            
            
            2.6
            
            
            2.3
            
            
            2.4Weighted
                average number of common sharesoutstanding
                during the period - Diluted EPS**(1)**
            
            138.2
            
            
            148.9
            
            
            143.5
            
            
            149.7






(1)
            The
                decrease in weighted average number of common shares outstanding
                during
                the period for Basic and Diluted EPS resulted from 2.5 million and
                12.0
                million treasury shares repurchased in the three and nine months
                ended
                September 30, 2006.


(2)
            Excludes
                SSRs of 0.9 million for the three and nine months ended September
                30,
                2006. These were excluded because their effect was
                anti-dilutive.





The
      above
      shares are all calculated under the “treasury stock” method in accordance with
      FAS 128, “Earnings per Share.” Certain stock-based awards were outstanding
      during the three and nine months ended September 30, 2006 and could potentially
      dilute basic earnings per share in the future, but were not included in the
      computation of diluted earnings per share for those periods because they were
      anti-dilutive.





**Note
      5 - Stock-based compensation plans**





Under
      our
      stock-based compensation plans, we have issued stock options, SSRs, restricted
      stock and performance share awards. As of September 30, 2006, approximately
      8.8
      million shares of our Common Stock are available for issuance under our current
      plan. Awards are typically settled using treasury shares. The maximum
      contractual term of stock options and SSRs granted under our current plan is
      10
      years. Due to the nature of the awards, we use the same valuation methods and
      accounting treatments for SSRs and stock options. During the nine months ended
      September 30, 2006, we granted to certain officers and employees approximately
      46,000 performance share awards with a fair market value of $87.27 per share.
      The performance share awards cliff vest at the end of three years. The number
      of
      shares that ultimately vest is dependent upon achieving specific performance
      targets. All performance share awards are non-vested as of September 30, 2006.
      We also granted 902,000 SSRs and 25,000 stock options with a weighted average
      Black-Scholes value of $28.61 per share. The SSRs and stock options have
      three-year graded vesting.





During
      the nine months ended September 30, 2006, we also granted to certain officers
      and employees approximately 82,000 restricted shares of Common Stock with a
      fair
      market value of $85.34 per share. These shares have three-year graded vesting.
      The total number of non-vested restricted stock awards was 284,000 at September
      30, 2006 and 449,000 at December 31, 2005.




The
      following table presents
      amounts related to stock-based compensation:





*(in
                millions, except per share data)*
            **SSRs
                and Stock**
              **Options**
            **Restricted
                Stock**
              **and
                Performance**
              **Shares****Three
                months ended September 30, 2006**Stock-based
                compensation:Expense,
                pre-tax
            $
            5.1
            
            $
            1.5Expense,
                after
                tax
            
            3.2
            
            
            0.9Expense
                per diluted
                share
            $
            0.02
            
            $
            0.01**Nine
                months ended September 30, 2006**Stock-based
                compensation:Expense,
                pre-tax
            $
            15.2
            
            $
            5.5Expense,
                after
                tax
            
            9.5
            
            
            3.4Expense
                per diluted
                share
            $
            0.06
            
            $
            0.02**As
                of September 30, 2006**Unamortized
                portion(1)
            $
            20.6
            
            $
            8.8





(1)
      As of September 30, 2006 we have $0.2 million of unearned compensation related
      to unvested shares that are part of our deferred compensation plan.





The
      weighted average remaining recognition period for SSRs and stock options is
      1.2
      years, and for restricted stock and performance shares is 2.0
      years.





As
      a
      result of the adoption of FAS 123R, we now classify the tax benefit from the
      exercise of stock options as a financing cash inflow. For the nine months ended
      September 30, 2006, the tax benefit related to employee
      stock compensation was
      $33.0 million. Prior to the adoption of FAS 123R, the tax benefit from the
      exercise of stock options was classified as an inflow from operating activities
      and under the modified prospective method, prior periods are not restated to
      reflect the adoption of FAS 123R.





Prior
      to
      January 1, 2006, we accounted for stock-based compensation in accordance with
      APB 25, which required the use of the intrinsic value method. Accordingly,
      no
      compensation expense was recognized in prior periods for the stock options
      granted, since the exercise price was equal to the fair market value of the
      shares at the grant date. Compensation expense was recognized under APB 25
      for
      restricted stock awards based on the fair market value of the stock on the
      date
      of grant.




Had
      compensation cost for our stock-based compensation plans been determined based
      on the fair value method required by FAS 123R, net earnings and earnings per
      share would have been reduced as shown in the following table:







**Three
                  Months Ended**
              
              **Nine****Months****Ended***(in
                  millions, except per share data)*
              **September
                  30, 2005**
              
              **September
                  30, 2005**Net
                  income, as reported
              $
              101.7
              
              
              $
              289.0Plus:
                  Employee stock-based compensation expenseincluded
                  in reported net earnings, net of relatedtax
                  effects
              
              1.2
              
              
              
              5.7Less:
                  Employee stock-based compensation expensedetermined
                  using fair-value based method forstock-based
                  awards, net of tax
              
              (3.5
              )
              
              
              (13.9
              )Pro
                  forma net income
              $
              99.4
              
              
              $
              280.8Basic
                  earnings per shareAs
                  reported
              $
              0.70
              
              
              $
              1.96Pro
                  forma
              
              0.67
              
              
              
              1.91Diluted
                  earnings per shareAs
                  reported
              $
              0.68
              
              
              $
              1.93Pro
                  forma
              
              0.66
              
              
              
              1.87




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





**Three
                Months Ended****September
                30,**
            
            **Nine
                Months Ended****September
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Expected
                life of option
            
            3-5
                years
            
            
            3-5
                years
            
            
            3-5
                years
            
            
            3-5
                yearsRisk-free
                interest rate
            
            5.0%
                - 5.3%
            
            
            3.9%-4.1%
            
            
            4.6%
                - 5.3%
            
            
            3.5%-4.1%Expected
                volatility of stock
            
            32%-34%
            
            
            36%
            
            
            32%-34%
            
            
            36%-40%Expected
                dividend yield
            
            None
            
            
            None
            
            
            None
            
            
            None




A
      summary
      of the status of stock options and SSRs as of September 30, 2006 and
      changes during the nine months ended September 30, 2006 are presented
      below.







**Nine
                  Months Ended****September
                  30, 2006*****(share
                  data in millions)***
              **Shares**
              
              **Weighted-Average
                  Exercise Price**Outstanding
                  at beginning of year
              
              6.3
              
              $
              28.21Granted
              
              0.9
              
              $
              85.89Exercised
              
              (1.5
              )
              $
              21.25Forfeited/Cancelled
              
              (0.1
              )
              $
              49.89Outstanding
                  at end of period
              
              5.6
              
              $
              38.90Awards
                  exercisable at period end
              
              3.1
              
              $
              24.62Weighted-average
                  fair value of
                options
                  granted during the year
              $
              28.61




A
      summary
      of the status of restricted stock and performance shares as of
      September 30, 2006 and changes during the nine months ended September 30,
      2006 are presented below.




