**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


WASHINGTON,
      D.C. 20549





**FORM
      10-Q**





X
            QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934
              For
                the quarterly period ended June 30, 2006.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 June 30, 2006:
            137,748,217
            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 -  (Not Applicable)





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


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





Item
      4. Submission
      of Matters to a Vote of Security Holders





Item
      5. Other
      Information - (Not Applicable)





Item
      6. Exhibits





Signatures





Index
      to
      Exhibits







PART
      I.
      FINANCIAL INFORMATION


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


**EXPRESS
                SCRIPTS, INC.****Unaudited
                Consolidated Balance Sheet****June
                30,**
            
            **December
                31,***(in
                millions, except share data)*
            **2006**
            
            **2005**AssetsCurrent
                assets:Cash
                and cash equivalents
            $
            195.9
            
            $
            477.9Receivables,
                net
            
            1,265.1
            
            
            1,393.2Inventories
            
            260.8
            
            
            273.4Deferred
                taxes
            
            60.6
            
            
            53.1Prepaid
                expenses and other current assets
            
            57.0
            
            
            59.8Total
                current assets
            
            1,839.4
            
            
            2,257.4Property
                and equipment, net
            
            187.5
            
            
            201.3Goodwill,
                net
            
            2,712.4
            
            
            2,700.1Other
                intangible assets, net
            
            282.9
            
            
            303.3Other
                assets
            
            31.2
            
            
            31.4Total
                assets
            $
            5,053.4
            
            $
            5,493.5Liabilities
                and Stockholders’ EquityCurrent
                liabilities:Claims
                and rebates payable
            $
            1,204.2
            
            $
            1,380.0Accounts
                payable
            
            571.2
            
            
            596.5Accrued
                expenses
            
            292.4
            
            
            308.7Current
                maturities of long-term debt
            
            110.0
            
            
            110.0Total
                current liabilities
            
            2,177.8
            
            
            2,395.2Long-term
                debt
            
            1,605.4
            
            
            1,400.5Other
                liabilities
            
            236.8
            
            
            233.0Total
                liabilities
            
            4,020.0
            
            
            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: 159,444,000 and 159,499,000, respectively;shares
                outstanding: 137,749,000 and 145,993,000, respectively
            
            1.6
            
            
            1.6Additional
                paid-in capital
            
            516.8
            
            
            473.5Unearned
                compensation under employee compensation plans
            
            (37.0
            )
            
            (5.8
            )Accumulated
                other comprehensive income
            
            12.0
            
            
            9.8Retained
                earnings
            
            1,755.3
            
            
            1,542.82,248.7
            
            
            2,021.9Common
                Stock in treasury at cost, 21,695,000 and 13,506,000shares,
                respectively
            
            (1,215.3
            )
            
            (557.1
            )Total
                stockholders’ equity
            
            1,033.4
            
            
            1,464.8Total
                liabilities and stockholders’ equity
            $
            5,053.4
            
            $
            5,493.5


*See
      accompanying Notes to Unaudited Consolidated Financial Statements*








**EXPRESS
      SCRIPTS, INC.**


**Unaudited
      Consolidated Statement of Operations**





**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30,***(in
                millions, except per share data)*
            **2006**
            
            **2005**
            
            **2006**
            
            **2005**Revenues1
            $
            4,452.1
            
            $
            3,944.3
            
            $
            8,896.7
            
            $
            7,783.4Cost
                of revenues1
            
            4,088.5
            
            
            3,667.5
            
            
            8,188.5
            
            
            7,241.7Gross
                profit
            
            363.6
            
            
            276.8
            
            
            708.2
            
            
            541.7Selling,
                general and administrative
            
            171.1
            
            
            128.4
            
            
            332.2
            
            
            255.0Operating
                income
            
            192.5
            
            
            148.4
            
            
            376.0
            
            
            286.7Other
                (expense) income:Undistributed
                loss from joint venture
            
            (0.3
            )
            
            (0.6
            )
            
            (0.8
            )
            
            (1.3
            )Interest
                income
            
            4.0
            
            
            2.5
            
            
            9.0
            
            
            4.1Interest
                expense
            
            (23.7
            )
            
            (4.7
            )
            
            (44.2
            )
            
            (9.4
            )(20.0
            )
            
            (2.8
            )
            
            (36.0
            )
            
            (6.6
            )Income
                before income taxes
            
            172.5
            
            
            145.6
            
            
            340.0
            
            
            280.1Provision
                for income taxes
            
            64.7
            
            
            43.6
            
            
            127.5
            
            
            92.8Net
                income
            $
            107.8
            
            $
            102.0
            
            $
            212.5
            
            $
            187.3Basic
                earnings per share:
            $
            0.76
            
            $
            0.69
            
            $
            1.48
            
            $
            1.27Weighted
                average number of common sharesOutstanding
                during the period - Basic EPS
            
            141.2
            
            
            148.2
            
            
            143.8
            
            
            147.8Diluted
                earnings per share:
            $
            0.75
            
            $
            0.68
            
            $
            1.45
            
            $
            1.25Weighted
                average number of common sharesOutstanding
                during the period - Diluted EPS
            
            143.4
            
            
            150.5
            
            
            146.2
            
            
            149.9








*1
      Exludes estimated retail pharmacy co-payments of $1,045.7 and $1,460.2 for
      the
      three months ended June 30, 2006 and 2005, respectively, and $2,266.5 and
      $2,943.9 for the six months ended June 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
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            212.5
            
            
            -
            
            
            212.5Other
                comprehensive income:Foreign
                currencytranslation
                adjustment
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            2.2
            
            
            -
            
            
            -
            
            
            2.2Comprehensive
                income
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            2.2
            
            
            212.5
            
            
            -
            
            
            214.7Treasury
                stock
                acquired
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (707.7
            )
            
            (707.7
            )Changes
                in stockholders’ equity
                relatedto
                employee stock plans
            
            (0.1
            )
            
            -
            
            
            43.3
            
            
            (31.2
            )
            
            -
            
            
            -
            
            
            49.5
            
            
            61.6Balance
                at June 30, 2006
            
            159.4
            
            $
            1.6
            
            $
            516.8
            
            $
            (37.0
            )
            $
            12.0
            
            $
            1,755.3
            
            $
            (1,215.3
            )
            $
            1,033.4


*See
      accompanying Notes to Unaudited Consolidated Financial Statements*











**EXPRESS
                SCRIPTS, INC.****Unaudited****Consolidated
                Statement of Cash Flows****Six
                Months Ended****June
                30,***(in
                millions)*
            **2006**
            
            **2005**Cash
                flows from operating activities:Net
                income
            $
            212.5
            
            $
            187.3Adjustments
                to reconcile net income to net cashprovided
                by operating activities, excludingthe
                effect of the acquisition:Depreciation
                and amortization
            
            51.9
            
            
            39.3Non-cash
                adjustments to net income
            
            13.4
            
            
            17.7Taxbenefit
                relating to employee stock compensation
            
            -
            
            
            14.0Net
                changes in operating assets and liabilities
            
            (84.0
            )
            
            58.1Net
                cash provided by operating activities
            
            193.8
            
            
            316.4Cash
                flows from investing activities:Purchases
                of property and equipment
            
            (20.7
            )
            
            (17.9
            )Other
            
            (0.1
            )
            
            1.5Net
                cash used in investing activities
            
            (20.8
            )
            
            (16.4
            )Cash
                flows from financing activities:Repayment
                of long-term debt
            
            (80.1
            )
            
            (11.1
            )Proceeds
                from (repayment of) revolving credit line, net
            
            285.0
            
            
            (50.0
            )Tax
                benefit relating to employee stock compensation
            
            27.5
            
            
            -Treasury
                stock acquired
            
            (707.7
            )
            
            -Net
                proceeds from employee stock plans
            
            19.7
            
            
            12.6Other
            
            (0.3
            )
            
            -Net
                cash used in financing activities
            
            (455.9
            )
            
            (48.5
            )Effect
                of foreign currency translation adjustment
            
            0.9
            
            
            (0.3
            )Net
                (decrease) increase in cash and cash equivalents
            
            (282.0
            )
            
            251.2Cash
                and cash equivalents at beginning of period
            
            477.9
            
            
            166.0Cash
                and cash equivalents at end of period
            $
            195.9
            
            $
            417.2


*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 June 30, 2006, the Unaudited Consolidated Statements of Operations for the
      three and six months ended June 30, 2006 and 2005, the Unaudited Consolidated
      Statement of Changes in Stockholders’ Equity for the six months ended June 30,
      2006, and the Unaudited Consolidated Statements of Cash Flows for the six months
      ended June 30, 2006 and 2005. Operating results for the three and six months
      ended June 30, 2006 are not necessarily indicative of the results that may
      be expected for the year ending December  31,  2006.




