UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
              For
      the quarterly period ended September 30, 2008.o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
              For
      the transition period from ____________ to _____________.








Commission
File Number:  0-20199








EXPRESS
SCRIPTS, INC.


(Exact
name of registrant as specified in its charter)








Delaware
              (State
      or other jurisdiction of incorporation or organization)
            43-1420563
              (I.R.S.
      employer identification no.)One
      Express Way, St. Louis, MO
              (Address
      of principal executive offices)
            63121
              (Zip
      Code)





Registrant’s
telephone number, including area code:  (314) 996-0900





Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days.  Yes X   No  ___





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.  (check one):





Large
accelerated filer
[X]                                                                                                Accelerated
filer [   ]





Non-accelerated
filer [   ] (Do not check if a smaller reporting
company)                 Smaller
reporting company [   ]





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


Yes
____   No  X





Common
      stock outstanding as of September 30, 2008:
            247,459,000
            
            Shares





1


EXPRESS
SCRIPTS, INC.





INDEX














Part
      I
            Financial
      InformationItem
      1.
            Financial
      Statements (unaudited)
            3a)
            Unaudited
      Consolidated Balance Sheet
            3b)
            Unaudited
      Consolidated Statement of Operations
            4c)
            Unaudited
      Consolidated Statement of Changes
            5in
      Stockholders’ Equityd)
            Unaudited
      Consolidated Statement of Cash Flows
            6e)
            Notes
      to Unaudited Consolidated Financial Statements
            7Item
      2.
            Management’s
      Discussion and Analysis of Financial
            16Condition
      and Results of OperationsItem
      3.
            Quantitative
      and Qualitative Disclosures About
            24Market
      RiskItem
      4.
            Controls
      and Procedures
            25Part
      II
            Other
      InformationItem
      1.
            Legal
      Proceedings
            26Item
      1A.
            Risk
      Factors – (Not Applicable)
            -Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            27Item
      3.
            Defaults
      Upon Senior Securities – (Not Applicable)
            -Item
      4.
            Submission
      of Matters to a Vote of Security Holders (Not Applicable)
            -Item
      5.
            Other
      Information – (Not Applicable)
            -Item
      6.
            Exhibits
            29





Signatures





Index to
Exhibits








2


PART
      I. FINANCIAL INFORMATION


Item
      1.
            Financial
      Statements


EXPRESS
      SCRIPTS, INC.Unaudited
      Consolidated Balance Sheet




September
      30,
            
            December
      31,(in
      millons, except share data)
            
            2008
            
            2007AssetsCurrent
      assets:Cash
      and cash equivalents
            $
            227.1
            
            
            $
            434.7Restricted
      cash and investments
            
            
            3.5
            
            
            
            2.2Receivables,
      net
            
            
            1,228.3
            
            
            
            1,184.6Inventories
            
            
            158.6
            
            
            
            166.1Deferred
      taxes
            
            
            113.3
            
            
            
            121.1Prepaid
      expenses and other current assets
            
            
            64.2
            
            
            
            18.7Current
      assets of discontinued operations
            
            
            2.0
            
            
            
            40.4Total
      current assets
            
            
            1,797.0
            
            
            
            1,967.8Property
      and equipment, net
            
            
            216.9
            
            
            
            215.5Goodwill
            
            
            2,905.8
            
            
            
            2,695.3Other
      intangible assets, net
            
            
            342.8
            
            
            
            342.0Other
      assets
            
            
            36.8
            
            
            
            30.2Non-current
      assets of discontinued operations
            
            
            -
            
            
            
            5.6Total
      assets
            
            $
            5,299.3
            
            
            $
            5,256.4Liabilities
      and Stockholders’ EquityCurrent
      liabilities:Claims
      and rebates payable
            
            $
            1,301.4
            
            
            $
            1,258.9Accounts
      payable
            
            
            541.4
            
            
            
            517.3Accrued
      expenses
            
            
            388.3
            
            
            
            432.5Current
      maturities of long-term debt
            
            
            320.1
            
            
            
            260.1Current
      liabilities of discontinued operations
            
            
            1.1
            
            
            
            6.2Total
      current liabilities
            
            
            2,552.3
            
            
            
            2,475.0Long-term
      debt
            
            
            1,520.3
            
            
            
            1,760.3Other
      liabilities
            
            
            361.2
            
            
            
            324.7Total
      liabilities
            
            
            4,433.8
            
            
            
            4,560.0Stockholders’
      Equity:Preferred
      stock, 5,000,000 shares authorized, $0.01 par value per share;
              and
      no shares issued and outstanding
            
            
            -
            
            
            
            -Common
      Stock, 1,000,000,000 authorized, $0.01 par value;
              shares
      issued: 318,940,000 and 318,886,000, respectively;
              shares
      outstanding: 247,459,000 and 252,371,000, respectively
            
            
            3.2
            
            
            
            3.2Additional
      paid-in capital
            
            
            627.2
            
            
            
            564.5Accumulated
      other comprehensive income
            
            
            16.9
            
            
            
            20.9Retained
      earnings
            
            
            3,154.2
            
            
            
            2,584.93,801.5
            
            
            
            3,173.5Common
      stock in treasury at cost, 71,481,000 and 66,515,000
              shares,
      respectively
            
            
            (2,936.0
            )
            
            
            (2,477.1
            )Total
      stockholders’ equity
            
            
            865.5
            
            
            
            696.4Total
      liabilities and stockholders’ equity
            
            $
            5,299.3
            
            
            $
            5,256.4


See
accompanying Notes to Unaudited Consolidated Financial
Statements


3


EXPRESS
SCRIPTS, INC.


Unaudited
Consolidated Statement of Operations




Three
      Months Ended
            
            Nine
      Months EndedSeptember
      30,
            
            September
      30,(in
      millions, except share data)
            
            2008
            
            2007
            
            2008
            
            2007Revenues
      1
            
            $
            5,450.5
            
            
            $
            5,358.2
            
            
            $
            16,472.1
            
            
            $
            16,270.7Cost
      of revenues 1
            
            
            4,930.1
            
            
            
            4,918.1
            
            
            
            14,983.0
            
            
            
            14,974.3Gross
      profit
            
            
            520.4
            
            
            
            440.1
            
            
            
            1,489.1
            
            
            
            1,296.4Selling,
      general and administrative
            
            
            189.7
            
            
            
            174.4
            
            
            
            547.1
            
            
            
            515.1Operating
      income
            
            
            330.7
            
            
            
            265.7
            
            
            
            942.0
            
            
            
            781.3Other
      income (expense):Non-operating
      (charges) gains, net
            
            
            (2.0
            )
            
            
            0.2
            
            
            
            (2.0
            )
            
            
            (18.6
            )Undistributed
      loss from joint venture
            
            
            -
            
            
            
            (0.3
            )
            
            
            (0.3
            )
            
            
            (1.1
            )Interest
      income
            
            
            2.1
            
            
            
            2.7
            
            
            
            10.8
            
            
            
            8.1Interest
      expense
            
            
            (15.7
            )
            
            
            (31.3
            )
            
            
            (56.1
            )
            
            
            (79.1
            )(15.6
            )
            
            
            (28.7
            )
            
            
            (47.6
            )
            
            
            (90.7
            )Income
      before income taxes
            
            
            315.1
            
            
            
            237.0
            
            
            
            894.4
            
            
            
            690.6Provision
      for income taxes
            
            
            112.1
            
            
            
            90.3
            
            
            
            321.1
            
            
            
            256.2Net
      income from continuing operations
            
            
            203.0
            
            
            
            146.7
            
            
            
            573.3
            
            
            
            434.4Net
      loss from discontinued operations, net of tax
            
            
            (1.1
            )
            
            
            (3.8
            )
            
            
            (4.0
            )
            
            
            (5.1
            )Net
      income
            
            $
            201.9
            
            
            $
            142.9
            
            
            $
            569.3
            
            
            $
            429.3Weighted
      average number of common shares
              outstanding
      during the periodBasic:
            
            
            247.1
            
            
            
            254.2
            
            
            
            249.3
            
            
            
            263.1Diluted:
            
            
            250.3
            
            
            
            257.3
            
            
            
            252.7
            
            
            
            266.3Basic
      earnings per share:Continuing
      operations
            
            $
            0.82
            
            
            $
            0.57
            
            
            $
            2.30
            
            
            $
            1.65Discontinued
      operations
            
            
            -
            
            
            
            (0.01
            )
            
            
            (0.02
            )
            
            
            (0.02
            )Net
      earnings
            
            
            0.82
            
            
            
            0.56
            
            
            
            2.28
            
            
            
            1.63Diluted
      earnings per share:Continuing
      operations
            
            $
            0.81
            
            
            $
            0.57
            
            
            $
            2.27
            
            
            $
            1.63Discontinued
      operations
            
            
            -
            
            
            
            (0.01
            )
            
            
            (0.02
            )
            
            
            (0.02
            )Net
      earnings
            
            
            0.81
            
            
            
            0.56
            
            
            
            2.25
            
            
            
            1.61








1
Includes retail pharmacy co-payments of $733.7 million and $864.4 million for
the three months ended September 30, 2008 and 2007, respectively, and $2,445.5 million  and $2,694.0 million for the
nine  months ended September 30, 2008 and 2007,
respectively.  See Note 2 for change in accounting policy during the third quarter of 2008.