**Nine
                  Months Ended****September
                  30, 2006*****(share
                  data in millions)***
              **Shares**
              
              **Weighted-Average
                  Grant**
                **Date
                  Fair Value**Outstanding
                  at beginning of year
              
              0.4
              
              $
              35.36Granted
              
              0.1
              
              $
              86.03Released
              
              (0.2
              )
              $
              32.39Forfeited/Cancelled
              
              -
              
              
              -Outstanding
                  at end of period
              
              0.3
              
              $
              53.14




At
      September
      30, 2006, the weighted-average remaining contractual lives of stock options
      outstanding and stock options exercisable were 4.6 years and 3.8 years,
      respectively, and the aggregate intrinsic value (the amount by which the market
      value of the underlying stock exceeds the exercise price of the option) of
      shares outstanding and shares exercisable was $203.7 million and $159.1 million,
      respectively. Cash proceeds, tax benefits, fair value of vested shares and
      intrinsic value related to total stock options exercised and restricted shares
      vested during the three and nine months ended September 30, 2006 and 2005 are
      provided in the following table:








**Three Months Ended**
              **September 30,**
            
            **Nine Months Ended**
              **September 30,***(in
                millions)*
            **2006**
            
            **2005**
            
            **2006**
            
            **2005**Proceeds
                from stock options exercised
            $
            7.9
            
            $
            14.5
            
            $
            31.0
            
            $
            31.8Tax
                benefit related toemployee stock compensation
            
            5.5
            
            
            14.4
            
            
            33.0
            
            
            28.4Fair
                value of vested restricted shares
            
            -
            
            
            -
            
            
            19.7
            
            
            16.3Cash
                received for tax withholding upon vesting ofrestricted
                stock
            
            -
            
            
            -
            
            
            0.5
            
            
            1.9Intrinsic
                value of stock options exercised
            
            14.5
            
            
            36.8
            
            
            92.3
            
            
            62.0








**Note
      6 - Contingencies**





We
      accrue
      self-insurance reserves based upon estimates of the aggregate liability of
      claim
      costs in excess of our insurance coverage. Reserves are estimated using certain
      actuarial assumptions followed in the insurance industry and our historical
      experience (see Note 1, “Self-insurance reserves”). The majority of these claims
      are legal claims and our liability estimate is primarily related to the cost
      to
      defend these claims. We do not accrue for settlements, judgments, monetary
      fines
      or penalties until such amounts are probable and estimable, in compliance with
      FAS 5, “Accounting for Contingencies.” Under FAS 5, if the range of possible
      loss is broad, the liability accrual should be based on the lower end of the
      range.





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





**Note
      7 - Segment reporting**





We
      report
      segments on the basis of services offered and have determined we have two
      reportable segments: PBM and SAAS. Our domestic and Canadian PBM operating
      segments have similar characteristics and as such have been aggregated into
      a
      single PBM reporting segment. Our SAAS segment includes the Specialty operations
      of CuraScript, and our Specialty Distribution Services (“SDS”) and Phoenix
      Marketing Group LLC (“PMG”) service lines. Prior to the third quarter of 2006,
      SDS and PMG were included in a separate Pharma Business Solutions (“PBS”)
      segment. During the third quarter, the operations of the Specialty business
      and
      the Pharma Business Solutions (“PBS”) unit were combined in order to capture the
      natural synergies between these two businesses, which share common products
      and
      customers. Accordingly, these two businesses are now combined into one reporting
      segment labeled, Specialty and Ancillary Services. Prior period data has been
      reclassified to reflect the change in our operating and reporting
      segments.




We
        have
        reclassified certain amounts deemed immaterial between PBM revenue and PBM
        cost
        of revenue.  There is no effect on consolitdated gross profit.


Operating
      income is the measure used by our chief operating decision maker to assess
      the
      performance of each of our operating segments. The following table presents
      information about our reportable segments, including a reconciliation of
      operating income to income before income taxes, for the three and nine months
      ended September 30, 2006 and 2005:





***(in
                millions)***
            **PBM**
            
            **SAAS**
            
            **Total****Three
                months ended September 30, 2006**Product
                revenuesNetwork
                revenues
            $
            2,159.3
            
            $
            -
            
            $
            2,159.3Home
                delivery revenues
            
            1,265.3
            
            
            -
            
            
            1,265.3Other
                revenues
            
            -
            
            
            834.0
            
            
            834.0Service
                revenues
            
            40.5
            
            
            31.1
            
            
            71.6Total
                revenues
            
            3,465.1
            
            
            865.1
            
            
            4,330.2Depreciation
                and amortization expense
            
            14.7
            
            
            9.1
            
            
            23.8Operating
                income
            
            194.0
            
            
            11.7
            
            
            205.7Undistributed
                loss from joint venture
            
            
            
            
            
            
            
            (0.4
            )Interest
                income
            
            
            
            
            
            
            
            2.3Interest
                expense
            
            
            
            
            
            
            
            (26.4
            )Income
                before income taxes
            
            
            
            
            
            
            
            181.2Capital
                expenditures
            
            12.9
            
            
            4.6
            
            
            17.5







***(in
              millions)***
            ****
            **PBM**
            ****
            ****
            **SAAS**
            ****
            ****
            **Total****Three
                months ended September 30, 2005**Product
                revenue:Network
                revenues
            $
            2,207.0
            
            $
            -
            
            $
            2,207.0Home
                delivery revenues
            
            1,245.6
            
            
            -
            
            
            1,245.6Other
                revenues
            
            -
            
            
            317.8
            
            
            317.8Service
                revenues
            
            38.6
            
            
            38.6
            
            
            77.2Total
                revenues
            
            3,491.2
            
            
            356.4
            
            
            3,847.6Depreciation
                and amortization expense
            
            17.3
            
            
            3.0
            
            
            20.3Operating
                income
            
            138.4
            
            
            22.7
            
            
            161.1Undistributed
                loss from joint venture
            
            
            
            
            
            
            
            (0.6
            )Interest
                income
            
            
            
            
            
            
            
            3.5Interest
                expense
            
            
            
            
            
            
            
            (5.1
            )Income
                before income taxes
            
            
            
            
            
            
            
            158.9Capital
                expenditures
            
            12.3
            
            
            4.0
            
            
            16.3**Nine
                months ended September 30, 2006**Product
                revenuesNetwork
                revenues
            $
            6,484.3
            
            $
            -
            
            $
            6,484.3Home
                delivery revenues
            
            3,894.2
            
            
            -
            
            
            3,894.2Other
                revenues
            
            -
            
            
            2,530.5
            
            
            2,530.5Service
                revenues
            
            121.6
            
            
            100.7
            
            
            222.3Total
                revenues
            
            10,500.1
            
            
            2,631.2
            
            
            13,131.3Depreciation
                and amortization expense
            
            47.8
            
            
            27.9
            
            
            75.7Operating
                income
            
            522.1
            
            
            59.6
            
            
            581.7Undistributed
                loss from joint venture
            
            
            
            
            
            
            
            (1.2
            )Interest
                income
            
            
            
            
            
            
            
            11.3Interest
                expense
            
            
            
            
            
            
            
            (70.6
            )Income
                before income taxes
            
            
            
            
            
            
            
            521.2Capital
                expenditures
            
            27.6
            
            
            10.6
            
            
            38.2







***(in
              millions)***
            
            **PBM**
            ****
            ****
            **SAAS**
            ****
            ****
            **Totals****Nine
                months ended September 30, 2005**Product
                revenue:Network
                revenues
            $
            6,833.0
            
            $
            -
            
            $
            6,833.0Home
                delivery
                revenues
            
            3,715.3
            
            
            -
            
            
            3,715.3Other
                revenues
            
            -
            
            
            875.6
            
            
            875.6Service
                revenues
            
            110.7
            
            
            96.4
            
            
            207.1Total
                revenues
            
            10,659.0
            
            
            972.0
            
            
            11,631.0Depreciation
                and amortization expense
            
            50.8
            
            
            8.8
            
            
            59.6Operating
                income
            
            394.2
            
            
            53.6
            
            
            447.8Undistributed
                loss from joint venture
            
            
            
            
            
            
            
            (1.9
            )Interest
                income
            
            
            
            
            
            
            
            7.6Interest
                expense
            
            
            
            
            
            
            
            (14.5
            )Income
                before income taxes
            
            
            
            
            
            
            
            439.0Capital
                expenditures
            
            23.6
            
            
            10.6
            
            
            34.2**As
                of September 30, 2006**Total
                assets
            $
            2,666.3
            
            $
            2,357.1
            
            $
            5,023.4Investment
                in equity method investees
            
            0.2
            
            
            2.6
            
            
            2.8**As
                of December 31, 2005**Total
                assets
            $
            3,255.5
            
            $
            2,238.0
            
            $
            5,493.5Investment
                in equity method investees
            
            0.8
            
            
            2.8
            
            
            3.6





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





Revenues
      earned by our Canadian PBM totaled $9.3 million and $7.7 million for the three
      months ended September 30, 2006 and 2005, respectively, and $27.4 million and
      $22.8 million for the nine months ended September 30, 2006 and 2005,
      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 $39.4 million and $37.5 million as of September 30, 2006 and December
      31, 2005, respectively. All other long-lived assets are domiciled in the United
      States.