*REVENUE
        RECOGNITION*
 ***Revenue
            recognition.*** Revenues
            from our pharmacy benefit management (“PBM”) segment are earned by dispensing
            prescriptions from our home delivery pharmacies, processing claims for
            prescriptions filled by retail pharmacies in our networks, and by providing
            services to drug manufacturers, including administration of discount
            programs
            (see also “—Rebate Accounting”).
 
 Revenues
        from dispensing prescriptions from our home delivery pharmacies, which include
        the co-payment received from members of the health plans we serve, are recorded
        when prescriptions are shipped. At the time of shipment, our earnings process
        is
        complete: the obligation of our customer to pay for the drugs is fixed, and,
        due
        to the nature of the product, the member may not return the drugs nor receive
        a
        refund.
 
 Revenues
        related to the sale of prescription drugs by retail pharmacies in our networks
        consist of the amount the client has contracted to pay us (which excludes
        the
        co-payment) for the dispensing of such drugs together with any associated
        administrative fees. These revenues are recognized when the claim is processed.
        When we independently have a contractual obligation to pay our network pharmacy
        providers for benefits provided to our clients’ members, we act as a principal
        in the arrangement and we include the total payments we have contracted to
        receive from these clients as revenue, and payments we make to the network
        pharmacy providers as cost of revenue in compliance with Emerging Issues
        Task
        Force (“EITF”) Issue No. 99-19, “Reporting Gross Revenue as a Principal vs. Net
        as an Agent.” When a prescription is presented by a member to a retail pharmacy
        within our network, we are solely responsible for confirming member eligibility,
        performing drug utilization review, reviewing for drug-to-drug interactions,
        performing clinical intervention, which may involve a call to the member’s
        physician, communicating plan provisions to the pharmacy, directing payment
        to
        the pharmacy and billing the client for the amount they are contractually
        obligated to pay us for the prescription dispensed, as specified within our
        client contracts. We also provide benefit design and formulary consultation
        services to clients. We have separately negotiated contractual relationships
        with our clients and with network pharmacies, and under our contracts with
        pharmacies we assume the credit risk of our clients’ ability to pay for drugs
        dispensed by these pharmacies to clients’ members. Our clients are not obligated
        to pay the pharmacies as we are primarily obligated to pay retail pharmacies
        in
        our network the contractually agreed upon amount for the prescription dispensed,
        as specified within our provider contracts. In addition, under most of our
        client contracts, we realize a positive or negative margin represented by
        the
        difference between the negotiated ingredient costs we will receive from our
        clients and the separately negotiated ingredient costs we will pay to our
        network pharmacies. These factors indicate we are a principal as defined
        by EITF
        99-19 and, as such, we record ingredient cost billed to clients in revenue
        and
        the corresponding ingredient cost paid to network pharmacies in cost of
        revenues.
 
 If
        we
        merely administer a client’s network pharmacy contracts to which we are not a
        party and under which we do not assume credit risk, we record only our
        administrative fees as revenue. For these clients, we earn an administrative
        fee
        for collecting payments from the client and remitting the corresponding amount
        to the pharmacies in the client’s network. In these transactions we act as a
        conduit for the client. Because we are not the principal in these transactions,
        drug ingredient cost is not included in our revenues or in our cost of
        revenues.
 
 In
        retail
        pharmacy transactions, amounts paid to pharmacies and amounts charged to
        clients
        are always exclusive of the applicable co-payment. Under our pharmacy
        agreements, the pharmacy is solely obligated to collect the co-payment from
        the
        member based on the amount we advise them to collect. We have no information
        regarding actual co-payments collected. As such, we do not include member
        co-payments to retail pharmacies in our revenue or in our cost of revenue.
        Retail pharmacy co-payments, which we instructed retail pharmacies to collect
        from members, of $1.0 billion and $1.5 billion for the three months ended
        June 30, 2006 and 2005, respectively, and $2.3 billion and $2.9 billion for
        the six months ended June 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 six months ended June 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.
 
 We
        provide medications/pharmaceuticals for diseases that rely upon high-cost
        injectible, infused, oral, or inhaled drugs which are high cost and have
        sensitive handling and storage needs (“Specialty”). Our Specialty services also
        include 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. Revenues from our Specialty segment 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 from our Pharma Business Solutions (“PBS”) segment are derived from the
        distribution of pharmaceuticals requiring special handling or packaging where
        we
        have been selected by the pharmaceutical manufacturer as part of a limited
        distribution network, the distribution of pharmaceuticals through Patient
        Assistance Programs where we receive a fee from the pharmaceutical manufacturer
        for administrative and pharmacy services for the delivery of certain drugs
        free
        of charge to doctors for their low-income patients, sample fulfillment and
        sample accountability services. Revenues earned by PBS include administrative
        fees received from pharmaceutical manufacturers for dispensing or distributing
        consigned pharmaceuticals requiring special handling or packaging and
        administrative fees for verification of practitioner licensure and distribution
        of consigned drug samples to doctors based on orders received from
        pharmaceutical sales representatives. We also administer sample card programs
        for certain manufacturers and include the ingredient costs of those drug
        samples
        dispensed from retail pharmacies in PBS revenues, and the associated costs
        for
        these sample card programs in cost of revenues. Because manufacturers are
        independently obligated to pay us and we have an independent contractual
        obligation to pay our network pharmacy providers for free samples dispensed
        to
        patients under sample card programs, we include the total payments from these
        manufacturers (including ingredient costs) as revenue, and payments to the
        network pharmacy provider as cost of revenue. These transactions require
        us to
        assume credit risk.





*REBATE
      ACCOUNTING*





We
      administer 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 $164.8 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 June 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
      June 30, 2006 and December 31, 2005, unbilled receivables were $681.4 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 June 30, 2006 and December 31, 2005, is an allowance
      for doubtful accounts of $58.7 million and $57.9 million,
      respectively.




*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 June 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
      June
      2006, the FASB issued FASB Interpretation (“FIN”) 48, “Accounting for
      Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109.” This
      interpretation clarifies the accounting for uncertainty in income taxes
      recognized in an entity’s financial statements. This interpretation is effective
      for fiscal years beginning after December 15, 2006. Express Scripts, Inc. will
      be required to adopt this interpretation in the first quarter of 2007. We
      are currently evaluating the requirements of FIN 48.  We do not
      believe implementation will have a material effect on our consolidated financial
      statements.