See
accompanying Notes to Unaudited Consolidated Financial Statements





4


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
            
            Accumulated
              Other
      Comprehensive Income
            
            Retained
              Earnings
            
            Treasury
              Stock
            
            TotalBalance
      at December 31, 2007
            
            318.9
            
            
            $
            3.2
            
            
            $
            564.5
            
            
            $
            20.9
            
            
            $
            2,584.9
            
            
            $
            (2,477.1
            )
            
            $
            696.4Comprehensive
      income:Net
      income
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            569.3
            
            
            
            -
            
            
            
            569.3Other
      comprehensive (loss):Foreign
      currency translation
              adjustment
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (4.0
            )
            
            
            -
            
            
            
            -
            
            
            
            (4.0
            )Comprehensive
      (loss) income
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (4.0
            )
            
            
            569.3
            
            
            
            -
            
            
            
            565.3Treasury
      stock acquired
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (494.4
            )
            
            
            (494.4
            )Changes
      in stockholders’
              equity
      related to employee
              stock
      plans
            
            -
            
            
            
            -
            
            
            
            62.7
            
            
            
            -
            
            
            
            -
            
            
            
            35.5
            
            
            
            98.2Balance
      at September 30, 2008
            
            318.9
            
            
            $
            3.2
            
            
            $
            627.2
            
            
            $
            16.9
            
            
            $
            3,154.2
            
            
            $
            (2,936.0
            )
            
            $
            865.5





See
accompanying Notes to Unaudited Consolidated Financial Statements








5


EXPRESS
      SCRIPTS, INC.Unaudited
      Consolidated Statement of Cash
Flows




Nine
      Months EndedSeptember
      30,(in
      millions)
            
            2008
            
            2007Cash
      flows from operating activities:Net
      income
            
            $
            569.3
            
            
            $
            429.3Net
      loss from discontinued operations, net of tax
            
            
            4.0
            
            
            
            5.1Net
      income from continuing operations
            
            
            573.3
            
            
            
            434.4Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
            
            
            72.9
            
            
            
            74.3Non-cash
      adjustments to net income
            
            
            100.6
            
            
            
            45.2Changes
      in operating assets and liabilities:Claims
      and rebates payable
            
            
            33.7
            
            
            
            (72.0
            )Other
      net changes in operating assets and liabilities
            
            
            (53.4
            )
            
            
            23.9Net
      cash provided by operating activities—continuing
operations
            
            
            727.1
            
            
            
            505.8Net
      cash provided by (used in) operating activities—discontinued
      operations
            
            
            1.9
            
            
            
            (7.5
            )Net
      cash flows provided by operating activities
            
            
            729.0
            
            
            
            498.3Cash
      flows from investing activities:Purchases
      of property and equipment
            
            
            (59.9
            )
            
            
            (47.5
            )Acquisition,
      net of cash
            
            
            (246.5
            )
            
            
            -Short
      term investments transferred from cash
            
            
            (49.3
            )
            
            
            -Proceeds
      from the sale of businesses
            
            
            27.7
            
            
            
            -Sale
      of marketable securities
            
            
            -
            
            
            
            34.2Other
            
            
            (0.9
            )
            
            
            (0.6
            )Net
      cash used in investing activities—continuing operations
            
            
            (328.9
            )
            
            
            (13.9
            )Net
      cash used in investing activities—discontinued operations
            
            
            -
            
            
            
            (2.0
            )Net
      cash used in investing activities
            
            
            (328.9
            )
            
            
            (15.9
            )Cash
      flows from financing activities:Proceeds
      from long-term debt
            
            
            -
            
            
            
            700.0Repayment
      of long-term debt
            
            
            (180.1
            )
            
            
            (120.1
            )Repayment
      of revolving credit line, net
            
            
            -
            
            
            
            (50.0
            )Tax
      benefit relating to employee stock compensation
            
            
            39.2
            
            
            
            43.7Treasury
      stock acquired
            
            
            (494.4
            )
            
            
            (1,140.3
            )Net
      proceeds from employee stock plans
            
            
            29.2
            
            
            
            47.1Deferred
      financing fees
            
            
            -
            
            
            
            (1.3
            )Net
      cash used in financing activities
            
            
            (606.1
            )
            
            
            (520.9
            )Effect
      of foreign currency translation adjustment
            
            
            (1.6
            )
            
            
            3.5Net
      decrease in cash and cash equivalents
            
            
            (207.6
            )
            
            
            (35.0
            )Cash
      and cash equivalents at beginning of period
            
            
            434.7
            
            
            
            131.0Cash
      and cash equivalents at end of period
            
            $
            227.1
            
            
            $
            96.0





See
accompanying Notes to Unaudited Consolidated Financial Statements








6


EXPRESS
SCRIPTS, INC.





NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS








Note 1 – Summary of
significant accounting policies





Our
significant accounting policies normally included in financial statements
prepared in conformity with generally accepted accounting principles, have been
omitted from this Form 10-Q pursuant to the rules and regulations of the
Securities and Exchange Commission (“SEC”).  However, we believe the
disclosures contained in this Form 10-Q are adequate to make the information
presented not misleading when read in conjunction with the notes to the
consolidated financial statements included in our Annual Report on Form 10-K for
the year ended December 31, 2007 filed with the SEC on February 21,
2008.  During the third quarter 2008, we changed our accounting policy
for member co-payments to retail pharmacies.  See Note 2, “Change in
accounting policy.”  For a full description of our accounting
policies, please refer to the Notes to Consolidated Financial Statements
included in our Annual Report on Form 10-K for the year ended December 31,
2007.





We
believe the accompanying unaudited consolidated financial statements reflect all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the Unaudited Consolidated Balance Sheet at September 30, 2008,
the Unaudited Consolidated Statements of Operations for the three and nine
months ended September 30, 2008 and 2007, the Unaudited Consolidated Statement
of Changes in Stockholders’ Equity for the nine months ended September 30, 2008,
and the Unaudited Consolidated Statements of Cash Flows for the nine months
ended September 30, 2008 and 2007.  Operating results for the three
and nine months ended September 30, 2008 are not necessarily indicative of the
results that may be expected for the year ending
December 31, 2008.





New Accounting
Guidance.  In February 2007, the Financial Accounting Standards
Board (“FASB”) issued FAS 159, “The Fair Value Option for Financial Assets
and Financial Liabilities—including an amendment of FASB Statement No. 115”
(“FAS 159”).  Under FAS 159, a company may elect to measure eligible
financial assets and financial liabilities at fair value.  Unrealized
gains and losses on items for which the fair value option has been elected are
reported in earnings at each subsequent reporting date.  Eligible
items include, but are not limited to, accounts and loans receivable, equity
method investments, accounts payable, guarantees, issued debt and firm
commitments. If elected, FAS 159 is effective for fiscal years beginning after
November 15, 2007. Currently, we have not elected to account for any of our
eligible items using the fair value option under FAS 159.





In
December 2007, the FASB issued FAS 141R, “Business Combinations” and FAS
160, “Business Combinations and Noncontrolling Interests” (“FAS 141R” and “FAS
160”, respectively).  FAS 141R and FAS 160 are effective for fiscal
years beginning after December 15, 2008.  FAS 141R changes the
definitions of a business and a business combination, and will result in more
transactions recorded as business combinations.  Certain acquired
contingencies will be recorded initially at fair value on the acquisition date,
transaction and restructuring costs generally will be expensed as incurred and
in partial acquisitions companies generally will record 100 percent of the
assets and liabilities at fair value, including goodwill.  We do not
expect these pronouncements to have an effect on our financial statements unless
we enter into a business combination subsequent to the effective
date.







Note 2 – Change in
accounting policy





During
the third quarter of 2008, we changed our accounting policy for member
co-payments to retail pharmacies.  Prior to this change, member
co-payments to retail pharmacies were excluded from our revenue and cost of
revenue; however, the amount of such member co-payments was disclosed on the
face of the Consolidated Statement of Operations.  Under the new
policy, these co-payments are included in revenue and cost of
revenue.  We believe that this new policy is preferable under the
circumstances because it provides for revenue recognition consistent with
industry practice.  This change increases revenues and cost of
revenues equally and does not impact gross profit.  Comparative
financial statements for all prior periods have been adjusted to apply the new
policy retrospectively.


7


The
following tables present the line items on the statement of operations that were
impacted by the accounting policy change during the third quarter of
2008.




(in
      millions)
            Prior
      to
              Change
      in
              Accounting
              Prnciple
            
            Effect
      of
              Change
            
            As
              ReportedFor
      the three months ended September 30, 2008Revenues
            $
            4,716.8
            
            
            $
            733.7
            
            
            $
            5,450.5Cost
      of revenues
            
            4,196.4
            
            
            
            733.7
            
            
            
            4,930.1Gross
      profit
            
            520.4
            
            
            
            -
            
            
            
            520.4For
      the nine months ended September 30, 2008Revenues
            
            14,026.6
            
            
            
            2,445.5
            
            
            
            16,472.1Cost
      of revenues
            
            12,537.5
            
            
            
            2,445.5
            
            
            
            14,983.0Gross
      profit
            
            1,489.1
            
            
            
            -
            
            
            
            1,489.1





Additionally,
the tables below reflect the adjustments to our previously reported financial
information for the 2008 and 2007 quarters as well as the years ended 2007,
2006, and 2005.





(in
      millions)
            As
              Originally
              Reported(1)
            
            Effect
      of
              Change
            
            As
              AdjustedFor
      the three months ended March 31, 2008Revenues
            $
            4,603.1
            
            
            $
            887.7
            
            
            $
            5,490.8Cost
      of revenues
            
            4,137.0
            
            
            
            887.7
            
            
            
            5,024.7Gross
      profit
            
            466.1
            
            
            
            -
            
            
            
            466.1For
      the three months ended June 30, 2008Revenues
            
            4,706.7
            
            
            
            824.1
            
            
            
            5,530.8Cost
      of revenues
            
            4,204.1
            
            
            
            824.1
            
            
            
            5,028.2Gross
      profit
            
            502.6
            
            
            
            -
            
            
            
            502.6For
      the three months ended March 31, 2007Revenues
            
            4,508.0
            
            
            
            935.6
            
            
            
            5,443.6Cost
      of revenues
            
            4,089.4
            
            
            
            935.6
            
            
            
            5,025.0Gross
      profit
            
            418.6
            
            
            
            -
            
            
            
            418.6For
      the three months ended June 30, 2007Revenues
            
            4,574.8
            
            
            
            894.0
            
            
            
            5,468.8Cost
      of revenues
            
            4,137.1
            
            
            
            894.0
            
            
            
            5,031.1Gross
      profit
            
            437.7
            
            
            
            -
            
            
            
            437.7For
      the three months ended September 30, 2007Revenues
            
            4,493.8
            
            
            
            864.4
            
            
            
            5,358.2Cost
      of revenues
            
            4,053.7
            
            
            
            864.4
            
            
            
            4,918.1Gross
      profit
            
            440.1
            
            
            
            -
            
            
            
            440.1For
      the three months ended December 31, 2007Revenues
            
            4,692.9
            
            
            
            860.5
            
            
            
            5,553.4Cost
      of revenues
            
            4,230.5
            
            
            
            860.5
            
            
            
            5,091.0Gross
      profit
            
            462.4
            
            
            
            -
            
            
            
            462.4




8


(in
      millions)
            As
              Originally
              Reported(1)
            
            Effect
      of
              Change
            
            As
              AdjustedFor
      the year ended December 31, 2007Revenues
            $
            18,269.5
            
            
            $
            3,554.5
            
            
            $
            21,824.0Cost
      of revenues
            
            16,510.7
            
            
            
            3,554.5
            
            
            
            20,065.2Gross
      profit
            
            1,758.8
            
            
            
            -
            
            
            
            1,758.8For
      the year ended December 31, 2006Revenues
            
            17,549.9
            
            
            
            4,012.7
            
            
            
            21,562.6Cost
      of revenues
            
            16,081.0
            
            
            
            4,012.7
            
            
            
            20,093.7Gross
      profit
            
            1,468.9
            
            
            
            -
            
            
            
            1,468.9For
      the year ended December 31, 2005Revenues
            
            16,187.8
            
            
            
            5,691.3
            
            
            
            21,879.1Cost
      of revenues
            
            15,002.0
            
            
            
            5,691.3
            
            
            
            20,693.3Gross
      profit
            
            1,185.8
            
            
            
            -
            
            
            
            1,185.8





(1)
            Adjusted
      for discontinued operations discussed in Note
5.