**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:*




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


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


•
            *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* •
            *changes
              in average wholesale prices (“AWP”), which could reduce prices and
              margins, including the impact of a proposed settlement in a class action
              case involving First DataBank, an AWP reporting
              service* •
            *uncertainties
              regarding the implementation of the Medicare Part D prescription drug
              benefit, including the financial impact to us to the extent that we
              participate in the program on a risk-bearing basis, uncertainties of
              client or member losses to other providers under Medicare Part D, and
              increased regulatory risk* •
            *uncertainties
                associated with U.S. Centers for Medicare & Medicaid’s (“CMS”)
                implementation of the Medicare Part B Competitive Acquisition Program
                (“CAP”), including the potential loss of clients/revenues to providers
                choosing to participate in the
                CAP*


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


•
            *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 relating to our contracts with the DoD TRICARE Management
                Activity 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 or interruption of the
                supply of
                any pharmaceutical products*


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


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


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


•
            *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*


*•*
            *our
                ability to attract and retain qualified personnel*


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





We
      do not
      undertake any obligation to release publicly any revisions to such
      forward-looking statements to reflect events or circumstances after the date
      hereof or to reflect the occurrence of unanticipated events.














*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,
      2005.*







**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, benefit design consultation, drug
      utilization review, formulary management, disease management, and drug data
      analysis services. We provide specialty services (“Specialty”), including
      patient care and direct specialty home delivery to patients; distribution of
      infusion drugs to patient homes, physician offices, and infusion centers;
      distribution of pharmaceuticals and medical supplies to providers and clinics;
      third party logistics services for contracted pharmaceutical manufacturer
      clients; fertility services to providers and patients; and bio-pharmaceutical
      services including marketing, reimbursement and customized logistics solutions.
      Specialty does not include the fulfillment of specialty prescriptions at retail
      pharmacies participating in our networks; these prescriptions are reflected
      in
      PBM network revenues. We also provide services  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 Specialty and Ancillary Services ("SAAS") (see
“—Results of Operations”).  Revenue generated by our segments can be
      classified as either tangible product revenue or service revenue. We earn
      tangible product revenue from the sale of prescription drugs by retail
      pharmacies in our retail pharmacy networks and from dispensing prescription
      drugs from our home delivery and specialty pharmacies. Service revenue includes
      administrative fees associated with the administration of retail pharmacy
      networks contracted by certain clients, market research programs, medication
      counseling services, certain specialty distribution services, and sample
      fulfillment and sample accountability services. Tangible product revenue
      generated by our PBM and SAAS segments represented 98.3% of revenues for the
      three and nine months ended September 30, 2006, respectively, as compared to
      98.0% and 98.2% for the three and nine months ended September 30,
      2005.




On
        October 14, 2005, we purchased the capital stock of Priority Healthcare,
        Inc.
        (“Priority”) in a cash transaction for $28 per share, or approximately $1.3
        billion. The acquisition was accomplished through the merger of one of our
        wholly-owned subsidiaries with and into Priority. The $1.3 billion purchase
        price was financed with approximately $167.0 million of cash on hand and
        the
        remainder by adding $1.6 billion in term loans under a new credit facility
        which
        replaced our prior credit facility. Consequently, our operating results include
        those of Priority from October 14, 2005.


**EXECUTIVE
      SUMMARY AND TREND FACTORS AFFECTING OUR BUSINESS**





Prescription
      drug costs have increased considerably over the past several years, primarily
      due to brand-name product inflation, the introduction of new products by
      pharmaceutical manufacturers and higher utilization of drugs. We face continuing
      pressures on margins resulting from client demands for better management of
      pharmacy trends, enhanced service offerings and/or higher service levels on
      contract renewals, and unfavorable modifications to contracts with key clients.




Our
        business model is built around the alignment of key components of our business
        model with the financial interests of our clients and members in making the
        use
        of prescription drugs safer and more affordable. The improvement in our
        consolidated results of operations in the nine months ended September 30,
        2006
        over the same period of 2005 was primarily driven by factors which also reduce
        pharmacy trends for our clients. In the nine months ended September 30, 2006,
        we
        benefited from higher generic utilization (57.0% in the nine months ended
        September 30, 2006 compared to 54.4% in the same period of 2005), better
        management of ingredient costs (resulting from renegotiation of certain supplier
        contracts, increased competition among generic manufacturers and other actions
        which helped to reduce ingredient costs) and increased home delivery volume.
        In
        addition, our results of operations in the nine months ended September 30,
        2006
        improved over the same period of 2005 as a result of increased workforce
        efficiencies and the consolidation of certain of our facilities. These positive
        trends were partially offset by a decrease in network claims volume due to
        client attrition in the first nine months of 2006. We believe the positive
        impact resulting from increased generic usage, productivity improvements,
        and
        increased home delivery volume will continue to generate improvement in our
        results of operations in the future.


Current
        results of operations for our SAAS segment were negatively affected by the
        migration of members from our Patient Assistance Programs to the Medicare
        Part D
        program, by margin declines in our core specialty and distribution business
        units and by integration expenses. We do, however, anticipate sequential
        growth
        in SAAS operating income due to various contributing factors including new
        business that will begin in the fourth quarter, seasonality improvements,
        and a
        further focus on reduction in expenses. We believe that the infrastructure
        investments made during integration, the management and reporting changes
        implemented in the third quarter, and our improved success in being awarded
        specialty products in limited and exclusive networks position us to capitalize
        on the growth opportunities in the specialty marketplace.





**RECENT
      DEVELOPMENTS**




The
        case of New
        England Carpenters Health Benefits Fund, et al. v. First DataBank, et
        al. ,
        Civil
        Action No. 1:05-CV-11148-PBS (D. Mass.), is a civil class action case brought
        against one of several companies that report data on prescription drug prices,
        including “average wholesale price,” or AWP. As part of a proposed settlement in
        the case First DataBank (“FDB”) has agreed to reduce the reported AWP of over
        8,000 specific pharmaceutical products by four percent. At this time the
        proposed settlement has received neither preliminary nor final court approval.
        We cannot predict the outcome of this case, or, if the settlement is approved,
        the precise timing of any of the proposed AWP changes.


Our
        contracts with our retail pharmacy networks and with our PBM and Specialty
        pharmacy clients generally use AWP as a benchmark for establishing pricing
        for
        most brand drugs and certain generic drugs. We have also generally used FDB’s
        reported AWP in processing retail and home delivery transactions. In the
        absence
        of any mitigating action on our part, the proposed reduction in FDB’s AWP would
        have a material adverse effect on the margin we earn on home delivery
        transactions. It may also create disruption in our retail networks due to
        the
        adverse impact on AWP-based retail pharmacy pricing. However, most of our
        contracts with our clients and retail pharmacies contain terms that we believe
        will enable us to mitigate the adverse effect of this proposed reduction in
        FDB’s reported AWP. If the proposed settlement should become final we would
        exercise our contractual rights so as to mitigate as far as practicable the
        adverse impact to us.