**Note
      2 - Changes in business**





On
      October 14, 2005, we acquired the capital stock of Priority Healthcare
      Corporation (“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 six months ended
      July 2, 2005. This acquisition is expected to enhance our Specialty
      business. The $1.3 billion purchase price was financed with approximately $167.0
      million of cash on hand and the remainder by adding $1.6 billion in term
      loans under a new credit facility which replaced our prior credit facility.
      We
      are currently in the process of evaluating the net assets acquired from
      Priority. The allocation of the purchase price to the assets and liabilties
      acquired from Priority is preliminary and subject to revision based on the
      outcome of ongoing evaluations of these assets and liabilities.





The
      following table summarizes the estimated fair values of the Priority assets
      acquired and liabilities assumed at the date of acquisition (in millions).
      There
      have been no material adjustments made to these fair values since December
      31,
      2005.





**As
                of**
              **June
                30,****2006**Current
                assets
            $
            524.0Property
                and equipment
            
            23.7Goodwill
            
            1,002.6Other
                identifiable intangible assets
            
            86.0Other
                assets
            
            1.4Total
                assets acquired
            
            1,637.7Current
                liabilities
            
            286.1Deferred
                tax liabilities
            
            36.3Total
                liabilities assumed
            
            322.4Net
                Assets Acquired
            $
            1,315.3











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**
              **June
                30, 2005**
            
            **Six
                Months Ended**
              **June
                30, 2005**Total
                revenues
            $
            4,455.8
            
            
            $
            8,773.3Net
                income
            
            103.2
            
            
            
            190.4Basic
                earnings per share
            
            0.70
            
            
            
            1.29Diluted
                earnings per share
            
            0.69
            
            
            
            1.27








**Note
      3 - Goodwill and other intangibles**





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





**June
                30, 2006**
            
            **December
                31, 2005****Gross**
              **Carrying**
              **Amount**
            
            **Accumulated**
              **Amortization**
            
            **Gross**
              **Carrying**
              **Amount**
            
            **Accumulated**
              **Amortization**GoodwillPBM
            $
            1,509.9
            
            $
            107.1
            
            $
            1,509.0
            
            $
            107.0Specialty(1)
            
            1,287.5
            
            
            -
            
            
            1,276.0
            
            
            -PBS
            
            22.1
            
            
            -
            
            
            22.1
            
            
            -$
            2,819.5
            
            $
            107.1
            
            $
            2,807.1
            
            $
            107.0Other
                intangible assetsPBM(2)Customer
                contracts
            $
            244.4
            
            $
            79.3
            
            $
            265.4
            
            $
            94.5Other
            
            61.6
            
            
            44.8
            
            
            72.8
            
            
            52.2306.0
            
            
            124.1
            
            
            338.2
            
            
            146.7SpecialtyCustomer
                contracts(1)
            
            110.7
            
            
            18.7
            
            
            110.7
            
            
            9.1Other(1)
            
            7.9
            
            
            2.4
            
            
            8.0
            
            
            1.8118.6
            
            
            21.1
            
            
            118.7
            
            
            10.9PBSCustomer
                contracts
            
            4.0
            
            
            2.2
            
            
            4.0
            
            
            1.8Other
            
            1.7
            
            
            -
            
            
            1.9
            
            
            0.15.7
            
            
            2.2
            
            
            5.9
            
            
            1.9Total
                other intangible assets
            $
            430.3
            
            $
            147.4
            
            $
            462.8
            
            $
            159.5





(1) As
      a
      result of our acquisition of the capital stock of Priority in October 2005,
      we
      preliminarily recorded goodwill, customer contracts, trade names, and other
      intangible assets of $1,002.6 million, $82.0 million, $2.2 million, and $1.8
      million, respectively (See Note 2).


(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 $10.4
      million and $7.4 million for the three months ended June 30, 2006 and 2005,
      respectively, and $20.5 million and $14.9 million for the six months ended
      June
      30, 2006 and 2005, respectively. The future aggregate amount of amortization
      expense of other intangible assets is approximately $21.0 million for the
      remainder of 2006, $38.6 million for 2007, $35.1 million for 2008, $34.1 million
      for 2009, and $29.5 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**
              **June
                30,**
            
            **Six
                Months Ended**
              **June
                30,****2006**
            
            
            **2005**
            
            
            **2006**
            
            **2005**Weighted
                average number of common sharesoutstanding
                during the period - Basic EPS**(1)**
            
            141.2
            
            
            148.2
            
            
            143.8
            
            
            147.8Dilutive
                common stock equivalents:Outstanding
                stock options, SSRs,restricted
                stock units, and executivedeferred
                compensation units**(2)**
            
            2.2
            
            
            2.3
            
            
            2.4
            
            
            2.1Weighted
                average number of common sharesoutstanding
                during the period - Diluted EPS**(1)**
            
            143.4
            
            
            150.5
            
            
            146.2
            
            
            149.9


(1)
            The
                decrease in weighted average number of common shares outstanding
                during
                the period for Basic and Diluted EPS resulted from the repurchase
                of 9.5
                million treasury shares in the second quarter of
                2006.


(2)
            Excludes
                SSRs of 0.9 million for the three and six months ended June 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 six months ended June 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 June 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 the 2000 LTIP is 10
      years. Due to the nature of the awards, we use the same valuation methods and
      accounting treatments for SSRs and stock options. During the six months ended
      June 30, 2006, we granted to certain officers and employees approximately 46,000
      performance share awards with a fair market value of $87.27. 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 June 30, 2006. We also granted
      895,000 SSRs and 25,000 stock options with a weighted average Black-Scholes
      value of $28.65. The SSRs and stock options have three-year graded vesting.





During
      the six months ended June 30, 2006, we also granted to certain officers and
      employees approximately 80,000 restricted shares of Common Stock with a fair
      market value of $85.36. These shares have three-year graded vesting. The total
      number of non-vested restricted stock awards was 283,000 at June 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 June 30, 2006**Stock-based
                compensation:Expense,
                pre-tax
            $
            5.0
            
            $
            1.6Expense,
                after tax
            
            3.1
            
            
            1.0Expense
                per diluted share
            $
            0.02
            
            $
            0.01**Six
                months ended June 30, 2006**Stock-based
                compensation:Expense,
                pre-tax
            $
            10.1
            
            $
            4.0Expense,
                after tax
            
            6.3
            
            
            2.5Expense
                per diluted share
            $
            0.04
            
            $
            0.02**As
                of June 30, 2006**Unamortized
                portion(1)
            $
            24.9
            
            $
            11.8





(1) As
      of June
      30, 2006 we have $0.3 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
      1.4
      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 six months ended
      June 30, 2006, the tax benefit related to employee
      stock compensation was
      $27.5 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**
            **Six
                Months Ended*****(in
                millions, except per share data)***
            **June
                30, 2005**
            **June
                30, 2005**Net
                income, as reported
            $
            102.0
            
            $
            187.3Plus:
                Employee stock-based compensation expenseincluded
                in reported net earnings, net of relatedtax
                effects
            
            1.0
            
            
            4.6Less:
                Employee stock-based compensation expensedetermined
                using fair-value based method forstock-based
                awards, net of tax
            
            (3.6
            )
            
            (10.4
            )Pro
                forma net income
            $
            99.4
            
            $
            181.5Basic
                earnings per shareAs
                reported
            $
            0.69
            
            $
            1.27Pro
                forma
            
            0.67
            
            
            1.23Diluted
                earnings per shareAs
                reported
            $
            0.68
            
            $
            1.25Pro
                forma
            
            0.66
            
            
            1.21





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





**Three
                Months Ended June 30,**
            **Six
                Months Ended June 30,****2006**
            **2005**
            **2006**
            **2005**Expected
                life of option
            3-5
                years
            3-5
                years
            3-5
                years
            3-5
                yearsRisk-free
                interest rate
            4.8%
                - 5.3%
            3.7%
                - 4.1%
            4.6%
                - 5.3%
            3.5%
                - 4.1%Expected
                volatility of stock
            34%
            38%
            34%
            38%
                - 40%Expected
                dividend yield
            None
            None
            None
            None