Note 3 – Fair value
measurements





In
September 2006, the FASB issued FAS 157, “Fair Value Measurements”
(“FAS 157”).  FAS 157 defines fair value, establishes guidelines for
measuring fair value and expands disclosures regarding fair value
measurements.  FAS 157 will apply whenever another standard requires
(or permits) assets or liabilities to be measured at fair value.  This
standard does not expand the use of fair value to any new
circumstances.  FAS 157 was effective for financial statements issued
for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years.  On February 6, 2008 the FASB approved the
Financial Staff Position that will defer the effective date of FAS 157 by one
year for nonfinancial assets and liabilities that are recognized or disclosed at
fair value in the financial statements on a nonrecurring basis.





We
adopted FAS 157 as of January 1, 2008, with the exception of the
application of the statement to nonrecurring nonfinancial assets and
nonfinancial liabilities.  Our partial adoption of FAS 157 did
not have a material impact on our consolidated financial position, results of
operations or cash flows. Nonrecurring nonfinancial assets and nonfinancial
liabilities for which we have not applied the provisions of FAS 157 include
those measured at fair value in goodwill impairment testing, indefinite lived
intangible assets measured at fair value for impairment testing, asset
retirement obligations initially measured at fair value, and those assets and
liabilities initially measured at fair value in a business
combination.





FAS 157 establishes a three-tier fair value hierarchy, which
prioritizes the inputs used in measuring fair value.  These tiers
include: Level 1, defined as observable inputs such as quoted prices in active
markets for identical assets or liabilities; Level 2, defined as inputs other
than quoted prices for similar assets and liabilities in active markets that are
either directly or indirectly observable; and Level 3, defined as unobservable
inputs in which little or no market data exists, therefore, requiring an entity
to develop its own assumptions.





Financial
assets accounted for at fair value on a recurring basis at September 30, 2008
include cash equivalents
of $160.8
million, restricted cash and investments of $3.5 million and trading securities
of $20.3 million (included in other assets).  These assets are carried
at fair value based on quoted market prices for identical securities (Level 1
inputs).


9


As of
September 30, 2008, short-term investments, included in Prepaid expenses and other current
assets in the Unaudited Consolidated Balance Sheet, were carried at fair
value and consisted of our investment in the Reserve Primary Fund (the “Primary
Fund”), which is a money market fund.  The estimated fair value of our
investment in the Primary Fund was $47.3 million and our cost was $49.3 million
as of September 30, 2008.  The net asset value of the Primary Fund
decreased below $1 per share as a result of the Primary Fund’s valuing at zero
its holdings of debt securities by Lehman Brothers Holdings, Inc., which filed
for bankruptcy on September 15, 2008.  Accordingly, we recognized an
unrealized loss of $2.0 million in the three months ended September 30, 2008,
which is included in Non-operating gains (charges),
net in the Unaudited Consolidated Statement of Operations and
reclassified the Primary Fund investment from Cash and cash equivalents to
Prepaid expenses and other
current assets in the Unaudited Consolidated Balance Sheet.  We
assessed the fair value of the underlying collateral for the Primary Fund
through evaluation of the liquidation value of assets held by the Primary Fund,
which is classified within Level 3 of the fair value hierarchy.
 
 We have
requested the redemption of our investment in the Primary Fund. We expect cash
distributions will occur as the Primary Fund’s assets mature or are
sold.  If the markets for short term securities remain illiquid, there
may be further declines in the value of these investments.  To the extent
we determine there is a further decline in fair value, we may recognize
additional losses in future periods up to the aggregate amount of these
investments.  We believe cash distributions for our investment in the
Primary Fund will be received within the next twelve months; however, no
commitments on the timing and ability of future redemptions have been made by
the Primary Fund.






Note 4 –
Acquisition





On July
22, 2008, we completed the acquisition of the Pharmacy Services Division of MSC
– Medical Services Company (“MSC”), a privately held Pharmacy Benefit Management
(“PBM”) company, for a preliminary purchase price of $246.5 million, which
includes a purchase price adjustment for working capital and transaction costs.
MSC is a leader in providing PBM services to clients providing workers
compensation benefits and enhances our ability to provide high level service and
clinical expertise in the workers compensation arena.  The transaction
was accounted for under the provisions of FAS 141, “Business
Combinations.”





The
purchase price has been preliminarily allocated based upon the estimated fair
value of net assets acquired at the date of the acquisition.  A
portion of the excess of purchase price over tangible net assets acquired has
been allocated to intangible assets, consisting of customer relationships in the
amount of $28.9 million and internally developed software in the amount of $1.2
million, which are being amortized using a straight-line method over estimated
useful lives of fifteen years and five years, respectively.  The
acquired customer relationships and internally developed software are included
in Other intangibles,
net and Property and
equipment, net, respectively, in the Unaudited Consolidated Balance
Sheet.  In addition, the excess of purchase price over tangible net
assets and identified intangible assets acquired has been allocated to goodwill
in the amount of $212.4 million.  The amounts preliminarily assigned
to intangible assets and goodwill may be further adjusted pending finalization
of the purchase price and asset valuation.  Goodwill is not deductible
for tax purposes.  The purchase price was funded through internally
generated cash and temporary borrowings under the credit
facility.  This acquisition is reported as part of our PBM
segment.





Note 5 – Discontinued
operations





On June
30, 2008, we completed the sale of CuraScript Infusion Pharmacy, Inc. (“IP”),
our infusion pharmacy line of business, for $27.5 million which includes an
estimated pre-tax gain of approximately $8.2 million.  The gain is
included in Net loss from
discontinued operations, net of tax in the Unaudited Consolidated
Statement of Operations for the nine months ended September 30,
2008.  Rights to certain working capital balances related to IP were
not sold and are retained on the balance sheet as of September 30,
2008.  For a period of time, we will continue to generate cash flows
and income statement activity on assets and liabilities of discontinued
operations as these working capital balances wind down, which are not expected
to be material.





IP
was identified as available for sale during the fourth quarter of 2007 as we
considered it non-core to our future operations.  In connection with
the classification of IP as a discontinued operation, we recorded a charge in
the fourth quarter of 2007 related to impairment losses.  IP is
headquartered in Louisville, Kentucky and operates twelve infusion pharmacies in
six states.  IP offers a broad range of infused therapies in the home
to patients with acute or chronic conditions.


10





Prior to being classified as a
discontinued operation, IP was included in our Specialty and Ancillary Services
(“SAAS”) segment.  The results of operations for IP are reported as
discontinued operations for all periods presented in the accompanying Unaudited
Consolidated Statements of Operations.  Additionally, for all periods
presented, assets and liabilities of the discontinued operations are segregated
in the accompanying Unaudited Consolidated Balance Sheets, and cash flows of our
discontinued operations are segregated in our accompanying Unaudited
Consolidated Statement of Cash Flows.





On April 4, 2008, we completed the
sale of Custom Medical Products, Inc. (“CMP”) and recorded a pre-tax loss of
approximately $1.3 million which is included in Net loss from discontinued
operations, net of tax in the Unaudited Consolidated Statement of
Operations for the nine months ended September 30, 2008.  CMP, which
assembles customer medical kits containing various types of medical supplies,
was included in our SAAS segment prior to being classified as a discontinued
operation.




Certain information
with respect to the discontinued operations for the three and nine months ended
September 30, 2008 and 2007 is summarized as follows:




Three
      Months Ended
              September
      30,
            
            Nine
      Months Ended
              September
      30,(in
      millions)
            2008
            2007
            
            2008
            
            2007Revenues
            $
            -
            
            $
            25.2
            
            
            $
            44.7
            
            
            $
            82.3Net
      loss from discontinued operations, net of tax
            
            (1.1
            )
            
            (3.8
            )
            
            
            (4.0
            )
            
            
            (5.1
            )Income
      tax benefit from discontinued operations
            
            0.7
            
            
            1.3
            
            
            
            0.7
            
            
            
            1.9






Note 6 – Non-operating
charges, net





The
non-operating charge of $2.0 million during the three and nine months ended
September 30, 2008 represents an unrealized loss on shares held in the Reserve
Primary Fund.  See Note 3, “Fair value measurements.”





On
December 18, 2006, we announced a proposal to acquire all of the outstanding
shares of Caremark Rx, Inc. (“Caremark”) common stock.  On March 16,
2007, Caremark shareholders approved a merger agreement with CVS Corporation
(“CVS”) and we subsequently withdrew our proposal to acquire
Caremark.  Legal and other professional fees (which do not include
expenses incurred internally) of $27.2 million were expensed in the first nine
months of 2007.   These expenses were partially offset by a $4.4
million special dividend CVS/Caremark Corporation (“CVS/ Caremark”) paid on
Caremark stock we owned prior to the CVS/Caremark merger and by a non-operating
gain of $4.2 million resulting from the sale of our shares of CVS/Caremark stock
in the second quarter of 2007.  We recognized net non-operating
charges of $18.6 million in the first nine months of 2007.