Whatever
      the outcome of this case, we believe that payors, pharmacy providers and
      PBMs will begin to evaluate other pricing benchmarks as the basis for
      contracting for prescription drugs and benefit management services in the
      future. We believe our business model can utilize one or more other consistently
      calculated benchmarks but we cannot evaluate the overall financial impact that
      the transition to any such alternative benchmark might
      have.





Due
      to
      these and other uncertainties, we can give no assurance that the short or long
      term impact of changes to industry pricing benchmarks will not have a material
      adverse effect on our financial performance, results of operations and financial
      condition in future periods.





**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, 2005, filed with
      the
      SEC on February 22, 2006.






***REBATE
      ACCOUNTING***





ACCOUNTING
      POLICY


We
      administer a rebate program through which we receive rebates and administrative
      fees from pharmaceutical manufacturers. The portion of rebates payable to
      clients is estimated quarterly 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 estimated aggregate allocation percentages and actual rebate
                allocation percentages calculated on a client-by-client
                basis; •
            Drug
                patent expirations; and •
            Changes
                in drug utilization patterns.


Historically,
      adjustments to our original estimates have been 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 is 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 the number and nature of claims could impact our
      estimate.








***REVENUE
      RECOGNITION***





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
                or in our cost of revenues.


•
            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 low income
                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.


•
            Discounts
                and contractual allowances related to our Specialty revenues are
                estimated
                based on historical collections over a recent period for the sales
                that
                are recorded at gross charges. The percentage is applied to the applicable
                accounts receivable balance that contains gross charges for each
                period.
                Any differences between the estimates and actual collections are reflected
                in operations in the year payment is received. Differences may result
                in
                the amount and timing of revenues for any period if actual performance
                varies from estimates. Allowances for returns are estimated based
                on
                historical return trends.


•
            SAAS
                product revenues include revenues earned through the distribution
                of
                specialty drugs to clients as well as supplies provided through the
                distributions business, as well as administering sample card programs
                for
                certain manufacturers. We include ingredient cost of those drug samples
                dispensed from retail pharmacies in our revenues and the associated
                costs
                for these sample card programs in cost of
                revenues.


•
            SAAS
                service revenues include revenues earned through providing reimbursement
                solutions and product support to pharmaceutical manufacturers,
                biotechnology companies, and medical device companies, revenues derived
                from our group purchasing organization (“GPO”), and 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**




We
        maintain a PBM segment, consisting of our domestic and Canadian PBM operations,
        and a SAAS segment, which consists of our specialty operations of CuraScript,
        Specialty Distribution Services (“SDS”) and Phoenix Marking Group LLC
        (“Phoenix”) service lines. Prior to the third quarter of 2006, SDS and PMG were
        included in a separate Pharma Business Solutions (“PBS”) segment. During the
        third quarter, the operations of the Specialty business and the PBS unit
        were
        combined in order to capture the natural synergies between these two businesses,
        which share common products and customers. Accordingly, these two businesses
        are
        now combined into one reporting segment labeled Specialty and Ancillary
        Services.  Prior period data has been reclassified to reflect the change in
        our operating and reporting segments.


We
        have reclassified certain
        amounts deemed immaterial between PBM revenue and PBM cost of revenue. There
        is
        no effect on consolidated gross profit.


*PBM
      OPERATING INCOME*


**Three
                      Months Ended September 30,**
                  
                  **Nine
                      Months Ended September 30,*****(in
                      millions)***
                  **2006**
                  ***Increase/***
                    ***(Decrease)***
                  **2005**
                  **2006**
                  ***Increase/***
                    ***(Decrease)***
                  **2005**Product
                      revenuesNetwork
                      revenues
                  $
                  2,159.3
                  
                  
                  *(2.2*
                  *%)*
                  $
                  2,207.0
                  
                  $
                  6,484.3
                  
                  
                  *(5.1*
                  *%)*
                  $
                  6,833.0Home
                      delivery revenues
                  
                  1,265.3
                  
                  
                  *1.6*
                  *%*
                  
                  1,245.6
                  
                  
                  3,894.2
                  
                  
                  *4.8*
                  *%*
                  
                  3,715.3Service
                      revenues
                  
                  40.5
                  
                  
                  *4.9*
                  *%*
                  
                  38.6
                  
                  
                  121.6
                  
                  
                  *9.8*
                  *%*
                  
                  110.7Total
                      PBM revenues
                  
                  3,465.1
                  
                  
                  *(0.7*
                  *%)*
                  
                  3,491.2
                  
                  
                  10,500.1
                  
                  
                  *(1.5*
                  *%)*
                  
                  10,659.0Cost
                      of PBM revenues
                  
                  3,145.7
                  
                  
                  *(2.7*
                  *%)*
                  
                  3,234.1
                  
                  
                  9,600.7
                  
                  
                  *(3.2*
                  *%)*
                  
                  9,915.8PBM
                      Gross Profit
                  
                  319.4
                  
                  
                  *24.2*
                  *%*
                  
                  257.1
                  
                  
                  899.4
                  
                  
                  *21.0*
                  *%*
                  
                  743.2PBM
                      SG&A expenses
                  
                  125.4
                  
                  
                  *5.6*
                  *%*
                  
                  118.7
                  
                  
                  377.3
                  
                  
                  *8.1*
                  *%*
                  
                  349.0PBM
                      operating income
                  $
                  194.0
                  
                  
                  *40.2*
                  *%*
                  $
                  138.4
                  
                  $
                  522.1
                  
                  
                  *32.4*
                  *%*
                  $
                  394.2Total
                      adjusted PBM Claims(1)
                  
                  123.8
                  
                  
                  *(8.6*
                  *%)*
                  
                  135.5
                  
                  
                  385.1
                  
                  
                  *(7.4*
                  *%)*
                  
                  415.7


(1)
            PBM
                adjusted claims represent network claims plus home delivery claims,
                which
                are multiplied by 3, as home delivery claims are typically 90 day
                claims
                and network claims are generally 30 day claims. Excluded from the
                network
                claims are manual claims and drug formulary only claims where we
                only
                administer the clients formulary. We process approximately 2 million
                manual claims per year.





Network
      claims decreased by 12.5 million and 33.7 million claims, or 11.8% and 10.3%,
      respectively, in the three and nine months ended September 30, 2006 over the
      same periods in 2005. These decreases are primarily due to the loss of lives
      resulting from the attrition of several clients, including the shift to the
      government funded benefit, Medicare Part D. Total home delivery claims increased
      by 0.2 million and 1.0 million claims, or 2.2% and 3.4%, respectively, in the
      three and nine months ended September 30, 2006, primarily due to the increased
      usage of our home delivery pharmacies by members of new and existing clients.
      These increases were mostly offset by the client attrition as described above.
      On an adjusted basis, total PBM claims decreased 8.6% and 7.4% in the three
      and
      nine months ended September 30, 2006, respectively.





*Product
      Revenues for the three months ended September 30, 2006:* The
      $47.7
      million, or 2.2%, decrease in network pharmacy revenues in the three months
      ended September 30, 2006 as compared to the same period of 2005
      is attributable to lower claim volumes and an increase in generic
      penetration.  Network pharmacy revenues decreased by approximately $260.5
      million due to a decrease in network claims, as described
      above.   Generic claims accounted for 59.7% of total network
      claims for the third quarter of 2006 as compared to 55.6% of total network
      claims for the same period of 2005, resulting in a decrease in network pharmacy
      revenues as generic drugs are less expensive than brand
      drugs.