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




**Six
                Months Ended**
              **June
                  30, 2006***(share
                data in millions)*
            **Shares**
            **Weighted-Average
                Exercise Price**Outstanding
                at beginning of year
            
            6.3
            
            $
            28.21Granted
            
            0.9
            
            $
            86.03Exercised
            
            (1.2
            )
            $
            19.76Forfeited/Cancelled
            
            (0.1
            )
            $
            48.10Outstanding
                at end of period
            
            5.9
            
            $
            38.47Awards
                exercisable at period end
            
            3.4
            
            $
            24.59Weighted-average
                fair value of
              options
                granted during the year
            $
            28.65





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




**Six
                Months Ended**
              **June
                  30, 2006*****(share
                data in millions)***
            **Shares**
            
            **Weighted-Average
                Grant Date Fair Value**Outstanding
                at beginning of year
            
            0.4
            
            $
            35.36Granted
            
            0.1
            
            $
            86.06Released
            
            (0.2
            )
            $
            32.39Forfeited/Cancelled
            
            -
            
            
            -Outstanding
                at end of period
            
            0.3
            
            $
            53.69





At
      June
      30, 2006, the weighted-average remaining contractual lives of stock options
      outstanding and stock options exercisable were 5.1 years and 4.4 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 $196.5 million and $158.6 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 six months ended June 30, 2006 and 2005 are provided
      in the following table:





**Three
                Months Ended**
              **June
                30,**
            
            **Six
                Months Ended**
              **June
                30,*****(in
                millions)***
            **2006**
            **2005**
            **2006**
            **2005**Proceeds
                from stock options exercised
            $
            2.6
            
            $
            5.2
            
            $
            23.1
            
            $
            17.4Tax
                benefit related toemployee stock compensation
            
            5.6
            
            
            4.2
            
            
            27.5
            
            
            14.0Fair
                value of vested restricted shares
            
            -
            
            
            -
            
            
            19.7
            
            
            16.3Cash
                received for tax withholding upon vesting of restricted
                stock
            
            -
            
            
            -
            
            
            0.5
            
            
            1.9Intrinsic
                value of stock options exercised
            
            13.2
            
            
            6.6
            
            
            77.8
            
            
            25.2








**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 is based on the lower end of the range.





While
      we
      believe that our services and business practices are in compliance with all
      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 these matters would not have a material adverse effect on our consolidated
      results of operations, consolidated financial position and/or consolidated
      cash
      flow from operations.





**Note
      7 - Segment reporting**





We
      report
      segments on the basis of services offered and have determined that we have
      three
      reportable segments: PBM, Specialty, and PBS. Our domestic and Canadian PBM
      operating segments have similar characteristics and as such have been aggregated
      into a single PBM reporting segment. Our PBS segment includes our Specialty
      Distribution Services (“SDS”) and Phoenix Marketing Group, LLC (“PMG”) service
      lines. Effective in October 2005, we began managing our Specialty business
      as a
      separate operating segment. Previously, our Specialty business was part of
      our
      domestic PBM operating segment. The change is primarily due to the acquisition
      of Priority (see Note 2) on October 14, 2005. Our Specialty segment consists
      of
      our CuraScript (acquired in January 2004) and Priority businesses and 2005
      data
      has been reclassified to reflect the change in our operating and reporting
      segments.





We
      have
      reclassified certain inventory purchase discounts received by our Specialty
      segment to more accurately reflect the allocation between our PBM and Specialty
      segment. There is no effect on PBM and Specialty segment gross profit and the
      amounts reported below reflect the reclassification. Consolidated revenues
      and
      cost of revenues reported in the Consolidated Statement of Operations were
      not
      affected.





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





***(in
                millions)***
            **PBM**
            **Specialty**
            **PBS**
            **Total****Three
                months ended June 30, 2006**Product
                revenuesNetwork
                revenues
            $
            2,199.5
            
            $
            -
            
            $
            -
            
            $
            2,199.5Home
                delivery revenues
            
            1,318.6
            
            
            -
            
            
            -
            
            
            1,318.6Other
                revenues
            
            -
            
            
            829.2
            
            
            30.5
            
            
            859.7Service
                revenues
            
            41.3
            
            
            10.4
            
            
            22.6
            
            
            74.3Total
                revenues
            
            3,559.4
            
            
            839.6
            
            
            53.1
            
            
            4,452.1Depreciation
                and amortization expense
            
            16.8
            
            
            7.6
            
            
            1.7
            
            
            26.1Operating
                income
            
            170.5
            
            
            17.9
            
            
            4.1
            
            
            192.5Undistributed
                loss from joint venture
            
            
            
            
            
            
            
            
            
            
            (0.3
            )Interest
                income
            
            
            
            
            
            
            
            
            
            
            4.0Interest
                expense
            
            
            
            
            
            
            
            
            
            
            (23.7
            )Income
                before income taxes
            
            
            
            
            
            
            
            
            
            
            172.5Capital
                expenditures
            
            8.3
            
            
            2.2
            
            
            1.5
            
            
            12.0**Three
                months ended June 30, 2005**Product
                revenue:Network
                revenues
            $
            2,324.1
            
            $
            -
            
            $
            -
            
            $
            2,324.1Home
                delivery revenues
            
            1,256.4
            
            
            -
            
            
            -
            
            
            1,256.4Other
                revenues
            
            -
            
            
            255.0
            
            
            41.8
            
            
            296.8Service
                revenues
            
            38.3
            
            
            0.8
            
            
            27.9
            
            
            67.0Total
                revenues
            
            3,618.8
            
            
            255.8
            
            
            69.7
            
            
            3,944.3Depreciation
                and amortization expense
            
            16.6
            
            
            1.5
            
            
            1.4
            
            
            19.5Operating
                income
            
            131.7
            
            
            7.9
            
            
            8.8
            
            
            148.4Undistributed
                loss from joint venture
            
            
            
            
            
            
            
            
            
            
            (0.6
            )Interest
                income
            
            
            
            
            
            
            
            
            
            
            2.5Interest
                expense
            
            
            
            
            
            
            
            
            
            
            (4.7
            )Income
                before income taxes
            
            
            
            
            
            
            
            
            
            
            145.6Capital
                expenditures
            
            11.0
            
            
            0.3
            
            
            0.7
            
            
            12.0**Six
                months ended June 30, 2006**Product
                revenuesNetwork
                revenues
            $
            4,396.6
            
            $
            -
            
            $
            -
            
            $
            4,396.6Home
                delivery revenues
            
            2,652.9
            
            
            -
            
            
            -
            
            
            2,652.9Other
                revenues
            
            -
            
            
            1,636.2
            
            
            60.2
            
            
            1,696.4Service
                revenues
            
            81.1
            
            
            20.2
            
            
            49.5
            
            
            150.8Total
                revenues
            
            7,130.6
            
            
            1,656.4
            
            
            109.7
            
            
            8,896.7Depreciation
                and amortization expense
            
            33.4
            
            
            15.1
            
            
            3.4
            
            
            51.9Operating
                income
            
            329.3
            
            
            37.5
            
            
            9.2
            
            
            376.0Undistributed
                loss from joint venture
            
            
            
            
            
            
            
            
            
            
            (0.8
            )Interest
                income
            
            
            
            
            
            
            
            
            
            
            9.0Interest
                expense
            
            
            
            
            
            
            
            
            