Note 7 – Earnings per
share





Basic
earnings per share (“EPS”) is computed using the weighted average number of
common shares outstanding during the period.  Diluted EPS 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 EPS calculations for all periods:


11


Three
      Months Ended
              September
      30,
            
            Nine
      Months Ended
              September
      30,(in
      millions)
            2008
            
            2007
            
            2008
            
            2007Weighted
      average number of common shares outstanding
              during
      the period – Basic EPS(1)
            
            247.1
            
            
            254.2
            
            
            
            249.3
            
            
            263.1Dilutive
      common stock equivalents:Outstanding
      stock options, “stock-settled” stock appreciation
              rights
      (“SSRs”), restricted stock units, and executive
              deferred
      compensation units(2)
            
            3.2
            
            
            3.1
            
            
            
            3.4
            
            
            3.2Weighted
      average number of common shares outstanding
              during
      the period – Diluted EPS(1)
            
            250.3
            
            
            257.3
            
            
            
            252.7
            
            
            266.3





(1)
            The
      decrease in weighted average number of common shares outstanding from the
      prior year for Basic and Diluted EPS resulted from 7.2  million
      treasury shares repurchased in 2008 and 23.1 million treasury shares
      repurchased in 2007.


(2)
            Excludes
      SSRs of  0.1 million for the six months ended September 30,
      2007.  These were excluded because their effect was
      anti-dilutive.





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






Note 8 – Stock-based
compensation plans





Under our
stock-based compensation plans, we have issued stock options, SSRs, restricted
stock and performance share awards.  Awards are typically settled
using treasury shares.  The maximum contractual term of stock options
and SSRs granted under the 2000 Long Term Incentive Plan (“LTIP”) is 10
years.  Due to the nature of the awards, we use the same valuation
methods and accounting treatments for SSRs and stock options.  During
the first nine months of 2008, we granted 1,800,260 stock options with a
weighted average fair market value of $17.86.  The SSRs and stock
options have three-year graded vesting.





During
the first nine months of 2008, we granted to certain officers and employees
approximately 197,000 restricted shares of common stock and performance shares
with a weighted average fair market value of $65.10.  The restricted
stock awards have three-year graded vesting and the performance shares cliff
vest at the end of the three years.  The number of performance shares
that ultimately vest is dependent upon achieving specific performance
targets.  Prior to vesting, these shares are subject to forfeiture to
us without consideration upon termination of employment under certain
circumstances.  The total number of non-vested restricted stock and
performance share awards was 842,000 at September 30, 2008 and 677,000 at
December 31, 2007.





We
recognized stock-based compensation expense of $9.4 million and $7.0 million in
the three months ended September 30, 2008 and 2007, respectively, and $29.2
million and $23.8 million in the nine months ended September 30, 2008 and 2007,
respectively.  Unamortized stock-based compensation as of September
30, 2008 was $39.1 million for stock options and SSRs and $16.0 million for
restricted stock and performance shares.





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





Three
      Months Ended
              September
      30,
            
            Nine
      Months Ended
              September
      30,2008
            
            2007
            
            2008
            
            2007Expected
      life of option
            3-5
      years
            
            3-5
      years
            
            3-5
      years
            
            3-5
      yearsRisk-free
      interest rate
            2.8%-3.2%
            
            4.2%-4.3%
            
            1.9%-3.4%
            
            4.2%-5.2%Expected
      volatility of stock
            30-31%
            
            31%
            
            30%-31%
            
            31%Expected
      dividend yield
            None
            
            None
            
            None
            
            None




12
 Note 9 –
Contingencies





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





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





On July
29, 2008, a consent order and judgment was entered into that resolves the
complaint filed by the State of New York against us and Cigna Life Insurance Co.
on August 4, 2004.  The Company and Cigna agreed to pay a total of $27
million which was paid during the third quarter of 2008.  These
amounts had previously been fully reserved and did not have an effect on our
results for the third quarter of 2008.





On May
27, 2008, we entered into an Assurance of Voluntary Compliance (“AVC”) with 28
states and the District of Columbia.  In connection with the AVC, we
paid approximately $9.3 million during the second quarter 2008.  In
addition, we have agreed to pay $200,000 which will be allocated for payments
not to exceed $25 each to patients for physician visits and tests related to
drug switches between brand statin drugs.  These amounts had
previously been fully reserved and did not impact our results for the second
quarter of 2008.






Note 10 – Segment
information





We report
segments on the basis of services offered and have determined we have two
reportable segments: PBM and SAAS.  Our domestic and Canadian PBM
operating segments have similar characteristics and as such have been aggregated
into a single PBM reporting segment.  As described in Note 5, the
IP and CMP line of businesses were included in our SAAS segment prior to being
classified as discontinued operations.





Operating
income is the measure used by our chief operating decision maker to assess the
performance of each of our operating segments.  The following table
presents information about our reportable segments, including a reconciliation
of operating income from continuing operations to income before income taxes
from continuing operations for the three and nine months ended September 30,
2008 and 2007:





(in
      millions)
            PBM
            
            SAAS
            
            TotalFor
      the three months ended September 30, 2008Product
      revenue:Network
      revenues(1)
            $
            3,181.6
            
            
            $
            -
            
            
            $
            3,181.6Home
      delivery revenues
            
            1,264.2
            
            
            
            -
            
            
            
            1,264.2Other
      revenues
            
            -
            
            
            
            930.3
            
            
            
            930.3Service
      revenues
            
            47.0
            
            
            
            27.4
            
            
            
            74.4Total
      revenues
            
            4,492.8
            
            
            
            957.7
            
            
            
            5,450.5Depreciation
      and amortization expense
            
            14.5
            
            
            
            8.8
            
            
            
            23.3Operating
      income
            
            315.6
            
            
            
            15.1
            
            
            
            330.7Non-operating
      charges, net
            
            
            
            
            
            
            
            
            
            (2.0
            )Undistributed
      loss from joint venture
            
            
            
            
            
            
            
            
            
            -Interest
      income
            
            
            
            
            
            
            
            
            
            2.1Interest
      expense
            
            
            
            
            
            
            
            
            
            (15.7
            )Income
      before income taxes
            
            
            
            
            
            
            
            
            
            315.1Capital
      expenditures
            
            29.5
            
            
            
            0.3
            
            
            
            29.8




13





(in
      millions)
            
            PBM
            
            
            SAAS
            
            
            TotalFor
      the three months ended September 30, 2007Product
      revenue:Network
      revenues(1)
            $
            3,184.4
            
            
            $
            -
            
            
            $
            3,184.4Home
      delivery revenues
            
            1,251.2
            
            
            
            -
            
            
            
            1,251.2Other
      revenues
            
            -
            
            
            
            849.3
            
            
            
            849.3Service
      revenues
            
            41.2
            
            
            
            32.1
            
            
            
            73.3Total
      revenues
            
            4,476.8
            
            
            
            881.4
            
            
            
            5,358.2Depreciation
      and amortization expense
            
            13.8
            
            
            
            9.0
            
            
            
            22.8Operating
      income (loss)
            
            269.9
            
            
            
            (4.2
            )
            
            
            265.7Non-operating
      gains, net
            
            
            
            
            
            
            
            
            
            0.2Undistributed
      loss from joint venture
            
            
            
            
            
            
            
            
            
            (0.3
            )Interest
      income
            
            
            
            
            
            
            
            
            
            2.7Interest
      expense
            
            
            
            
            
            
            
            
            
            (31.3
            )Income
      before income taxes
            
            
            
            
            
            
            
            
            
            237.0Capital
      expenditures
            
            14.9
            
            
            
            3.6
            
            
            
            18.5For
      the nine months ended September 30, 2008Product
      revenue:Network
      revenues(1)
            $
            9,759.3
            
            
            $
            -
            
            
            $
            9,759.3Home
      delivery revenues
            
            3,742.8
            
            
            
            -
            
            
            
            3,742.8Other
      revenues
            
            -
            
            
            
            2,745.0
            
            
            
            2,745.0Service
      revenues
            
            140.0
            
            
            
            85.0
            
            
            
            225.0Total
      revenues
            
            13,642.1
            
            
            
            2,830.0
            
            
            
            16,472.1Depreciation
      and amortization expense
            
            45.1
            
            
            
            27.8
            
            
            
            72.9Operating
      income
            
            902.7
            
            
            
            39.3
            
            
            
            942.0Non-operating
      charges, net
            
            
            
            
            
            
            
            
            
            (2.0
            )Undistributed
      loss from joint venture
            
            
            
            
            
            
            
            
            
            (0.3
            )Interest
      income
            
            
            
            
            
            
            
            
            
            10.8Interest
      expense
            
            
            
            
            
            
            
            
            
            (56.1
            )Income
      before income taxes
            
            
            
            
            
            
            
            
            
            894.4Capital
      expenditures
            
            58.2
            
            
            
            1.7
            
            
            
            59.9For
      the nine months ended September 30, 2007Product
      revenue:Network
      revenues(1)
            $
            9,722.9
            
            
            $
            -
            
            
            $
            9,722.9Home
      delivery revenues
            
            3,737.6
            
            
            
            -
            
            
            
            3,737.6Other
      revenues
            
            -
            
            
            
            2,591.8
            
            
            
            2,591.8Service
      revenues
            
            124.1
            
            
            
            94.3
            
            
            
            218.4Total
      revenues
            
            13,584.6
            
            
            
            2,686.1
            
            
            
            16,270.7Depreciation
      and amortization expense
            
            47.1
            
            
            
            27.2
            
            
            
            74.3Operating
      income
            
            756.7
            
            
            
            24.6
            
            
            
            781.3Non-operating
      charges, net
            
            
            
            
            
            
            
            
            
            (18.6
            )Undistributed
      loss from joint venture
            
            
            
            
            
            
            
            
            
            (1.1
            )Interest
      income
            
            
            
            
            
            
            
            
            
            8.1Interest
      expense
            
            
            
            
            
            
            
            
            
            (79.1
            )Income
      before income taxes
            
            
            
            
            
            
            
            
            
            690.6Capital
      expenditures
            
            37.1
            
            
            
            10.4
            
            
            
            47.5




(1)
            Includes
      retail pharmacy co-payments of $733.7 million and $864.4 million for the
      three months ended September 30, 2008 and 2007, respectively, and $2,445.5
      million and $2,694.0 million for the nine  months ended
      September 30, 2008 and 2007, respectively.  See Note 2 for
      change in accounting policy during the third quarter of
    2008.