Average
      revenue per network claim increased 10.9% in the third quarter of 2006 from
      the
      same period in 2005.  This increase is primarily due to inflation and
      a significant reduction in claim volume from members participating in discount
      programs with 100% co-payments who transitioned to Medicare Part D programs.
      For
      these discount programs, we do not include member copayments to retail
      pharmacies in revenue or cost of revenue, and as such, only report
      administrative fees as revenues. A reduction of these lower revenue claims
      from
      last year results in a higher average revenue per network claim this year.





The
      $19.7
      million, or 1.6%, increase in home delivery revenues in the three months ended
      September 30, 2006 as compared to the same period of 2005 is attributable to
      higher claim volumes, partially offset by an increase in generic
      penetration.  The increase in volume, which accounted for an increase in
      revenues of approximately $27.5 million, is primarily due to the increased
      usage
      of our home delivery pharmacies by members of new and existing clients, as
      described above. Generic claims made up 47.1% of total home delivery claims
      for
      the third quarter of 2006 as compared to 43.4% of total network claims for
      the
      same period of 2005.  Our home delivery generic fill rate is lower than the
      retail generic fill rate as fewer generic substitutions are available among
      maintenance medications (e.g. therapies for chronic conditions) commonly
      dispensed from home delivery pharmacies compared to acute medications that
      are
      dispensed primarily by pharmacies in our retail networks.





Average
      revenue per home delivery claim remained relatively consistent in the third
      quarter of 2006 from the same period of 2005, decreasing slightly by 0.6%,
      primarily due to the increased generics usage as described above.





*Product
      Revenues for the nine months ended September 30, 2006:* The
      $348.7 million, or 5.1%, decrease in network pharmacy revenues in the nine
      months ended September 30, 2006 as compared to the same period of 2005
      is attributable to lower claim volumes and an increase in generic
      penetration.  Network pharmacy revenues decreased by approximately $706.4
      million due to a decrease in network claims, as described
      above.   Generic claims accounted for 58.4% of total network
      claims in the nine months ended September 30, 2006 as compared to 55.0% of
      total
      network claims for the same period of 2005, resulting in a decrease in network
      pharmacy revenues as generic drugs are less expensive than brand
      drugs.




Average
      revenue per network claim increased 5.8% in the nine months ended September
      30,
      2006 from the same period in 2005.  This increase is primarily due to
      inflation and mix changes, as discussed above.





The
      $178.9 million, or 4.8%, increase in home delivery revenues in the nine months
      ended September 30, 2006 as compared to the same period of 2005 is attributable
      to higher claim volumes, partially offset by an increase in generic
      penetration.  This increase in volume, which accounted for an increase in
      revenues of approximately $127.9 million, is primarily due to the increased
      usage of our home delivery pharmacies by members of new and existing clients,
      as
      described above. Generic claims made up 44.8% of total home delivery claims
      for
      the nine months ended September 30, 2006 from 43.4% for the same period of
      2005.





Average
      revenue per home delivery claim increased 1.3% in the nine months ended
      September 30, 2006 from the same period in 2005, primarily due to inflation
      and
      a significant reduction in claim volume from members participating in discount
      programs with 100% co-payments who transitioned to Medicare Part D programs,
      as
      described above.





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 $1.9 million, or 4.9%, and $10.9 million, or
      9.8%,
      increase in PBM service revenues in the three and nine months ended September
      30, 2006, respectively, as compared to the three and nine months ended September
      30, 2005 is primarily due to the growth of our Canadian PBM.





Cost
      of
      PBM revenues decreased $88.4 million, or 2.7%, and $315.1 million, or 3.2%,
      respectively for the three and nine months ended September 30, 2006 as compared
      to the same periods of 2005 as a result of the 8.6% and 7.4% decrease in
      adjusted claims volume, respectively. The decreases from lower volumes were
      partially offset by increases in the cost of revenue per adjusted claim for
      the
      three and nine months ended September 30, 2006 of 6.4% and 4.5%, respectively,
      primarily from ingredient cost inflation and a significant reduction of lower
      revenue network claims discussed above.





PBM
      gross
      profit increased $62.3 million, or 24.2%, and $156.2 million, or 21.0%,
      respectively for the three and nine months ended September 30, 2006 as compared
      to the same periods of 2005. Client cost savings from higher home delivery
      volumes, the increase in the aggregate generic fill rate and better management
      of ingredient costs resulting from renegotiation of certain supplier contracts
      were only partially offset by lower network claims volumes and margin pressures
      arising from the current competitive environment.





PBM
      selling, general and administrative expenses (“SG&A”) increased $6.7
      million, or 5.6% and $28.3 million, or 8.1%, respectively in the three and
      nine months ended September 30, 2006 as compared to the same periods of 2005.
      These increases are primarily due to the following:


•
            Stock
                option expense of $5.0 million and $15.2 million recognized in the
                three
                and nine months ended September 30, 2006 due to the implementation
                of
                Financial Accounting Standard (“FAS”) No. 123R, “Share-Based
                Payment”.


•
            Increased
                spending of $8.5 million and $18.2 million in the three and nine
                months
                ended September 30, 2006 as compared to the same periods of 2005,
                on costs
                to improve the operation and the administrative functions supporting
                the
                management of the pharmacy benefit.





PBM
      operating income increased $55.6 million, or 40.2%, and $127.9 million, or
      32.4%, respectively for the three and nine months ended September 30, 2006
      as
      compared to the same periods of 2005.


*SAAS
      OPERATING INCOME*




**Three
                Months Ended September 30,**
            
            **Nine
                Months Ended September 30,*****(in
                millions)***
            **2006****(1)**
            ***Increase/***
              ***(Decrease)***
            **2005******
            **2006****(1)**
            ***Increase/***
              ***(Decrease)***
            **2005**Product
                revenues
            $
            834.0
            
            
            *162.4*
            *%*
            $
            317.8
            
            $
            2,530.5
            
            
            *189.0*
            *%*
            $
            875.6Service
                revenues
            
            31.1
            
            
            *(19.4*
            *%)*
            
            38.6
            
            
            100.7
            
            
            *4.5*
            *%*
            
            96.4Total
                SAAS revenues
            
            865.1
            
            
            *142.7*
            *%*
            
            356.4
            
            
            2,631.2
            
            
            *170.7*
            *%*
            
            972.0Cost
                of SAAS revenues
            
            810.2
            
            
            *153.0*
            *%*
            
            320.3
            
            
            2,448.1
            
            
            *178.1*
            *%*
            
            880.3SAAS
                gross profit
            
            54.9
            
            
            *52.1*
            *%*
            
            36.1
            
            
            183.1
            
            
            *99.7*
            *%*
            
            91.7SAAS
                SG&A expenses
            
            43.2
            
            
            *222.4*
            *%*
            
            13.4
            
            
            123.5
            
            
            *224.1*
            *%*
            
            38.1SAAS
                operating income
            $
            11.7
            
            
            *(48.5*
            *%)*
            $
            22.7
            
            $
            59.6
            
            
            *11.2*
            *%*
            $
            53.6




(1)
      Includes the acquisition of Priority effective October 14, 2005.




As
      noted
      above, we combined our PBS segment with our Specialty segment and formed a
      SAAS
      segment.





The
      acquisition of Priority in October 2005 is a primary driver of the increases
      in
      SAAS revenues, SAAS cost of revenues, and SAAS gross profit in the three and
      nine months ended September 30, 2006, over the same periods of
      2005.




The
        operating income of our legacy PBS line of business declined $7.2 million
        and
        $12.9 million in the three and nine months ended September 30, 2006 from
        the
        same periods of 2005. This is mainly due to fewer Patient Assistance Program
        shipments and other activities as patients have shifted to the Medicare Part
        D
        program, which decreased legacy PBS operating income by $4.2 million and
        $7.5
        million in the three and nine months ended September 30, 2006.