            
            (44.2
            )Income
                before income taxes
            
            
            
            
            
            
            
            
            
            
            340.0Capital
                expenditures
            
            14.7
            
            
            3.4
            
            
            2.6
            
            
            20.7**Six
                months ended June 30, 2005**Product
                revenue:Network
                revenues
            $
            4,626.0
            
            $
            -
            
            $
            -
            
            $
            4,626.0Home
                delivery revenues
            
            2,469.7
            
            
            -
            
            
            -
            
            
            2,469.7Other
                revenues
            
            -
            
            
            480.6
            
            
            77.2
            
            
            557.8Service
                revenues
            
            72.1
            
            
            1.4
            
            
            56.4
            
            
            129.9Total
                revenues
            
            7,167.8
            
            
            482.0
            
            
            133.6
            
            
            7,783.4Depreciation
                and amortization expense
            
            33.6
            
            
            2.9
            
            
            2.8
            
            
            39.3Operating
                income
            
            255.8
            
            
            14.8
            
            
            16.1
            
            
            286.7Undistributed
                loss from joint venture
            
            
            
            
            
            
            
            
            
            
            (1.3
            )Interest
                income
            
            
            
            
            
            
            
            
            
            
            4.1Interest
                expense
            
            
            
            
            
            
            
            
            
            
            (9.4
            )Income
                before income taxes
            
            
            
            
            
            
            
            
            
            
            280.1Capital
                expenditures
            
            14.0
            
            
            1.2
            
            
            2.7
            
            
            17.9**As
                of June 30, 2006**Total
                assets
            $
            2,749.9
            
            $
            2,127.7
            
            $
            175.8
            
            $
            5,053.4Investment
                in equity method investees
            
            0.3
            
            
            3.3
            
            
            -
            
            
            3.6**As
                of December 31, 2005**Total
                assets
            $
            3,255.5
            
            $
            2,066.9
            
            $
            171.1
            
            $
            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. Specialty product
      revenues consist of distribution of certain specialty drugs. PBS product
      revenues consist of revenues from 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. PBS service revenue includes revenues from certain specialty
      distribution services, and sample distribution and accountability
      services.





Revenues
      earned by our Canadian PBM totaled $9.1 million and $7.4 million for the three
      months ended June 30, 2006 and 2005, respectively, and $18.1 million and $15.0
      million for the six months ended June 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 $37.0 million and
      $36.0 million as of June 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*


•
            *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*


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


•
            *our
                ability to attract and retain qualified personnel*


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





*See
      the more comprehensive description of risk factors under the captions “Forward
      Looking Statements and Associated Risks” contained in Item 1 - “Business” and
“Item 1A—Risk Factors” 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 retail pharmacies participating in our networks. We also provide services
      through our Pharma Business Solutions (“PBS”) unit, which include distribution
      of specialty pharmaceuticals requiring special handling or packaging where
      we
      have been selected by the pharmaceutical manufacturer as part of a limited
      distribution network; distribution of pharmaceuticals to low-income patients
      through manufacturer-sponsored and company-sponsored generic patient assistance
      programs, and distribution of sample units to physicians and verification of
      practitioner licensure.  We
        report three segments: PBM, Specialty and PBS (see “—Results of Operations”). We
        derive revenues primarily from the sale of PBM and Specialty services in
        the
        United States and Canada. Revenue generated by our segments can be classified
        as
        either tangible product revenue or service revenue. We earn tangible product
        revenue from the sale of prescription drugs by retail pharmacies in our retail
        pharmacy networks and from dispensing prescription drugs from our home delivery
        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,
        Specialty and PBS segments represented 98.3% of revenues for the three and
        six
        months ended June 30, 2006 as compared to 98.3% and 98.4% for the three and
        six
        months ended June 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 our
      interests with those 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 six months ended June 30, 2006 over
      the same period of 2005 was primarily driven by factors which also reduce
      pharmacy trends for our clients. In the six months ended June 30, 2006, we
      benefited from growth in Specialty services, higher generic utilization (56.3%
      in the six months ended June 30, 2006 compared to 53.8% 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 six months ended
      June 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 half of 2006. We believe the positive impact
      resulting from growth in Specialty services, increased generic usage,
      productivity improvements, and increased home delivery volume will continue
      to
      generate improvement in our results of operations in the
      future.




CRITICAL
      ACCOUNTING
      POLICIES




The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States requires management to make estimates
      and assumptions 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.


·
            Specialty
                product revenues include revenues earned through the distribution
                of
                specialty drugs to clients as well as supplies provided through the
                distribution business.


·
            Specialty
                service revenues include revenues earned through providing reimbursement
                solutions and product support to pharmaceutical manufacturers,
                biotechnology companies, and medical device companies, as well as
                revenues
                derived from our group purchasing organization (“GPO”).


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


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











**RESULTS
      OF OPERATIONS**




Effective
      in October 2005, we began managing our Specialty business as a separate
      operating segment. Previously, our Specialty business was part of our domestic
      PBM operating segment. The change is primarily due to the acquisition of
      Priority (see “—Overview”) on October 14, 2005. Our Specialty segment consists
      of our CuraScript (acquired in January 2004) and Priority businesses and 2005
      data has been reclassified to reflect the change in our operating and reporting
      segments.





We
      have
      reclassified certain inventory purchase discounts received by our Specialty
      segment to more accurately reflect the allocation between our PBM and Specialty
      segment. There is no effect on PBM and Specialty segment gross profit and the
      amounts reported below reflect the reclassification. Consolidated revenues
      and
      cost of revenues reported in the Consolidated Statement of Operations were
      not
      affected.








*PBM
      OPERATING INCOME*





**Three
                Months Ended June 30,**
            
            **Six
                Months Ended June 30,*****(in
                millions)***
            **2006**
            ***Increase/***
              ***(Decrease)***
            **2005**
            **2006**
            ***Increase/***
              ***(Decrease)***
            **2005**Product
                revenuesNetwork
                revenues
            $
            2,199.5
            
            
            *(5.4*
            *%)*
            $
            2,324.1
            
            $
            4,396.6
            
            
            *(5.0*
            *%)*
            $
            4,626.0Home
                delivery revenues
            
            1,318.6
            
            
            *5.0*
            *%*
            
            1,256.4
            
            
            2,652.9
            
            
            *7.4*
            *%*
            
            2,469.7Service
                revenues
            
            41.3
            
            
            *7.8*
            *%*
            
            38.3
            
            
            81.1
            
            
            *12.5*
            *%*
            
            72.1Total
                PBM revenues
            
            3,559.4
            
            
            *(1.6*
            *%)*
            
            3,618.8
            
            
            7,130.6
            
            
            *(0.5*
            *%)*
            
            7,167.8Cost
                of PBM revenues
            
            3,258.5
            
            
            *(3.4*
            *%)*
            
            3,371.5
            
            
            6,549.4
            
            
            *(2.0*
            *%)*
            
            6,681.7PBM
                gross profit
            
            300.9
            
            
            *21.7*
            *%*
            
            247.3
            
            
            581.2
            
            
            *19.6*
            *%*
            
            486.1PBM
                SG&A expenses
            
            130.4
            
            
            *12.8*
            *%*
            
            115.6
            
            
            251.9
            
            
            *9.4*
            *%*
            
            230.3PBM
                operating income
            $
            170.5
            
            
            *29.5*
            *%*
            $
            131.7
            
            $
            329.3
            
            
            *28.7*
            *%*
            $
            255.8Total
                adjusted PBM Claims(1)
            
            128.0
            
            
            *(8.4*
            *%)*
            
            139.8
            
            
            261.3
            
            
            *(6.7*
            *%)*
            
            280.2





(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 21.3 million claims, or 11.5% and 9.6%,
      respectively, in the three and six months ended June 30, 2006 over the three
      and
      six months ended June 30, 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 0.3 million and 0.8 million claims, or 2.7% and 4.1%, respectively,
      in the three and six months ended June 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 8.4% and 6.7% in the three
      and
      six months ended June 30, 2006, respectively.