14


The
following table presents balance sheet information about our reportable
segments, including the discontinued operations (“Disc Op”):




(in
      millions)
            PBM
            
            SAAS
            
            Disc
      Op
            
            TotalAs
      of September 30, 2008Total
      assets
            $
            3,169.4
            
            
            $
            2,127.9
            
            
            $
            2.0
            
            
            $
            5,299.3Investment
      in equity method investees
            
            -
            
            
            
            3.6
            
            
            
            -
            
            
            
            3.6As
      of December 31, 2007Total
      assets
            $
            2,958.5
            
            
            $
            2,251.9
            
            
            $
            46.0
            
            
            $
            5,256.4Investment
      in equity method investees
            
            0.2
            
            
            
            3.4
            
            
            
            -
            
            
            
            3.6





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





Revenues
earned by our Canadian PBM totaled $11.5 million and $10.2 million for the three
months ended September 30, 2008 and 2007, respectively, and $34.8 million and
$29.8 million for the nine months ended September 30, 2008 and 2007,
respectively.  All other revenues were earned in the United
States.  Long-lived assets of our Canadian PBM (consisting primarily
of fixed assets) totaled $15.6 million and $23.4 million as of September
30, 2008 and December 31, 2007, respectively.  All other long-lived
assets are domiciled in the United States.


15


Item
      2.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
 
 Information
we have included or incorporated by reference in this Quarterly Report on Form
10-Q, and information which may be contained in our other filings with the
Securities and Exchange Commission (the “SEC”) and our press releases or other
public statements, contain or may contain forward-looking
statements.  These forward-looking statements include, among others,
statements of our plans, objectives, expectations (financial or otherwise) or
intentions.
 
 Our
forward-looking statements involve risks and uncertainties.  Our
actual results may differ significantly from those projected or suggested in any
forward-looking statements.  We do not undertake any obligation to
release publicly any revisions to such forward-looking statements to reflect
events or circumstances occurring after the date hereof or to reflect the
occurrence of unanticipated events.  Factors which might cause such a
difference to occur include, but are not limited to:
 
 ·
              results
      in regulatory matters, the adoption of new legislation or regulations
      (including increased costs associated with compliance with new laws and
      regulations), more aggressive enforcement of existing legislation or
      regulations, or a change in the interpretation of existing legislation or
      regulations
 ·
              continued
      pressure on margins resulting from client demands for lower prices or
      different pricing approaches, enhanced service offerings and/or higher
      service levels
 ·
              costs
      and uncertainties of adverse results in litigation, including a number of
      pending class action cases that challenge certain of our business
      practices
 ·
              the
      possible loss, or adverse modification of the terms, of contracts with
      pharmacies in our retail pharmacy
network
 ·
              uncertainties
      associated with our acquisitions, which include integration risks and
      costs, uncertainties associated with client retention and repricing of
      client contracts, and uncertainties associated with the operations of
      acquired businesses
 ·
              the
      possible termination of, or unfavorable modification to, contracts with
      key clients or providers, some of which could have a material impact on
      our financial results
 ·
              changes
      in industry pricing benchmarks such as average wholesale price (“AWP”) and
      average manufacturer price (“AMP”), which could have the effect of
      reducing prices and margins
 ·
              competition
      in the PBM and specialty pharmacy industries, and our ability to
      consummate contract negotiations with prospective clients, as well as
      competition from new competitors offering services that may in whole or in
      part replace services that we now provide to our
  customers
 ·
              our
      ability to maintain growth rates, or to control operating or capital
      costs, including the impact of declines in prescription drug
      utilization
 ·
              increased
      compliance risk  relating to our contracts with the Department
      of Defense (“DoD”) TRICARE Management Activity and various state
      governments and agencies
 ·
              uncertainties
      and risks regarding the Medicare Part D prescription drug benefit,
      including the financial impact to us to the extent that we participate in
      the program on a risk-bearing basis, uncertainties of client or member
      losses to other providers under Medicare Part D, implementation of
      regulations that adversely affect our profitability or cash flow, and
      increased regulatory risk
 ·
              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
 ·
              in
      connection with our specialty pharmacy business, the possible loss, or
      adverse modification of the terms of our contracts with a limited number
      of biopharmaceutical companies from whom we acquire specialty
      pharmaceuticals
 ·
              the
      use and protection of the intellectual property, data, and tangible assets
      that we use in our business, or infringement or alleged infringement by us
      of intellectual property claimed by
others
 ·
              our
      leverage and debt service obligations, including the effect of certain
      covenants in our borrowing agreements, access to capital and increases in
      interest rates
 ·
              general
      developments in the health care industry, including the impact of
      increases in health care costs, government programs to control health care
      costs, changes in drug utilization and cost patterns and introductions of
      new drugs
 ·
              increase
      in credit risk relative to our clients due to adverse economic trends or
      other factors
 ·
              other
      risks described from time to time in our filings with the
    SEC
  16


See
the more comprehensive description of risk factors under the captions “Forward
Looking Statements and Associated Risks” contained in Item 1 – “Business” and
Item IA – “Risk Factors” of our Annual Report on Form 10-K for the year ended
December 31, 2007, filed with the SEC on February 21, 2008.







OVERVIEW





As one of
the largest full-service pharmacy benefit management (“PBM”) companies, we
provide health care management and administration services on behalf of our
clients, which include health maintenance organizations, health insurers,
third-party administrators, employers, union-sponsored benefit plans, workers
compensation plans, and government health programs.  Our integrated
PBM services include network claims processing, home delivery services, benefit
design consultation, drug utilization review, formulary management, and drug
data analysis services.





Through
our Specialty and Ancillary Services (“SAAS”) segment, we provide specialty
services, including: patient care and direct specialty home delivery to
patients; distribution of injectable drugs to patient homes and physician
offices; distribution of pharmaceuticals and medical supplies to providers and
clinics; fertility services to providers and patients; and bio-pharmaceutical
services including marketing, reimbursement and customized logistics
solutions.  SAAS does not include the fulfillment of specialty
prescriptions at retail pharmacies participating in our networks; these
prescriptions are reflected in PBM network revenues.  We also provide
services that include distribution of specialty pharmaceuticals requiring
special handling or packaging where we have been selected by the pharmaceutical
manufacturer as part of a limited distribution network, distribution of
pharmaceuticals to low-income patients through manufacturer-sponsored patient
assistance programs and company-sponsored generic patient assistance programs,
and distribution of sample units to physicians and verification of practitioner
licensure.





We report
two segments: PBM and SAAS (see “—Results of Operations”).  Revenue
generated by our segments can be classified as either tangible product revenue
or service revenue.  We earn tangible product revenue from the sale of
prescription drugs by retail pharmacies in our retail pharmacy networks and from
dispensing prescription drugs from our home delivery and specialty
pharmacies.  Service revenue includes administrative fees associated
with the administration of retail pharmacy networks contracted by certain
clients, market research programs, medication counseling services, certain
specialty distribution services, and sample fulfillment and accountability
services.  Tangible product revenue generated by our PBM and SAAS
segments represented 98.6% of revenues for both the three and nine months ended
September 30, 2008 and for the same period of 2007.





During
2008, we established the Center for Cost-Effective Consumerism (the “Center”)
which will assist us in the advancement of our understanding of consumers and
the way they use health care.  The Center combines our
industry-leading research capabilities with insights from a multidisciplinary
advisory board of national experts in science of human behavior and decision
making.  Using work done by the Center, we plan to better equip plan
sponsors to achieve: lowest cost drug mix (e.g., generics), maximum therapy
adherence (in key classes), greatest use of most cost-effective delivery
channel, uncompromising safety standards and increasing member engagement and
satisfaction.








EXECUTIVE
SUMMARY AND TREND FACTORS AFFECTING THE BUSINESS





Our
results in the first nine months of 2008 reflect the successful execution of our
business model, which emphasizes the alignment of our financial interests with
those of our clients through greater use of generics, home delivery and
specialty pharmacy.  In the first nine months of 2008 we benefited
from a higher generic fill rate (65.7% compared to 61.1% in the same period of
2007) and better management of ingredient costs through renegotiation of
supplier contracts, increased competition among generic manufacturers and other
actions which helped to reduce ingredient costs.  In addition, through
the research performed by the Center, as described above, we intend to provide
our clients with additional tools designed to generate higher generic fill
rates, and further increase the use of our home delivery and specialty pharmacy
services.




17
 Certain
activities within our SAAS segment have improved and we expect them to
continue to improve, including specialty pharmacy fulfillment to our PBM
clients.  Recently, these operating results have been negatively
impacted by margin declines in various other lines of business within our SAAS
segment.





We
believe the positive trends we see in the first nine months of 2008, including
increased generic usage and lower drug purchasing costs, should continue to
offset the negative impact of various marketplace forces effecting pricing and
plan structure, among other factors, and thus continue to generate improvements
in our results of operations in the future.








CRITICAL
ACCOUNTING POLICIES




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions which affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Our estimates and assumptions are based
upon a combination of historical information and various other assumptions
believed to be reasonable under the particular circumstances. Actual results may
differ from our estimates.  For a full description of our accounting
policies, please refer to the notes to the consolidated financial statements
included in our Annual Report on Form 10-K for the year ended December 31, 2007,
filed with the SEC on February 21, 2008.  During the third
quarter of 2008, we changed our accounting policy for member co-payments to
retail pharmacies.  Refer to Note 2 for further
discussion.