SG&A
      for our SAAS segment increased $29.8 million, or 222.4%, and $85.4 million,
      or
      224.1%, respectively, for the three and nine months ended September 30, 2006
      as
      compared to the same periods of 2005, primarily due to the acquisition of
      Priority. In addition, we incurred a one-time charge to bad debt expense of
      $4.0
      million in the third quarter of 2006 relating to the legacy Priority business.




Other
        factors that impacted third quarter results include:


•
            A
                decrease in core Specialty revenues, primarily due to a decline in
                sales
                of higher margin therapies.


•
            A
                decrease in distribution gross margins primarily due to a manufacturer's
                decision to limit the wholesale distribution network for certain
                oncology
                drugs.


•
            Priority
                integration expenses resulting from systems and site
                consolidations.


•
            A
                mid-year loss of a major third-party payor in the Specialty line
                of
                business.




SAAS
        operating income decreased $11.0 million, or 48.5%, and increased $6.0 million,
        or 11.2%, respectively, for the three and nine months ended September 30,
        2006
        as compared to the same periods of 2005, based on the factors described above.
        We anticipate sequential growth in SAAS operating income due to new business
        beginning in the fourth quarter, a reduction in expenses, and seasonal
        increases.


*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 invested approximately $20.0 million in the joint venture. We have
        recorded our investment in RxHub under the equity method of accounting, which
        requires our percentage interest in RxHub’s results to be recorded in our
        Unaudited Consolidated Statement of Operations. Our percentage of RxHub’s loss
        for the three and nine months ended September 30, 2006 was $0.4 million ($0.3
        million, net of tax) and $1.2 million ($0.8 million, net of tax), respectively,
        compared to $0.6 million ($0.4 million, net of tax) and $1.9 million ($1.3
        million, net of tax) for the same periods of 2005.


For
      the
      three and nine months ended September 30, 2006, net interest expense increased
      $22.5 million and $52.4 million, respectively, as compared to the same periods
      in 2005, resulting from the refinancing of our entire credit facility during
      the
      fourth quarter of 2005 and additional borrowings under our revolver (see “—Bank
      Credit Facility”).





*PROVISION
      FOR INCOME TAXES*





Our
      effective tax rate increased to 36.7% and 37.2% for the three and nine months
      ended September 30, 2006, as compared to 36.0% and 34.2% for the same periods
      of
      2005. The increase in effective tax rate for the three and nine months ended
      September 30, 2006 is due to a non-recurring net tax benefit recorded in 2005
      primarily relating to a change in the apportionment of our income for state
      income tax purposes.





*NET
      INCOME AND EARNINGS PER SHARE*





Net
      income for the three months ended September 30, 2006 increased $13.0 million,
      or
      12.8%, over the same period of 2005. Net income increased $38.2 million, or
      13.2%, for the nine months ended September 30, 2006 over the same period of
      2005.





Basic
      and
      diluted earnings per share increased 20.0% and 22.0%, respectively, for the
      three months ended September 30, 2006 over the same period of 2005. Basic and
      diluted earnings per share increased 18.4% and 18.1%, respectively, for the
      nine
      months ended September 30, 2006 over the nine months ended September 30, 2005.
      This increase is partially due to the decrease in the basic and diluted weighted
      average number of common shares, relating to the repurchase of 2.5 million
      and
      12.0 million shares in the three and nine months ended September 30, 2006 (see
      “—Stock Repurchase Program”).








**LIQUIDITY
      AND CAPITAL RESOURCES**





*OPERATING
      CASH FLOW AND CAPITAL EXPENDITURES*





For
      the
      nine months ended September 30, 2006, net cash provided by operations decreased
      $178.5 million to $352.6 million from $ 531.1 million
      during the nine months ended September 30, 2005. This decrease is due to several
      factors:




•
            The
                $178.9 million decrease in claims and rebates payable (which is a
                use of
                cash) was only partially offset by a $57.3 million decrease in accounts
                receivable (which is a source of cash) resulting in a net
                $121.6 million use of cash in the first nine months of 2006. This net
                decrease is partially due to the timing of collections and disbursements
                surrounding the end of 2005 which resulted in positive cash flows
                occurring in the fourth quarter of 2005 instead of 2006. The decrease
                is
                also a result of lower claim volumes. We manage our business to operate
                with negative net working capital. As a result, when we experience
                a
                reduction in claim volume, our negative net working position will
                decline
                as well, resulting in a use of cash.


•
            The
                decrease in other current liabilities in the first nine months of
                2006
                reduced operating cash flows by approximately $13.3 million, due
                to the
                payout of management incentive bonuses in the first quarter of 2006,
                and
                timing of payments to vendors, partially offset by other various
                increases.


•
            As
                a result of the adoption of FAS 123R on January 1, 2006, tax benefits
                from
                the exercise of stock options are now classified as financing cash
                flows,
                rather than operating cash flows. In the nine months ended
                September 30, 2005, cash flow from operating activities included a
                cash inflow of $28.4 million related to tax benefits from the exercise
                of
                stock options. This reconciliation will continue throughout
                2006.


•
            These
                decreases were partially offset by other positive changes in certain
                working capital components as well as increases in earnings and in
                depreciation and amortization.





Capital
      expenditures for the nine months ended September 30, 2006 increased $4.0
      million, or 11.7%, as compared to the same period of 2005. We intend to continue
      to invest in infrastructure and technology that we believe will provide
      efficiencies in operations and facilitate growth and enhance the services 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.





*STOCK
      REPURCHASE PROGRAM*





We
      have a
      stock repurchase program, originally announced on October 25, 1996. In May
      2006,
      our Board of Directors authorized a 10.0 million share increase to the existing
      program, which increased total authorized shares to 48.0 million. There is
      no
      limit on the duration of the program. During the three months ended September
      30, 2006, we used internally generated cash, as well as borrowings under our
      revolver, to repurchase 2.5 million shares for $199.1 million, bringing the
      total amount repurchased to 41.9 million as of September 30, 2006. 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.





*CHANGES
      IN BUSINESS*




On
        October 14, 2005, we acquired the capital stock of Priority in a cash
        transaction for $28 per share, or approximately $1.3 billion. The acquisition
        was accomplished through the merger of one of our wholly-owned subsidiaries
        into
        Priority. Priority, headquartered in Lake Mary, Florida, was among the nation’s
        largest Specialty and distribution companies, with approximately $1.7 billion
        in
        annual revenue during 2004 and approximately $1.1 billion in revenue for
        the
        nine months ended July 2, 2005. The $1.3 billion purchase price was financed
        with approximately $167.0 million of cash on hand and the remainder by adding
        $1.6 billion in term loans under a new credit facility which replaced our
        prior
        credit facility. As a result of this refinancing, we wrote-off approximately
        $3.6 million in deferred financing fees relating to our prior credit facility
        in
        the fourth quarter of 2005.


Aetna
      Specialty Pharmacy, a joint venture existing between Priority and Aetna, Inc.
      (“Aetna”), was 60% owned by Priority and 40% by Aetna. Upon a change in control
      of Priority, the joint venture agreement provided Aetna with an option to
      purchase Priority’s 60% ownership share of the joint venture. Aetna exercised
      its option and on December 30, 2005 purchased Priority’s 60% ownership share of
      Aetna Specialty Pharmacy. The gain on the assets sold, which was not material,
      reduced the amount of goodwill we recorded through the Priority acquisition.





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 2006 or thereafter.