*Product
      Revenues for the three months ended June 30, 2006:*  The $124.6
      million, or 5.4%, decrease in network pharmacy revenues in the three months
      ended June 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 $266.1
      million due to a decrease in network claims, as described
      above.   Generic claims accounted for 57.8% of total network
      claims for the second quarter of 2006 as compared to 54.9% 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 6.9% in the second quarter of 2006 from
      the
      same period in 2005.  This increase is primarily due to
      inflation and mix changes, including a 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
        $62.2
        million, or 5.0%, increase in home delivery revenues in the three months
        ended
        June 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
        $33.5 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 44.1% of total home delivery claims for the second 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 increased 2.2% in the second quarter of 2006
        over the same period in 2005, primarily due to inflation and mix
        changes.




*Product
      Revenues for the six months ended June 30, 2006:*The $229.4
      million, or 5.0%, decrease in network pharmacy revenues in the six months ended
      June 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 $445.8
      million due to a decrease in network claims, as described
      above.   Generic claims accounted for 57.8% of total network
      claims in the six months ended June 30, 2006 as compared to 54.7% 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 5.2% in the six months ended June 30, 2006
      from the same period in 2005.  This increase is primarily due to
      inflation and mix changes, as discussed above.




The
        $183.2 million, or 7.4%, increase in home delivery revenues in the six months
        ended June 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 $100.4 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 43.7% of total home delivery claims
        for
        the six months ended June 30, 2006 from 43.3% for the same period of 2005.
  Average
        revenue per home delivery claim increased 3.2%
        in the six months ended June 30, 2006 from the same period in 2005,
        primarily due to inflation and mix changes.


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 $3.0 million, or 7.8%, and $9.0 million, or 12.5%,
      increase in PBM service revenues in the three and six months ended June 30,
      2006, respectively, as compared to the three and six months ended June 30,
      2005
      is primarily due to the growth of the TRICARE contract.




Cost
      of
      PBM revenues decreased $113.0 million, or 3.4%, and $132.3 million, or 2.0%,
      respectively for the three and six months ended June 30, 2006 as compared to
      the
      same periods of 2005 as a result of the 8.4% and 6.7% 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
      six months ended June 30, 2006 of 5.6% and 5.1%, respectively, primarily from
      ingredient cost inflation and mix changes, including the reduction of lower
      revenue network claims discussed above.





PBM
      gross
      profit increased $53.6 million, or 21.7%, and $95.1 million, or 19.6%,
      respectively for the three and six months ended June 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 $14.8
      million, or 12.8% and $21.6 million, or 9.4%, respectively in the three and
      six months ended June 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 $10.1 million recognized in the
                three
                and six months ended June 30, 2006 due to the implementation of Financial
                Accounting Standard (“FAS”) No. 123R, “Share-Based
                Payment”.


·
            Increased
                spending of $10.3 million and $9.8 million in the three and six months
                ended June 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 $38.8 million, or 29.5%, and $73.5 million, or 28.7%,
      respectively for the three and six months ended June 30, 2006 as compared to
      the
      same periods of 2005.








*SPECIALTY
      OPERATING INCOME*




**Three
                Months Ended June 30,**
            
            **Six
                Months Ended June 30,*****(in
                millions)***
            **2006****(1)**
            ***Increase***
            **2005******
            **2006****(1)**
            ***Increase***
            **2005**Product
                revenues
            $
            829.2
            
            
            *225.2*
            *%*
            $
            255.0
            
            $
            1,636.2
            
            
            *240.4*
            *%*
            $
            480.6Service
                revenues
            
            10.4
            
            
            *NM*
            
            
            0.8
            
            
            20.2
            
            
            *NM*
            
            
            1.4Total
                Specialty revenues
            
            839.6
            
            
            *228.2*
            *%*
            
            255.8
            
            
            1,656.4
            
            
            *243.7*
            *%*
            
            482.0Cost
                of Specialty revenues
            
            785.1
            
            
            *227.7*
            *%*
            
            239.6
            
            
            1,546.9
            
            
            *242.7*
            *%*
            
            451.4Specialty
                gross profit
            
            54.5
            
            
            *236.4*
            *%*
            
            16.2
            
            
            109.5
            
            
            *257.8*
            *%*
            
            30.6Specialty
                SG&A expenses
            
            36.6
            
            
            *341.0*
            *%*
            
            8.3
            
            
            72.0
            
            
            *355.7*
            *%*
            
            15.8Specialty
                operating income
            $
            17.9
            
            
            *126.6*
            *%*
            $
            7.9
            
            $
            37.5
            
            
            *153.4*
            *%*
            $
            14.8


*NM-Not
      Meaningful*





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





As
      noted
      above, we acquired Priority on October 14, 2005, and it is included with
      CuraScript as part of our Specialty segment. As a result of the consolidation
      of
      operations and systems integration, the results of operations for the legacy
      entities are no longer distinguishable.





Due
      to
      the acquisition of Priority, the increased Specialty penetration into the PBM
      books of business and to a lesser extent the growth of the legacy CuraScript
      business, the following increases occurred:





·
            Specialty
                revenues increased $583.8 million, or 228.2%, and $1,174.4 million,
                or
                243.7%, respectively, for the three and six months ended June 30,
                2006
                over the same periods of 2005.


·
            Cost
                of Specialty revenues increased $545.5 million, or 227.7%, and $1,095.5
                million, or 242.7%, respectively, in the three and six months ended
                June
                30, 2006 over the same periods of 2005. This reflects the increase
                in
                revenues as discussed above as well as integration
                costs.


·
            Specialty
                gross profit increased $38.3 million, or 236.4%, and $78.9 million,
                or
                257.8%, respectively, for the three and six months ended June 30,
                2006 as
                compared to the same periods of
                2005.





SG&A
      for our Specialty segment increased $28.3 million, or 341.0%, and $56.2 million,
      or 355.7%, respectively, for the three and six months ended June 30, 2006 as
      compared to the same periods of 2005, primarily due to the acquisition of
      Priority. The remaining increase is due to the growth in the Specialty
      segment.





Specialty
      operating income increased $10.0 million, or 126.6%, and $22.7 million, or
      153.4%, respectively, for the three and six months ended June 30, 2006 as
      compared to the same periods of 2005, based on the factors described above.
      In
      addition, Specialty operating income was affected by investments we are making
      in our specialty infrastructure, including the closure of unprofitable infusion
      sites, and system and other integration activities.

