RESULTS
OF OPERATIONS





PBM
OPERATING INCOME





Three
      Months Ended
              September
      30,
            
            Nine
      Months Ended
              September
      30,(in
      millions)
            2008(2)
            
            2007
            
            2008(2)
            
            2007Product
      revenuesNetwork
      revenues(3)
            $
            3,181.6
            
            
            $
            3,184.4
            
            
            $
            9,759.3
            
            
            $
            9,722.9Home
      delivery revenues
            
            1,264.2
            
            
            
            1,251.2
            
            
            
            3,742.8
            
            
            
            3,737.6Service
      revenues
            
            47.0
            
            
            
            41.2
            
            
            
            140.0
            
            
            
            124.1Total
      PBM revenues
            
            4,492.8
            
            
            
            4,476.8
            
            
            
            13,642.1
            
            
            
            13,584.6Cost
      of PBM revenues(3)
            
            4,024.6
            
            
            
            4,079.2
            
            
            
            12,314.4
            
            
            
            12,433.7PBM
      gross profit
            
            468.2
            
            
            
            397.6
            
            
            
            1,327.7
            
            
            
            1,150.9PBM
      SG&A expenses
            
            152.6
            
            
            
            127.7
            
            
            
            425.0
            
            
            
            394.2PBM
      operating income
            $
            315.6
            
            
            $
            269.9
            
            
            $
            902.7
            
            
            $
            756.7Total
      adjusted PBM Claims(1)
            
            122.4
            
            
            
            122.7
            
            
            
            377.7
            
            
            
            374.3





(1)
            Adjusted
      PBM claims represent network claims plus home delivery claims, which are
      multiplied by 3, as home delivery claims are typically 90 day claims and
      network claims are generally 30 day
claims.


(2)
            Includes
      the July 22, 2008 acquisition of
MSC.


(3)
            Includes
      retail pharmacy co-payments of $733.7 million and $864.4 million for the
      three months ended September 30, 2008 and 2007, respectively, and $2,445.5
      million and $2,694.0 million for the nine months ended September 30, 2008
      and 2007, respectively.  See Note 2 for change in accounting
      policy during the third quarter of
2008.




18


Network
claims decreased 0.7 million, or 0.8%, in the three months ended September 30,
2008 from the same period of 2007.   Network claims increased by
2.7 million, or 1.0%, in the nine months ended September 30, 2008 from
the same period of 2007. Total
unadjusted home delivery claims increased 0.1 million, or 1.3%, and 0.2 million,
or 0.8%, for the three and nine months ended September 30, 2008, respectively,
when compared to the same periods of 2007.  On an adjusted basis,
total PBM claims remained relatively constant for the three months ended
September 30, 2008 when compared to the same period of 2007.  For the
nine months ended September 30, 2008, adjusted PBM claims increased 3.4 million,
or 0.9%.





Product Revenues for the three
months ended September 30, 2008:  Network pharmacy revenues
decreased $2.8 million, or 0.1%, in the three months ended September 30, 2008
over the same period of 2007.  The decrease is due to the expected
loss of discount card programs and other low margin clients, creating a
reduction in claims volume.





Additionally,
our generic penetration rate affects our average revenue per network
claim.  Our generic fill rate increased to 67.3% of total network
claims in the third quarter of 2008 as compared to 63.6% in the same period of
2007, which reduces revenue (but not margin) as generic drugs are generally less
expensive than the corresponding brand drug.





Home delivery revenues increased by
$13.0 million, or 1.0%, in the three months ended September 30, 2008 from the
same period in 2007.  The increase in home delivery revenues is
primarily due to two factors: changes in volume and changes in
price.  Approximately, $16.4 million of the increase is due to higher
claim volumes, as described above.  This increase is offset by a $3.4
million decrease in price.  The decrease in price is due to the impact
of the higher generic fill rate on average revenue per home delivery
claim.  Our generic fill rate increased to 57.2% of total home
delivery claims in the three months ended September 30, 2008 as compared to
51.1% in the same period of 2007.





Product Revenues for the nine months
ended September 30, 2008:Network pharmacy revenues increased
$36.4 million, or 0.4%, in the nine months ended September 30, 2008 from
the same period in 2007.  Approximately $92.5 million of the increase
in network pharmacy revenues is attributable to changes in
volume.  This was offset by a decrease of approximately $56.1 million
in network pharmacy revenues attributable to changes in price.





Average
revenue per network claim decreased 0.6% for the nine months ended September 30,
2008 from the same period of 2007.  Our generic fill rate affects our
average revenue per network claim, as noted above. As our generic fill rate has
increased to 66.9% of total network claims in the first nine months of 2008 as
compared to 62.6% in the same period in 2007, it offsets the upward trend in
price caused by inflation as generic drugs are less expensive than brand
drugs.





For the
nine months ended September 30, 2008, home delivery revenues increased $5.2
million, or 0.1%, as compared to the same period of
2007.  Approximately, $28.9 million of the increase in home delivery
revenues is attributable to changes in volume.  This was offset by a
decrease of approximately $23.7 million in home delivery revenues attributable
to changes in price.  Average revenue per home delivery claim
decreased 0.6% which is primarily due the impact of higher generic fill rate.
 Our generic fill rate increased to 56.0% of total home delivery claims in
the nine months ended September 30, 2008 as compared to 49.7% in the same period
of 2007.





Cost of
PBM revenues decreased $54.6 million, or 1.3%, and $119.3 million, or 1.0%, in
the three and nine months ended September 30, 2008 from the same period of
2007.  The decrease is primarily due to improvements in the aggregate
generic fill rate and better management of ingredient costs resulting from
renegotiation of certain supplier contracts.





Our PBM
gross profit increased $70.6 million, or 17.8%, and $176.8 million, or 15.4%,
respectively, for the three and nine months ended September 30, 2008 as compared
to the same periods of 2007.  Client cost savings from the increase in
the aggregate generic fill rate and better management of ingredient costs were
partially offset by margin pressures arising from ingredient cost inflation and
the current competitive environment.





Selling,
general and administrative expense (“SG&A”) for our PBM segment for the
three months and nine months ended September 30, 2008 increased by $24.9
million, or 19.5%, and $30.8 million, or 7.8%, respectively.  The
increase is primarily due to the expansion of our operation and administrative
functions supporting our program initiatives for impacting consumer behaviors to
help drive lowest cost drug mix, maximum therapy adherence and greatest
use of the most cost-effective delivery channel.  In addition, we had
a charge related to internally developed software.


19


PBM operating income increased $45.7 million, or 16.9%, and $146.0 million, or
19.3%, respectively, for the three months and nine months ended September 30,
2008 as compared to the same period of 2007, based on the various factors
described above.





SAAS
OPERATING INCOME





Three
      Months Ended
              September
      30,
            
            Nine
      Months Ended
              September 30,(in
      millions)
            2008
            
            2007
            
            2008
            
            2007Product
      revenues
            $
            930.3
            
            
            $
            849.3
            
            
            $
            2,745.0
            
            
            $
            2,591.8Service
      revenues
            
            27.4
            
            
            
            32.1
            
            
            
            85.0
            
            
            
            94.3Total
      SAAS revenues
            
            957.7
            
            
            
            881.4
            
            
            
            2,830.0
            
            
            
            2,686.1Cost
      of SAAS revenues
            
            905.5
            
            
            
            838.9
            
            
            
            2,668.6
            
            
            
            2,540.6SAAS
      gross profit
            
            52.2
            
            
            
            42.5
            
            
            
            161.4
            
            
            
            145.5SAAS
      SG&A expenses
            
            37.1
            
            
            
            46.7
            
            
            
            122.1
            
            
            
            120.9SAAS
      operating income (loss)
            $
            15.1
            
            
            $
            (4.2
            )
            
            $
            39.3
            
            
            $
            24.6





As
previously noted (see Note 5, “Discontinued operations”) our SAAS results for
2008 and 2007 have been adjusted for the discontinued operations, which were
formerly part of our SAAS segment.





SAAS Continuing
Operations.SAAS revenues increased $76.3 million, or
8.7%, and $143.9 million, or 5.4%, respectively, in the three and nine months
ended September 30, 2008 over the same periods of 2007. This is partially due to
increased cross-selling of specialty services to our PBM clients.





SAAS cost of revenues increased $66.6
million, or 7.9%, and $128.0, or 5.0%, in the three and nine months
ended           September 30,
2008 over the same periods of 2007.  The larger increase in revenue
resulted in an increase in gross profit of $9.7 million, or 22.8% and $15.9
million, or 10.9%, in the three and nine months ended September 30, 2008 over
the same periods of 2007.





SG&A
for our SAAS segment for the three months ended September 30, 2008 decreased by
$9.6 million, or 20.6%.  The decrease is primarily caused by a charge
of $13.5 million to bad debt expense in the third quarter 2007 in our Specialty
Distribution line of business related to the insolvency of a client and
integration of resources with our PBM.  The decrease is partially
offset by an increase in management compensation in 2008 due to better financial
results.  SG&A for our SAAS segment for the nine months ended
September 30, 2008 is consistent with the same period of 2007.





SAAS
income from continuing operations increased by $19.3 million, or 459.5%, for the
three months
ended                
September 30, 2008 and by $14.7 million, or 59.8%, in the nine months ended
September 30, 2008 from the same periods of 2007 based on the factors described
above.








OTHER
(EXPENSE) INCOME





Net
interest expense decreased $15.0 million, or 52.4%, and $25.7 million, or
36.2%  in the three and nine months ended September 30, 2008,
respectively, as compared to the same periods in 2007, which is primarily
due to decreases in interest rates and lower outstanding debt (see “—Liquidity
and Capital Resources—Bank Credit Facility”).





The
non-operating charge of $2.0 million during the three and nine months ended
September 30, 2008 represents an unrealized loss on shares held in the Reserve
Primary Fund (see “—Liquidity and Capital Resources—Investments”).


20


On December 18, 2006, we announced a proposal to acquire all of the outstanding
shares of Caremark Rx, Inc. (“Caremark”) common stock.  On March 16,
2007, Caremark shareholders approved a merger agreement with CVS Corporation
(“CVS”) and we subsequently withdrew our proposal to acquire
Caremark.  Legal and other professional fees (which do not include
expenses incurred internally) of $27.2 million were expensed in the first nine
months of 2007.   These expenses were partially offset by a $4.4
million special dividend CVS/Caremark Corporation (“CVS/Caremark”) paid on
Caremark stock we owned prior to the CVS/Caremark merger and by a non-operating
gain of $4.2 million resulting from the sale of our shares of CVS/Caremark stock
in the second quarter of 2007.  We recognized net non-operating
charges of $18.6 million in the first nine months of 2007.