*BANK
      CREDIT FACILITY*





In
      October 2005, we refinanced our entire credit facility with a $2.2 billion
      credit facility which includes $1.6 billion of Term A loans and a $600.0 million
      revolving credit facility. The revolving credit facility ($200.0 million of
      which was outstanding as of September 30, 2006) is available for general
      corporate purposes. During the third quarter of 2006, we made no scheduled
      payments on our Term A loan. We made net payments of $85.0 million under our
      revolving credit facility during the third quarter of 2006.





Our
      credit facility requires us to pay interest periodically on the London Interbank
      Offered Rates (“LIBOR”) or base rate options, plus a margin. The margin over
      LIBOR will range from 0.50% to 1.125%, depending on our consolidated leverage
      ratio or our credit rating. The margin over the base rate will range from 0%
      to
      0.125% depending upon our consolidated leverage ratio. Under our credit facility
      we are required to pay commitment fees on the unused portion of the
      $600.0 million revolving credit facility. The commitment fee will range
      from 0.10% to 0.25% depending on our consolidated leverage ratio or our credit
      rating.





At
      September 30, 2006, the weighted average interest rate on the facility was
      6.01%. Our credit facility contains covenants that limit the indebtedness we
      may
      incur, the common shares we may repurchase, and dividends we may pay. The
      repurchase and dividend covenant applies if certain leverage thresholds are
      exceeded. The covenants also include a minimum interest coverage ratio and
      a
      maximum leverage ratio. At September 30, 2006, we were 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
      September 30, 2006 (in millions):


**Payments
                  Due by Period as of September 30,****Contractual
                  obligations**
              **Total**
              **2006**
              **2007
                  - 2008**
              **2009
                  - 2010**
              **After
                  2010**Long-term
                  debt
              $
              1,630.4
              
              $
              30.0
              
              $
              440.0
              
              $
              1,160.2
              
              $
              0.2Future
                  minimum lease
                payments(1)
              
              110.9
              
              
              7.0
              
              
              47.4
              
              
              18.7
              
              
              37.8Total
                  contractual cash
                obligations
              $
              1,741.3
              
              $
              37.0
              
              $
              487.4
              
              $
              1,178.9
              
              $
              38.0






(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 September 30, 2006, our lease
      obligation is $13.5 million. In accordance with FASB Interpretation No. 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**




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 (see
      "-Recent Developments").




**Item
      3.**  **Quantitative
      and Qualitative Disclosures About Market Risk**





We
      are
      exposed to market risk from changes in interest rates related to debt
      outstanding under our credit facility. Our earnings are subject to change as
      a
      result of movements in market interest rates. At September 30, 2006, we had
      $1,562.3 million of obligations, net of cash, which were subject to variable
      rates of interest under our credit facility. A hypothetical increase in interest
      rates of 1% would result in an increase in annual interest expense of
      approximately $15.6 million (pre-tax), presuming that obligations subject to
      variable interest rates remained constant.





**Item
      4.**  **Controls
      and Procedures** ****





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





During
      the third quarter ended September 30, 2006, 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 subsidiaries are defendants in a number lawsuits that purport to be class
      actions. Each case seeks damages in an unspecified amount. We cannot ascertain
      with any certainty at this time the monetary damages or injunctive relief that
      any of the plaintiffs may seek to recover. In addition, we are the subject
      of
      several governmental investigations. Such investigations could result in civil
      damages, criminal penalties, or other sanctions, the nature and amount of which
      we cannot currently estimate. We cannot, however, provide any assurance that
      the
      outcome of any of these matters, or some number of them in the aggregate, will
      not be materially adverse to our financial condition, consolidated results
      of
      operations, cash flows or business prospects. In addition, the expenses of
      defending these cases may have a material effect on our financial results.
      The
      following developments have occurred since the filing of our last quarterly
      report:





•
            American
                Federation of State, County & Municipal Employees (AFSCME) v.
                AdvancePCS, et al.(Cause
                No. BC292227, Superior Court of the State of California for the County
                of
                Los Angeles). This action was filed on March 17, 2003. The case purported
                to be a class action on behalf of AFSCME, its California member unions
                having non-ERISA health plans, and all California public employees
                who
                participate in non-ERISA health plans. The complaint alleged that
                certain
                business practices engaged in by us and other PBM defendants violated
                California’s Unfair Competition Law. The suit sought unspecified
                monetary damages and injunctive relief. A stipulated dismissal has
                been
                signed by the parties and an order of dismissal with prejudice has
                been
                entered by the court. Plaintiff dismissed its appeal with prejudice
                and
                this case is now closed.





•
            North
                Jackson Pharmacy, Inc., et al. v. Express Scripts(Civil Action No. CV-03-B-2696-NE, United States District Court for
                the
                Northern District of Alabama). This action was filed on October 1,
                2003.
                This case purports to be a class action against us on behalf of
                independent pharmacies within the United States alleging that certain
                of
                our business practices violate the Sherman Antitrust Act, 15 U.S.C
§1, et.
                seq. Plaintiffs’ motion for class certification was granted. A motion
                filed by the plaintiffs in an antitrust matter against Medco and
                Merck in
                the Eastern District of Pennsylvania before the Judicial Panel on
                Multi-District Litigation requesting transfer of this case and others
                to
                the Eastern District of Pennsylvania for MDL treatment was
                granted.





•
            Harry
                Silverman v. Priority Healthcare Corporation(Case No. 05-CA-1628-16-K, Circuit Court of the Eighteenth District,
                Seminole County, Florida). On or about August 15, 2005, a purported
                shareholder class action lawsuit related to the merger agreement
                between
                us and Priority Healthcare Corporation ("Priority") was filed naming
                Priority and each of its directors as defendants. On September 20,
                2005,
                the parties reached an agreement in principle providing for the settlement
                of the lawsuit based upon additional disclosures in Priority's final
                proxy
                statement and the payment of plaintiff's fees and expenses. Final
                Judgment
                approving the settlement was entered by the Court on August 3, 2006.





•
            Ronald
                A. Katz Technology Licensing, L.P. v. Ahold USA, Inc. et
                al(Case No. C6-545, United States District Court for the District of
                Delaware). Ronald A. Katz Technology Licensing, L.P. ("RAKTL") filed
                a
                complaint against us for infringement of 16 patents allegedly relating
                to
                interactive phone call processing. We are accused of practicing the
                patents in our telephone systems that allows members to order
                prescription refills, pay for prescriptions, access account information,
                and locate participating pharmacies. Plaintiff is seeking an order
                for an accounting of damages, damages for infringement of all patents,
                an
                injunction as to the patents that have not yet expired, treble damages
                for
                willful infringement, and attorneys' fees. Express Scripts intends
                to
                contest the action vigorously.





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
      1A**  **Risk
      Factors** ****





Our
      Annual Report on Form 10-K
      for the year ended December 31, 2005 includes a detailed discussion of certain
      risk factors in Part I, Item 1A. The information presented below
      updates and should be read in conjunction with the risk factors and information
      disclosed in that Form 10-K. These are not the only risks and uncertainties
      that
      we face. Additional risks and uncertainties that we do not currently know about
      or that we currently believe are immaterial, or that we have not predicted,
      may
      also harm our business operations or adversely affect us. If any of these risks
      or uncertainties actually occurs, our business, financial condition, operating
      results or liquidity could be materially and adversely affected.




*Changes
        in Industry Pricing Benchmarks Could Adversely Affect Our Financial
        Performance*




Contracts
      in the prescription
      drug industry, including our contracts with our retail pharmacy networks and
      with our PBM and Specialty pharmacy clients, generally use certain published
      benchmarks to establish pricing for prescription drugs. These benchmarks include
      average wholesale price (“AWP”), average manufacturer price (“AMP”) and
      wholesale acquisition cost (“WAC”). Most of our contracts utilize the AWP
      standard.