*PBS
      OPERATING INCOME*





**Three
                Months Ended June 30,**
            
            **Six
                Months Ended June 30,*****(in
                millions)***
            **2006**
            ***(Decrease)***
            **2005**
            **2006**
            ***(Decrease)***
            **2005**Product
                revenues
            $
            30.5
            
            
            *(27.0*
            *%)*
            $
            41.8
            
            $
            60.2
            
            
            *(22.0*
            *%)*
            $
            77.2Service
                revenues
            
            22.6
            
            
            *(19.0*
            *%)*
            
            27.9
            
            
            49.5
            
            
            *(12.2*
            *%)*
            
            56.4Total
                PBS revenues
            
            53.1
            
            
            *(23.8*
            *%)*
            
            69.7
            
            
            109.7
            
            
            *(17.9*
            *%)*
            
            133.6PBS
                cost of revenues
            
            44.9
            
            
            *(20.4*
            *%)*
            
            56.4
            
            
            92.2
            
            
            *(15.1*
            *%)*
            
            108.6PBS
                Gross Profit
            
            8.2
            
            
            *(38.3*
            *%)*
            
            13.3
            
            
            17.5
            
            
            *(30.0*
            *%)*
            
            25.0PBS
                SG&A expense
            
            4.1
            
            
            *(8.9*
            *%)*
            
            4.5
            
            
            8.3
            
            
            *(6.7*
            *%)*
            
            8.9PBS
                operating income
            $
            4.1
            
            
            *(53.4*
            *%)*
            $
            8.8
            
            $
            9.2
            
            
            *(42.9*
            *%)*
            $
            16.1








PBS
      product revenues decreased $11.3 million, or 27.0%, and $17.0 million, or 22.0%,
      respectively, in the three and six months ended June 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 government funded
      benefit, Medicare Part D. PBS service
      revenues decreased $5.3 million, or 19.0%, and $6.9 million, or 12.2%,
      respectively, in the three and six months ended June 30, 2006 from the same
      periods for 2005. These decreases reflect client attrition and the impact of
      Medicare Part D on our Patient Assistance Programs.





In
      addition, these factors also decreased cost of PBS revenues, PBS gross profit,
      PBS SG&A, and PBS operating income.





*OTHER
      (EXPENSE) INCOME*





In
      February 2001, we entered into an agreement with AdvancePCS (now owned by
      CareMark, 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 six months ended June 30, 2006 was $0.3 million ($0.2 million,
      net of tax) and $0.8 million ($0.5 million, net of tax), respectively, compared
      to $0.6 million ($0.4 million, net of tax) and $1.3 million ($0.9 million,
      net of tax) for the same periods of 2005.





For
      the
      three and six months ended June 30, 2006, net interest expense increased $17.5
      million, or 795.5%, and $29.9 million, or 564.2%, respectively, as compared
      to
      the same periods in 2005, resulting from the refinancing of our entire credit
      facility during the fourth quarter of 2005 (see “—Bank Credit Facility”).








*PROVISION
      FOR INCOME TAXES*





Our
      effective tax rate increased to 37.5% for the three and six months ended June
      30, 2006, as compared to 29.9% and 33.1% for the same periods of 2005. The
      increase in effective tax rate for the three and six months ended June 30,
      2006
      is primarily due to a non-recurring net tax benefit of $11.0 million recorded
      in
      the second quarter of 2005 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 June 30, 2006 increased $5.8 million, or
      5.7%,
      over the same period of 2005. Net income increased $25.2 million, or 13.5%,
      for
      the six months ended June 30, 2006 over the same period of 2005.





Basic
      and
      diluted earnings per share increased 10.1% and 10.3%, respectively, for the
      three months ended June 30, 2006 over the same period of 2005. For the six
      months ended June 30, 2006, basic and diluted earnings per share increased
      16.5%
      and 16.0%, respectively, over the six months ended June 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 9.5 million shares in
      the
      second quarter of 2006 (see “—Stock Repurchase Program”).





**LIQUIDITY
      AND CAPITAL RESOURCES**





*OPERATING
      CASH FLOW AND CAPITAL EXPENDITURES*





For
      the
      six months ended June 30, 2006, net cash provided by operations decreased $122.6
      million to $193.8 million from $ 316.4 million
      during the six months ended June 30, 2005. This decrease is due to several
      factors:





·
            The
                $175.8 million decrease in claims and rebates payable (which is a
                use of
                cash) was only partially offset by a $121.3 million decrease in accounts
                receivable (which is a source of cash) resulting in a net
                $54.5 million use of cash in the first six 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. We expect cash flows to return
                to
                historical levels in the third and fourth quarters of
                2006.


·
            The
                decrease in other current liabilities in the first six months of
                2006
                reduced operating cash flows by approximately $50.0
                million, partially due to the payout of management incentive bonuses
                in the first quarter of 2006, as well as the timing of payments to
                vendors.


·
            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 six months ended June 30,
                2005, cash flow from operating activities included a cash inflow
                of $14.0
                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 as a result of the Priority acquisition
                in
                the fourth quarter of 2005.





Capital
      expenditures for the six months ended June 30, 2006 increased $2.8 million,
      or
      15.6%, 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 June 30, 2006, we used internally generated cash, as well
      as
      borrowings under our revolver, to repurchase 9.5 million shares for $707.7
      million, bringing the total amount repurchased to 39.4 million as of June 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
      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 six months ended July 2, 2005. This acquisition is expected to enhance
      our Specialty business. The $1.3 billion purchase price was financed with
      approximately $167.0 million of cash on hand and the remainder by adding $1.6
      billion in term 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 ($285.0 million of which was outstanding as of June 30, 2006)
      is available for general corporate purposes. During the second quarter of
      2006, we made scheduled payments on our Term A loan totaling $40.0 million.
      We had net borrowings of $285.0 million under our revolving credit facility
      during the second quarter of 2006, primarily used to repurchase 9.5 million
      treasury shares in the second quarter of 2006 (see “—Stock Repurchase Program”).





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
      June
      30, 2006, the weighted average interest rate on the facility was 5.81%. Our
      credit facility contains covenants that limit the indebtedness we may incur,
      the
      common shares we may repurchase, and dividends we may pay. The repurchase and
      dividend covenant applies if certain leverage thresholds are exceeded. The
      covenants also include a minimum interest coverage ratio and a maximum leverage
      ratio. At June 30, 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
      June 30, 2006 (in millions):





**Payments
                Due by Period as of June 30,****Contractual
                obligations**
            **Total**
            **2006**
            **2007
                - 2008**
            **2009
                - 2010**
            **After
                2010**Long-term
                debt
            $
            1,715.4
            
            $
            30.0
            
            $
            440.1
            
            $
            1,245.1
            
            $
            0.2Future
                minimum lease
              payments(1)
            
            125.6
            
            
            15.8
            
            
            50.1
            
            
            19.5
            
            
            40.2Total
                contractual cash
              Obligations
            $
            1,841.0
            
            $
            45.8
            
            $
            490.2
            
            $
            1,264.6
            
            $
            40.4





(1)
      In
      July 2004, we entered into a capital lease with the Camden County Joint
      Development Authority in association with the development of our new Patient
      Care Contact Center in St. Marys, Georgia. At June 30, 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 annual report.





**IMPACT
      OF INFLATION**





Changes
      in prices charged by manufacturers and wholesalers for pharmaceuticals affect
      our revenues and cost of revenues. Most of our contracts provide that we bill
      clients based on a generally recognized price index for pharmaceuticals, and
      accordingly we have been able to recover price increases from our clients under
      the terms of our agreements.