PROVISION
FOR INCOME TAXES





Our effective tax rate was 35.6% and
35.9% for the three and nine months ended September 30, 2008, respectively, as
compared to 38.1% and 37.1% for the same periods of 2007.  The three
and nine months ended September 30, 2008 include discrete tax adjustments
resulting in a net tax benefit of $2.7 million and $5.2 million, respectively,
attributable to lapses in the applicable statutes of limitations, favorable
audit resolutions, and changes in our unrecognized tax benefits.  The
three and nine months ended September 30, 2007 include a nondeductible penalty
of $10.5 million relating to the settlement of a legal matter.








NET
LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX





Net loss from discontinued operations,
net of tax, decreased $2.7 million and $1.1 million for the three and nine
months ended September 30, 2008, respectively, compared to the same period of
2007.  See Note 5 “Discontinued operations” for additional
discussion.








NET
INCOME AND EARNINGS PER SHARE





Net
income for the three months ended September 30, 2008 increased $59.0 million, or
41.3%, over the same period of 2007. Net income increased $140.0 million, or
32.6%, for the nine months ended September 30, 2008 over the same period of
2007.





On May
23, 2007, we announced a two-for-one stock split for stockholders of record
on June 8, 2007,
effective             
      June 22, 2007.  The split was effected
in the form of a dividend by issuance of one additional share of common stock
for each share of common stock outstanding.  The earnings per share
and the weighted average number of shares outstanding for basic and diluted
earnings per share for each respective period have been adjusted for the stock
split.





Basic and
diluted earnings per share increased 46.4% and 44.6%, respectively, for the
three months
ended                  
September 30, 2008 over the same period of 2007.  For the nine months
ended September 30, 2008, basic and diluted earnings per share increased 39.9%
and 39.8%, respectively, over the nine months ended September 30,
2007.  This increase is primarily due to improved operating results,
as well as the decrease in the basic and diluted weighted average number of
common shares, relating to the repurchase of 7.2 million shares in the nine
months of 2008 and 23.1 million shares during 2007 (see “—Stock Repurchase
Program”).








LIQUIDITY
AND CAPITAL RESOURCES





OPERATING
CASH FLOW AND CAPITAL EXPENDITURES





For the
nine months ended September 30, 2008, net cash provided by continuing operations
increased $221.3 million to $727.1 million. Changes in operating cash flows from
continuing operations for the nine months ended September 30, 2008 were impacted
by the following factors:


21





·
            Net
      income from continuing operations increased $138.9 million in the nine
      months ended September 30, 2008 as compared to the same period of
      2007.


·
            Changes
      in working capital resulted in a reduction of cash outflow from $48.1
      million in the nine months
      ended                
      September 30, 2007 to $19.7 million in the first nine months of
      2008.


·
            Net
      non-cash adjustments to net income increased from $45.2 million in the
      first nine months of 2007 to $100.6 million in the first nine months
      of 2008, primarily due to changes in the deferred tax provision caused by
      the first quarter 2007 implementation of Financial Accounting Standards
      Board (“FASB”) Interpretation Number 48, “Accounting for Uncertainty in
      Income Taxes – an interpretation of FASB Statement No.
    109”.





Our
capital expenditures for the nine months ended September 30, 2008 increased
$12.4 million compared to the same period of 2007.  We intend to
continue to invest in infrastructure and technology that we believe will provide
efficiencies in operations and facilitate growth and enhance the service we
provide to our clients.  We expect future anticipated capital
expenditures will be funded primarily from operating cash flow or, to the extent
necessary, with borrowings under our revolving credit facility, discussed
below.








INVESTMENTS




As of
September 30, 2008, short-term investments, included in Prepaid expenses and other current
assets in the Unaudited Consolidated Balance Sheet, were carried at fair
value and consisted of our investment in the Reserve Primary Fund (the “Primary
Fund”), which is a money market fund.  The estimated fair value of our
investment in the Primary Fund was $47.3 million and our cost was $49.3 million
as of September 30, 2008.  The net asset value of the Primary Fund
decreased below $1 per share as a result of the Primary Fund’s valuing at zero
its holdings of debt securities by Lehman Brothers Holdings, Inc., which filed
for bankruptcy on September 15, 2008.  Accordingly, we recognized an
unrealized loss of $2.0 million in the three months ended September 30, 2008,
which is included in Non-operating gains (charges),
net in the Unaudited Consolidated Statement of Operations and
reclassified the Primary Fund investment from Cash and cash equivalents to
Prepaid expenses and other
current assets in the Unaudited Consolidated Balance Sheet.  We
assessed the fair value of the underlying collateral for the Primary Fund
through evaluation of the liquidation value of assets held by the Primary
Fund.
 
 We have
requested the redemption of our investment in the Primary Fund. We expect cash
distributions will occur as the Primary Fund’s assets mature or are
sold.  If the markets for short term securities remain illiquid, there
may be further declines in the value of these investments.  To the
extent we determine there is a further decline in fair value, we may recognize
additional losses in future periods up to the aggregate amount of these
investments.  We believe cash distributions for our investment in the
Primary Fund, will be received within the next twelve months; however, no
commitments on the timing and ability of future redemptions have been made by
the Primary Fund.






CHANGES
IN BUSINESS





On July
22, 2008, we completed the acquisition of the Pharmacy Services Division of MSC
-  Medical Services Company (“MSC”), a privately held PBM, for a
purchase price of $246.5 million, which includes a purchase price adjustment for
working capital and transaction costs. MSC is a leader in providing PBM services
to clients providing workers compensation benefits.  The transaction
was accounted for under the provisions of Financial Accounting Standards (“FAS”)
141, “Business Combinations.”  The purchase price was funded through
internally generated cash and temporary borrowings under the revolving credit
facility.  This acquisition is reported as part of our PBM
segment.





On July
1, 2008, the merger of RxHub and SureScripts was announced.  We are
one of the founders of RxHub, an electronic exchange enabling physicians who use
electronic prescribing technology to link to pharmacies, PBM companies, and
health plans.  The new organization will enable physicians to securely
access health
information when caring for their patients through a fast and efficient health
exchange.  We have retained one-sixth ownership in the merged
company.  Due to the decreased ownership percentage, the investment is
being recorded using the cost method, under which dividends are the basis of
recognition of earnings from an investment.  This change did not have
a material effect on our consolidated financial statements.


22


On
June 30, 2008, we completed the sale of CuraScript Infusion Pharmacy, Inc.
(“IP”) for $27.5 million and recorded a pre-tax gain of approximately $8.2
million which is included in Net loss from discontinued
operations, net of tax in the consolidated statement of income for the
three and nine months ended September 30, 2008.  IP was identified as
available for sale during the fourth quarter of 2007 as we considered it
non-core to our future operations.  In connection with the
classification of IP as a discontinued operation, we recorded a charge in the
fourth quarter of 2007 related to impairment losses.





On
October 10, 2007, we purchased Connect Your Care, LLC (“CYC”), a leading
provider of consumer directed healthcare technology solutions to the employer,
health plan and financial services markets.  The purchase price was
funded through internally generated cash.  The purchase agreement
includes an earnout provision, payable after three years based on the
performance of the business.  This acquisition is reported as part of
our PBM segment.





We
regularly review potential acquisitions and affiliation
opportunities.  We believe available cash resources, bank financing or
the issuance of additional common stock could be used to finance future
acquisitions or affiliations.  There can be no assurance we will make
new acquisitions or establish new affiliations in 2008 or
thereafter.








STOCK
REPURCHASE PROGRAM





We have a
stock repurchase program, originally announced on October 25,
1996.  Treasury shares are carried at first in, first out
cost.  There is no limit on the duration of the
program.  During the three months ended September 30, 2008, we
repurchased no treasury shares.  During the nine months ended
September 30, 2008, we repurchased 7.2 million shares for $494.4
million.  Current year repurchases were funded through internally
generated cash.  On July 22, 2008, the Board approved an increase in
the share repurchase program to an aggregate program of 135 million shares, of
which 21 million shares remain available for repurchase under this
program.  Additional share repurchases, if any, will be made in such
amounts and at such times as we deem appropriate based upon prevailing market
and business conditions and other factors.








BANK
CREDIT FACILITY





At
September 30, 2008, our credit facility includes $1.0 billion of Term A loans,
$800.0 million of Term-1 loans and
a             
$600.0 million revolving credit facility.  The revolving credit
facility (none of which was outstanding as of September 30, 2008) is
available for general corporate purposes.  During the first nine
months of 2008, we made three scheduled payments of $60.0 million on our Term A
loan.  The maturity date of our credit facility is October 14,
2010.





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





At
September 30, 2008, the weighted average interest rate on the facility was
4.1%.  Our credit facility contains covenants that limit the
indebtedness we may incur, the common shares we may repurchase, and dividends we
may pay.  The repurchase and dividend covenant applies if certain
leverage thresholds are exceeded.  The covenants also include a
minimum interest coverage ratio and a maximum leverage ratio.  At
September 30, 2008, we believe we are in compliance with all covenants
associated with our credit facility.


23


CREDIT
MARKET CONDITIONS





As of
September 30, 2008, we had $227.1 million of cash on hand which is consistent
with historical levels.  We consistently generate positive cash flow
from operations and typically do not rely on external sources of capital to meet
our routine operating needs.  As a result, we do not expect material
adverse financial consequences due to the recent credit market
conditions.








OTHER
MATTERS





In
September 2006, the Financial Accounting Standards Board (“ FASB”) issued
FAS 157, “Fair Value Measurements” (“FAS 157”).  FAS 157 defines fair
value, establishes guidelines for measuring fair value and expands disclosures
regarding fair value measurements.  FAS 157 will apply whenever
another standard requires (or permits) assets or liabilities to be measured at
fair value.  This standard does not expand the use of fair value to
any new circumstances.  FAS 157 was effective for financial statements
issued for fiscal years beginning after November 15, 2007 and interim periods
within those fiscal years.  On February 6, 2008 the FASB approved the
Financial Staff Position that will defer the effective date of FAS 157 by one
year for nonfinancial assets and liabilities that are recognized or disclosed at
fair value in the financial statements on a nonrecurring basis.  Our
partial adoption of FAS 157 for financial assets and liabilities as of
January 1, 2008 did not have a material impact on our consolidated financial
position, results of operations or cash flows. See Note 2, “Fair Value
Measurements.”