Recent
      events have raised uncertainties as to whether payors, pharmacy providers,
      PBMs
      and others in the prescription drug industry will continue to utilize AWP as
      it
      has previously been calculated or whether other pricing benchmarks will be
      adopted for establishing prices within the industry





Specifically,
      in the recently announced proposed settlement in the case of New
      England Carpenters Health Benefits Fund, et al. v. First DataBank, et
      al. ,
      Civil
      Action No. 1:05-CV-11148-PBS (D. Mass.), a civil class action case brought
      against First DataBank (“FDB”), one of several companies that report data on
      prescription drug prices, FDB has agreed to reduce the reported AWP of certain
      drugs by four percent. At this time, the proposed settlement has received
      neither preliminary nor final court approval.  We cannot predict the
      outcome of this case, or, if the settlement is approved, the precise timing
      of
      any of the proposed AWP changes.




In
        the
        absence of any mitigating action on our part, the proposed reduction in FDB’s
        AWP would have a material adverse effect on the margin we earn on home delivery
        transactions. It may also create disruption in our retail networks due to
        the
        adverse impact on AWP-based retail pharmacy pricing. However, most of our
        contracts with our clients and retail pharmacies contain terms that we believe
        will enable us to mitigate the adverse effect of this proposed reduction in
        FDB’s reported AWP.




Whatever
      the outcome of
      the FDB case, we believe that payors, pharmacy providers and PBMs will begin
      to
      evaluate other pricing benchmarks as the basis for contracting for prescription
      drugs and benefit management services in the future.





Due
      to
      these and other uncertainties, we can give no assurance that the short or long
      term impact of changes to industry pricing benchmarks will not have a material
      adverse effect on our financial performance, results of operations and financial
      condition in future periods.











**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 September 30, 2006 (share data in millions):





Period
            Shares
              purchased
            Average
              price
                paid
              per
                share
            Shares
                purchased
              as
                part of a
              publicly
              announced
              program
            Maximum
                shares
              that
                may yet be purchased under
              the
                program7/1/2006
                - 7/31/2006
            
            -
            
            $
            -
            
            
            -
            
            
            8.68/1/2006
                - 8/31/2006
            
            2.5
            
            
            79.65
            
            
            2.5
            
            
            6.19/1/2006
                - 9/30/2006
            
            -
            
            
            -
            
            
            -
            
            
            6.12006
                Total
            
            2.5
            
            $
            79.65
            
            
            2.5








We
      have a
      stock repurchase program, originally announced on October 25, 1996. In May
      2006,
      our Board of Directors authorized a 10.0 million share increase to the existing
      program, which increased total authorized shares to 48.0 million. There is
      no
      limit on the duration of the program. During the three months ended September
      30, 2006, we used internally generated cash, as well as borrowings under our
      revolver, to repurchase 2.5 million shares for $199.1 million, bringing the
      total amount repurchased to 41.9 million as of September 30, 2006. Additional
      share purchases, if any, will be made in such amounts and at such times as
      we
      deem appropriate based upon prevailing market and business conditions, subject
      to restrictions on the amount of stock repurchases contained in our bank credit
      facility.































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





(a)  See
      Index
      to Exhibits below.








**SIGNATURES**





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




EXPRESS SCRIPTS, INC.
 (Registrant)
 
 
 
 Date:  October
        24, 2006 By:    /s/
        George
        Paz
 George Paz, Chairman, President and Chief Executive
 Officer
 
 
 Date:  October
        24, 2006         
        By:    /s/ Edward
        Stiften
 Edward Stiften, Sr. Vice President and
 Chief Financial Officer





INDEX
      TO
      EXHIBITS


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


Exhibit
              Number
            Exhibit2.11
            Agreement
                and Plan of Merger, dated July 21, 2005, by and among the Company,
                Pony
                Acquisition Corporation, and Priority Healthcare Corporation, incorporated
                by reference to Exhibit No. 2.1 to the Company’s Current Report on Form
                8-K filed July 22, 2005.3.1
            Amended
                and Restated Certificate of Incorporation of the Company, incorporated
                by
                reference to the Company’s Annual Report on Form 10-K for the year ending
                December 31, 2001, incorporated by reference to Exhibit No. 3.2 to
                the
                Company’s Quarterly Report on Form 10-Q for the quarter ending June 30,
                2004.3.2
            Certificate
                of Amendment to the Certificate of Incorporation of the Company dated
                June
                2, 2004, incorporated by reference to Exhibit No. 3.3 to the Company’s
                Quarterly Report on Form 10-Q for the quarter ending June 30,
                2004.3.3
            Third
                Amended and Restated Bylaws, incorporated by reference to Exhibit
                No. 3.2
                to the Company’s Annual Report on Form 10-K for the year ending December
                31, 2000.4.1
            Form
                of Certificate for Common Stock, incorporated by reference to Exhibit
                No.
                4.1 to the Company’s Registration Statement on Form S-1 filed June 9, 1992
                (No. 33-46974) (the “Registration Statement”).4.2
            Stockholder
                and Registration Rights Agreement dated as of October 6, 2000 between
                the
                Company and New York Life Insurance Company, incorporated by reference
                to
                Exhibit No. 4.2 to the Company's Amendment No. 1 to Registration
                Statement
                on Form S-3 filed October 17, 2000 (Registration Number
                333-47572).4.3
            Asset
                Acquisition Agreement dated October 17, 2000, between NYLIFE Healthcare
                Management, Inc., the Company, NYLIFE LLC and New York Life Insurance
                Company, incorporated by reference to Exhibit No. 4.3 to the Company's
                amendment No. 1 to the Registration Statement on Form S-3 filed October
                17, 2000 (Registration Number 333-47572).4.4
            Rights
                Agreement, dated as of July 25, 2001, between the Corporation and
                American
                Stock Transfer & Trust Company, as Rights Agent, which includes the
                Certificate of Designations for the Series A Junior Participating
                Preferred Stock as Exhibit A, the Form of Right Certificate as Exhibit
                B
                and the Summary of Rights to Purchase Preferred Shares as Exhibit
                C,
                incorporated by reference to Exhibit No. 4.1 to the Company's Current
                Report on Form 8-K filed July 31, 2001.4.5
            Amendment
                dated April 25, 2003 to the Stockholder and Registration Rights Agreement
                dated as of October 6, 2000 between the Company and New York Life
                Insurance Company, incorporated by reference to Exhibit No. 4.8 to
                the
                Company’s Quarterly Report on Form 10-Q for the period ending March 31,
                2003.4.6
            Amendment
                No. 1 to the Rights Agreement between the Corporation and American
                Stock
                Transfer & Trust Company, as Rights Agent, dated May 25, 2005,
                incorporated by reference to Exhibit No. 10.1 to the Company’s Current
                Report on Form 8-K filed May 31, 2005.10.1
            Credit
                Agreement, dated as of October 14, 2005, among Express Scripts, Inc.,
                Credit Suisse, as administrative agent, Citigroup Global Markets
                Inc., as
                syndication agent, Bank of Nova Scotia, Calyon New York Branch, Deutsche
                Bank Securities Inc., JPMorgan Chase Bank, N.A., The Royal Bank of
                Scotland plc, Sun Trust and Union Bank of California, as co−documentation
                agents and the lenders named therein, incorporated by reference to
                Exhibit
                No. 10.1 to the Company’s Current Report on Form 8-K filed October 14,
                2005.31.12
            Certification
                by George Paz, as Chairman, 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 Chairman, President and Chief Executive Officer
                of
                Express Scripts, Inc., pursuant to 18 U.S.C. § 1350 and Exchange Act Rule
                13a-14(b).32.22
            Certification
                by 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.