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





We
      are
      exposed to market risk from changes in interest rates related to debt
      outstanding under our credit facility. Our earnings are subject to change as
      a
      result of movements in market interest rates. At June 30, 2006, we had $1,519.5
      million of obligations, net of cash, which were subject to variable rates of
      interest under our credit facility. A hypothetical increase in interest rates
      of
      1% would result in an increase in annual interest expense of approximately
      $15.2
      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 second quarter ended June 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 of lawsuits that purport to be
      class
      actions. Each case seeks damages in an unspecified amount and many cases also
      seek injunctive relief. We cannot ascertain with any certainty at this time
      the
      monetary damages or injunctive relief that any of the plaintiffs may recover.
      In
      addition, we are the subject of several governmental investigations described
      in
      our prior filings with the SEC. 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
      10-Q:





·
            Jerry
                Beeman, et al. v. Caremark, et al.(Cause No. 021327, United States District Court for the Central District
                of California). On December 12, 2002, we were served with a complaint
                against us and several other pharmacy benefit management companies.
                The
                complaint, filed by several California pharmacies as a putative class
                action, alleges rights to sue as a private attorney general under
                California law. The complaint alleges that we, and the other defendants,
                failed to comply with statutory obligations under California Civil
                Code
                Section 2527 to provide our California clients with the results of
                a
                bi-annual survey of retail drug prices. On July 12, 2004, the case
                was
                dismissed with prejudice on the grounds that the plaintiffs lacked
                standing to bring the action. On June 2, 2006, the U.S. Court of
                Appeals
                for the Ninth Circuit reversed the district court’s opinion on standing
                and remanded the case to the district court. ·
            People
                of the State of New York, et al v. Express Scripts, Inc.(Cause No. 4669-04, Supreme Court of the State of New York, County
                of
                Albany). On July 25, 2006, our motion to dismiss this case was granted
                in
                part and denied in part. Specifically, the State’s claims based on
                allegations of breach of fiduciary duty, negligent misrepresentation
                and
                violations of the State’s Education Law were dismissed in their entirety.
                Portions of the State’s claims alleging violations of the State’s General
                Business Law Section 349 were also dismissed because of the running
                of the
                applicable statute of limitations. We anticipate that discovery will
                now
                commence with respect to the remaining claims in the case.




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

















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





The
      following is a summary of our stock repurchasing activity during the three
      months ended June 30, 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
                program4/1/2006
                - 4/30/2006
            -
            $-
            -
            8.15/1/2006
                - 5/31/2006
            8.9
            74.56
            8.9
            9.26/1/2006
                - 6/30/2006
            0.6
            73.65
            0.6
            8.62006
                Total
            9.5
            $74.50
            9.5







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 June
        30,
        2006, we used internally generated cash, as well as borrowings under our
        revolver, to repurchase 9.5 million shares for $707.7 million, bringing the
        total amount repurchased to 39.4 million as of June 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
      4.** **Submission
      of Matters to a Vote of Security Holders** ****





(a) The
      Company's annual meeting of stockholders was held on May 24, 2006.





(b) The
      following persons were elected directors of the Company to serve until the
      next
      Annual Meeting of Stockholders and until their respective successors are elected
      and qualified: Gary G. Benanav, Frank J. Borelli, Maura C. Breen, Nicholas
      LaHowchic, Thomas P. Mac Mahon, John O. Parker, Jr., George Paz, Samuel K.
      Skinner, Seymour Sternberg, Barrett A. Toan, and Howard L. Waltman.





(c) The
      stockholder vote for each director was as follows:




Votes
            VotesCast
                for
            WithheldGary G. Benanav
            127,914,481
            
            1,482,142Frank J. Borelli
            126,860,924
            
            2,535,699Maura C. Breen
            128,002,901
            
            1,393,722Nicholas LaHowchic
            127,998,543
            
            1,398,080Thomas P. Mac Mahon
            127,981,554
            
            1,415,069John O. Parker, Jr.
            126,986,085
            
            2,410,538George Paz
            121,466,609
            
            7,930,014Samuel K. Skinner
            118,719,306
            
            10,677,317Seymour Sternberg
            116,043,744
            
            13,352,879Barrett A. Toan
            120,131,616
            
            9,265,007Howard L. Waltman
            115,254,409
            
            14,142,214







The
      stockholders also voted to:





i)
      approve and ratify an amendment to the Company’s Amended and Restated
      Certificate of Incorporation to increase the number of authorized shares of
      the
      Company’s common stock from 275,000,000 to 650,000,000 shares (100,931,950
      affirmative votes; 26,837,298 negative votes; 1,627,374 abstention
      votes);





ii)
      approve and ratify the Express Scripts, Inc. 2000 Long Term Incentive Plan,
      as
      amended (99,400,809 affirmative votes; 15,198,047 negative votes; 782,664
      abstention votes; and 14,015,103 broker non-votes);





iii)
      ratify the appointment of PricewaterhouseCoopers LLP as the Company's
      independent registered public accountants for 2006 (128,337,152 affirmative
      votes; 238,857 negative votes; 820,614 abstention votes).











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





(a) See
      Index
      to Exhibits below.








**SIGNATURES**





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











EXPRESS
      SCRIPTS, INC.


(Registrant)











Date:  July
      26,
      2006 By:    /s/
      George
      Paz


George
      Paz, Chairman, President and Chief Executive


Officer








Date:  July
      26,
      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, 2001.3.2
            Certificate
                of Amendment to the Certificate of Incorporation of the Company dated
                June
                2, 2004, incorporated by reference to Exhibit No. 3.2 to the Company’s
                Quarterly Report on Form 10-Q for the quarter ending June 30,
                2004.3.32
            Certificate
                of Amendment to the Certificate of Incorporation of the Company dated
                May
                24, 2006.3.4
            Third
                Amended and Restated Bylaws, incorporated by reference to Exhibit
                No. 3.3
                to the Company’s Quarterly Report on Form 10-Q for the quarter ending June
                30, 2004.4.1
            Form
                of Certificate for Common Stock, incorporated by reference to Exhibit
                No.
                4.1 to the Company’s Registration Statement on Form S-1 filed June 9, 1992
                (No. 33-46974) (the “Registration Statement”).4.2
            Stockholder
                and Registration Rights Agreement dated as of October 6, 2000 between
                the
                Company and New York Life Insurance Company, incorporated by reference
                to
                Exhibit No. 4.2 to the Company's Amendment No. 1 to Registration
                Statement
                on Form S-3 filed October 17, 2000 (Registration Number
                333-47572).4.3
            Asset
                Acquisition Agreement dated October 17, 2000, between NYLIFE Healthcare
                Management, Inc., the Company, NYLIFE LLC and New York Life Insurance
                Company, incorporated by reference to Exhibit No. 4.3 to the Company's
                amendment No. 1 to the Registration Statement on Form S-3 filed October
                17, 2000 (Registration Number 333-47572).4.4
            Rights
                Agreement, dated as of July 25, 2001, between the Corporation and
                American
                Stock Transfer & Trust Company, as Rights Agent, which includes the
                Certificate of Designations for the Series A Junior Participating
                Preferred Stock as Exhibit A, the Form of Right Certificate as Exhibit
                B
                and the Summary of Rights to Purchase Preferred Shares as Exhibit
                C,
                incorporated by reference to Exhibit No. 4.1 to the Company's Current
                Report on Form 8-K filed July 31, 2001.4.5
            Amendment
                dated April 25, 2003 to the Stockholder and Registration Rights Agreement
                dated as of October 6, 2000 between the Company and New York Life
                Insurance Company, incorporated by reference to Exhibit No. 4.8 to
                the
                Company’s Quarterly Report on Form 10-Q for the period ending March 31,
                2003.4.6
            Amendment
                No. 1 to the Rights Agreement between the Corporation and American
                Stock
                Transfer & Trust Company, as Rights Agent, dated May 25, 2005,
                incorporated by reference to Exhibit No. 10.1 to the Company’s Current
                Report on Form 8-K filed May 31, 2005.10.
                12,3
            Form
                of Performance Share Award Agreement under the Express Scripts, Inc.
                2000
                Long-Term Incentive Plan.10.
                23
            Third
                Amendment to the Express Scripts, Inc. 2000 Long-Term Incentive Plan,
                incorporated by reference to Exhibit A to the Company’s Proxy Statement
                filed April 18, 2006.10.
                33
            Form
                of Executive Employment Agreement entered into between the Company
                and
                certain key executives, incorporated by reference to Exhibit No.
                10.1 to
                the Company’s Current Report on Form 8-K filed May 4, 2006.31.12
            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.


3
            Management
                contract or compensatory plan or
                arrangement.