In
February 2007, the FASB issued FAS 159, “The Fair Value Option for Financial
Assets and Financial Liabilities—including an amendment of FASB Statement
No. 115” (“FAS 159”).  Under FAS 159, a company may elect to
measure eligible financial assets and financial liabilities at fair
value.  Unrealized gains and losses on items for which the fair value
option has been elected are reported in earnings at each subsequent reporting
date.  Eligible items include, but are not limited to, accounts and
loans receivable, equity method investments, accounts payable, guarantees,
issued debt and firm commitments. If elected, FAS 159 is effective for fiscal
years beginning after November 15, 2007. Currently, we have not elected to
account for any of our eligible items using the fair value option under FAS
159.





In
December 2007, the FASB issued FAS 141R, “Business Combinations” and FAS
160, “Business Combinations and Noncontrolling Interests” (FAS 141R and FAS 160,
respectively).  FAS 141R and FAS 160 are effective for fiscal years
beginning after December 15, 2008.  FAS 141R changes the definitions
of a business and a business combination, and will result in more transactions
recorded as business combinations.  Certain acquired contingencies
will be recorded initially at fair value on the acquisition date, transaction
and restructuring costs generally will be expensed as incurred and in partial
acquisitions companies generally will record 100 percent of the assets and
liabilities at fair value, including goodwill.  We do not expect these
pronouncements to have an effect on our financial statements unless we enter
into a business combination subsequent to the effective date.








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.





Item
      3.
            Quantitative and
      Qualitative Disclosures About Market
Risk





We are
exposed to market risk from changes in interest rates related to debt
outstanding under our credit facility.  Our earnings are subject to
change as a result of movements in market interest rates.  At
September 30, 2008, we had $1,613.3 million of obligations, net of cash, which
were subject to variable rates of interest under our credit
facility.  A hypothetical increase in interest rates of 1% would
result in an increase in annual interest expense of approximately $16.1 million
(pre-tax), presuming that obligations subject to variable interest rates
remained constant.


24





Item
      4.
            Controls and
      Procedures





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





During
the third quarter ended September 30, 2008, there was no change in our internal
control over financial reporting that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.


25




PART II. OTHER
      INFORMATION


Item
      1.
            Legal
      Proceedings








We and/or
our subsidiaries are defendants in a number of lawsuits that purport to be class
actions.  Each case seeks damages in an unspecified
amount.  We cannot ascertain with any certainty at this time the
monetary damages or injunctive relief that any of the plaintiffs may seek to
recover.  We cannot, however, provide any assurance that the outcome
of any of these matters, or some number of them in the aggregate, will not be
materially adverse to our financial condition, consolidated results of
operations, cash flows or business prospects.  In addition, the
expenses of defending these cases may have a material effect on our financial
results. The following developments have occurred since the filing of our last
Form 10-Q.








·
            Multi-District
      Litigation (Minshew v. Express
      Scripts) (Case No.Civ.4:02-CV-1503, United States District
      Court for the Eastern District of Missouri) (filed December 12,
      2001);   New England Health
      Care Employees Welfare Fund v. Express Scripts, Inc.
        (Case No.4:05-cv-1081, United States District Court for the
      Eastern District of Missouri) (filed October 28, 2004)) -- On July 30,
      2008, the plaintiffs’ motion for class certification of the ERISA plans
      was denied by the Court in its entirety.  Additionally, the
      Company’s motion for partial summary judgment on the issue of our ERISA
      fiduciary status was granted in part.  The Court found that the
      Company was not a fiduciary with respect to generic drug pricing,
      selecting the source for drug pricing, establishing formularies and
      negotiating rebates, or interest earned on rebates before the payment of
      the contracted client share.  The Court found that the Company
      was an ERISA fiduciary only with respect to the calculation of certain
      amounts due to clients under a therapeutic substitution program in
      effect.





·
            Irwin v. AdvancePCS,
      et al. (Case No.RG030886393, Superior Court of the State of
      California for Alameda County) (filed March 26, 2003).  On
      September 19, 2008, plaintiffs filed a motion to dismiss this previously
      reported case and the court entered the
  dismissal.





·
            Derivative
      lawsuits: Scott
      Rehm, Derivatively on behalf of nominal Defendant, Express Scripts, Inc.
      v. Stuart Bascomb, et al (Case No.044-1960a, Missouri Circuit
      Court, City of St. Louis) (filed August 27, 2004) – Plaintiff filed a
      motion to voluntarily dismiss the case and the dismissal was entered on
      August 28, 2008.





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.





Additional
information regarding such matters is contained in Item 3 – Legal Proceedings in
our Annual Report on Form 10-K for the year ended December 31, 2007 and in Part
II, Item 1 in our Quarterly Reports on Form 10-Q for the quarterly periods
ended             
March 31, 2008 and June 30, 2008.


26





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





The
following is a summary of our stock repurchasing activity during the three
months ended September 30, 2008 (share data in millions):




Period
            Total
      number
              of
              shares
              purchased
            
            Average
              price
      paid
              per
      share
            
            Total
      number of
              shares
      purchased
              as
      part of a
              publicly
              announced
              program
            Maximum
      number
              of
      shares
              that
      may yet be
              purchased
      under
              the
      program7/1/2008
      – 7/31/2008
            -
            
            
            $
            -
            
            
            -
            
            21.08/1/2008
      – 8/31/2008
            -
            
            
            
            -
            
            
            -
            
            21.09/1/2008
      – 9/30/2008
            -
            
            
            
            -
            
            
            -
            
            21.0Third
      Quarter
              2008
      Total
            -
            
            
            $
            -
            
            
            -





We have a
stock repurchase program, originally announced on October 25,
1996.  Treasury shares are carried at first in, first out
cost.  There is no limit on the duration of the
program.  During the three months ended September 30, 2008, we
repurchased no shares of treasury stock.  On July 22, 2008, the Board
approved an increase in the share repurchase program to an aggregate program of
135 million shares, of which 21 million shares remain available for repurchase
under this program.  Current year repurchases were funded through
internally generated cash.  Additional share repurchases, if any, will
be made in such amounts and at such times as we deem appropriate based upon
prevailing market and business conditions and other factors.








Item
      6.
            Exhibits





(a)
            See
      Index to Exhibits below.





27


SIGNATURES





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















EXPRESS SCRIPTS, INC.(Registrant)Date:  October
      30, 2008
            By:
            /s/ George
      PazGeorge
      PazChairman,
      President and Chief Executive Officer










Date:  October
      30, 2008
              By:
              /s/ Jeffrey
      HallJeffrey
      HallExecutive
      Vice President and Chief Financial
Officer











28


INDEX TO
EXHIBITS


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


Exhibit
              Number
            Exhibit3.1
            Amended
      and Restated Certificate of Incorporation of the Company, incorporated by
      reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for
      the year ending December 31, 2001.3.2
            Certificate
      of Amendment to the Certificate of Incorporation of the Company dated June
      2, 2004, incorporated by reference to Exhibit No. 3.2 to the Company’s
      Quarterly Report on Form 10-Q for the quarter ending June 30,
      2004.3.3
            Certificate
      of Amendment to the Certificate of Incorporation of the Company dated May
      24, 2006, incorporated by reference to Exhibit No. 3.3 to the Company’s
      Quarterly Report on Form 10-Q for the quarter ending June 30,
      2006.3.4
            Certificate
      of Amendment to the Certificate of Incorporation of the Company dated May
      29, 2008, incorporated by reference to Exhibit No. 3.4 to the Company’s
      Quarterly Report on Form 10-Q for the quarter ending June 30,
      2008.3.5
            Third
      Amended and Restated Bylaws, incorporated by reference to Exhibit No. 3.3
      to the Company’s Quarterly Report on Form 10-Q for the quarter ending June
      30, 2004.4.1
            Form
      of Certificate for Common Stock, incorporated by reference to Exhibit No.
      4.1 to the Company’s Registration Statement on Form S-1 filed June 9, 1992
      (No. 33-46974) (the “Registration Statement”).4.2
            Stockholder
      and Registration Rights Agreement dated as of October 6, 2000 between the
      Company and New York Life Insurance Company, incorporated by reference to
      Exhibit No. 4.2 to the Company's Amendment No. 1 to Registration Statement
      on Form S-3 filed October 17, 2000 (Registration Number
      333-47572).4.3
            Asset
      Acquisition Agreement dated October 17, 2000, between NYLIFE Healthcare
      Management, Inc., the Company, NYLIFE LLC and New York Life Insurance
      Company, incorporated by reference to Exhibit No. 4.3 to the Company's
      amendment No. 1 to the Registration Statement on Form S-3 filed October
      17, 2000 (Registration Number 333-47572).4.4
            Rights
      Agreement, dated as of July 25, 2001, between the Corporation and American
      Stock Transfer & Trust Company, as Rights Agent, which includes the
      Certificate of Designations for the Series A Junior Participating
      Preferred Stock as Exhibit A, the Form of Right Certificate as Exhibit B
      and the Summary of Rights to Purchase Preferred Shares as Exhibit C,
      incorporated by reference to Exhibit No. 4.1 to the Company's Current
      Report on Form 8-K filed July 31, 2001.4.5
            Amendment
      dated April 25, 2003 to the Stockholder and Registration Rights Agreement
      dated as of October 6, 2000 between the Company and New York Life
      Insurance Company, incorporated by reference to Exhibit No. 4.8 to the
      Company’s Quarterly Report on Form 10-Q for the period ending March 31,
      2003.4.6
            Amendment
      No. 1 to the Rights Agreement between the Company 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, 2005.18.11
            Preferability
      Letter from Pricewaterhouse Coopers, LLC, the Company’s independent
      registered public accounting firm.31.11
            Certification
      by George Paz, as Chairman, President and Chief Executive Officer of
      Express Scripts, Inc., pursuant to Exchange Act Rule
      13a-14(a).




29




Exhibit
              Number
            Exhibit31.21
            Certification
      by Jeffrey Hall, as Executive Vice President and Chief Financial Officer
      of Express Scripts, Inc., pursuant to Exchange Act Rule
      13a-14(a).32.11
            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).32.21
            Certification
      by Jeffrey Hall, as Executive Vice President and Chief Financial Officer
      of Express Scripts, Inc., pursuant to 18 U.S.C. § 1350 and Exchange Act
      Rule 13a-14(b).




1
            Filed
      herein.






30