CVS Caremark Corporation (CVS)

Liquidity and Capital Resources

We anticipate that cash flows from operations, supplemented by short-term commercial paper and long-term borrowings, will continue to fund the future growth of our business.

Net cash provided by operating activities increased to $771.3 million during the first quarter of 2009, compared to $740.8 million during the first quarter of 2008. The increase in net cash provided by operating activities during the first quarter of 2009 was primarily due to an increase in cash receipts from revenues due to

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the Longs Acquisition, which was offset by increased payments to employees and other suppliers and increased taxes paid during the quarter.

Net cash used in investing activities increased to $445.8 million during the first quarter of 2009, compared to $346.8 million during the first quarter of 2008. Gross capital expenditures totaled $466.4 million during the first quarter of 2009, compared to $400.3 million in the first quarter of 2008. The majority of the cash used for capital expenditures in both reporting periods supported the Retail Pharmacy Segment’s real estate development program.

During the first quarter of 2009, we opened 39 new retail pharmacy stores, closed 50 retail pharmacy stores, 5 specialty pharmacy stores and 1 mail order pharmacy. In addition, the Company relocated 53 retail pharmacy stores and 2 specialty pharmacy stores. For the remainder of 2009, we plan to open 150 – 200 new or relocated retail pharmacy stores.

Net cash used in financing activities was $680.5 million during the first quarter of 2009, compared to net cash used by financing activities of $632.4 million during the first quarter of 2008. Net cash used in financing activities during 2009 was primarily due to the repayment of $500 million of borrowings outstanding under our bridge credit facility used to finance the Longs Acquisition.

In January 2009, our Board of Directors authorized a 10.5% increase in our quarterly common stock dividend to $0.07625 per share on the Company’s common stock payable February 3, 2009 to holders of record on January 23, 2009. This increase equates to an annual dividend rate of $0.305 per share.

We had $1.4 billion of commercial paper outstanding at a weighted average interest rate of 3.75% as of March 31, 2009. In connection with our commercial paper program, we maintain a $675 million, five-year unsecured back-up credit facility, which expires on June 11, 2009, a $675 million, five-year unsecured back-up credit facility, which expires on June 2, 2010, a $1.4 billion, five-year unsecured back-up credit facility, which expires on May 12, 2011 and a $1.3 billion, five-year unsecured back-up credit facility, which expires on March 12, 2012. These committed credit facilities allow for borrowings at various rates that are dependent in part on our public debt rating. As of March 31, 2009, we had no outstanding borrowings against the credit facilities.

On March 10, 2009, we issued $1.0 billion of 6.60% unsecured senior notes due March 15, 2019 (the “2009 Notes”). The 2009 Notes pay interest semi-annually on March 15 and September 15 of each year and may be redeemed, in whole or in part, at any time prior to March 15, 2019, at the redemption price plus accrued interest. The net proceeds from the 2009 Notes were used to repay the bridge credit facility, a portion of our outstanding commercial paper borrowings and for general corporate purposes.

Our credit facilities, unsecured senior notes and Enhanced Capital Advantaged Preferred Securities contain customary restrictive financial and operating covenants. These covenants do not include a requirement for the acceleration of our debt maturities in the event of a downgrade in our credit rating. We do not believe the restrictions contained in these covenants materially affect our financial or operating flexibility.

As of March 31, 2009, our long-term debt was rated “Baa2” by Moody’s and “BBB+” by Standard & Poor’s, and our commercial paper program was rated “P-2” by Moody’s and “A-2” by Standard & Poor’s, with our credit outlook being categorized as positive by Moody’s and stable by Standard & Poor’s. In assessing our credit strength, we believe that both Moody’s and Standard & Poor’s considered, among other things, our capital structure and financial policies as well as our consolidated balance sheet, the Longs Acquisition, the Caremark merger and other financial information. Although we currently believe our long-term debt ratings will remain investment grade, we cannot guarantee the future actions of Moody’s and/or Standard & Poor’s. Our debt ratings have a direct impact on our future borrowing costs, access to capital markets and new store operating lease costs.

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Liquidity and Capital Resources

In addition to funding our business through cash flows from operations, which totaled approximately $2.2 billion for the thirty-nine weeks ended September 27, 2008, we have an approximately $4.0 billion commercial paper program backed by an equal amount of borrowing capacity under existing credit facilities syndicated across a large number of banking institutions. Additionally, we successfully funded the Longs Acquisition using a combination of cash on hand, commercial paper and a $1.2 billion bridge loan facility. We anticipate that cash flows from operations, supplemented by short-term commercial paper and long-term borrowings, will continue to fund the future growth of our business.

Net cash provided by operating activities increased to $2,178.3 million during the thirty-nine weeks ended September 27, 2008, compared to $1,872.7 million during the comparable 2007 period. The increase in net cash provided by operations during the thirty-nine weeks ended September 27, 2008 primarily resulted from increased net earnings.

Net cash used in investing activities decreased to $1,273.1 million during the thirty-nine weeks ended September 27, 2008, compared to $3,051.7 million during the comparable 2007 period. The decrease in net cash used in investing activities was due to less acquisition activity during 2008 as 2007 included the Caremark Merger. Gross capital expenditures totaled $1,483.2 million for the thirty-nine weeks ended September 27, 2008, compared to $1,232.7 million in the comparable 2007 period. The majority of the cash used for capital expenditures in both reporting periods supported the Retail Pharmacy Segment’s real estate development program.

During the thirty-nine weeks ended September 27, 2008, we opened 136 new retail pharmacy stores and closed 34 retail pharmacy stores, 2 mail order pharmacies and 1 specialty mail order pharmacy. In addition, the Company relocated 122 retail pharmacy stores and 1 specialty pharmacy store. For the remainder of 2008, we plan to open 50 to 60 new or relocated retail pharmacy stores.

Net cash used in financing activities was $679.5 million during thirty-nine weeks ended September 27, 2008, compared to net cash provided by financing activities of $1,375.4 million during the comparable 2007 period. On September 5, 2008, in connection with the Longs Acquisition, we issued $350.0 million of floating rate senior notes due September 10, 2010. Net cash used in financing activities was related to the payment of commercial paper and the repurchase of common stock, offset by the issuance of the $350.0 million senior notes during the thirty-nine weeks ended September 27, 2008. Net cash provided by financing activities during the thirty-nine weeks ended September 29, 2007, was primarily due to increased long-term borrowings to fund the Caremark Merger offset, in part, by the repayment of short-term borrowings and the repurchase of common shares through the tender offer and accelerated share repurchase program. In July 2008, our Board of Directors authorized a 15% increase in our quarterly common stock dividend to $0.069 per share on the Company’s common stock payable August 1, 2008 to holders of record on July 21, 2008. This increase equates to an annual dividend rate of $0.276 per share.

We had $982.0 million of commercial paper outstanding at a weighted average interest rate of 2.7% as of September 27, 2008. In connection with our commercial paper program, we maintain a $675 million, five-year unsecured back-up credit facility, which expires on June 11, 2009, a $675 million, five-year unsecured back-up credit facility, which expires on June 2, 2010, a $1.4 billion, five-year unsecured back-up credit facility, which expires on May 12, 2011 and a $1.3 billion, five-year unsecured back-up credit facility, which expires on March 12, 2012. On September 12, 2008, we entered into a $1.2 billion backup credit facility, which will act as bridge facility to finance the Longs Acquisition. The credit facilities allow for borrowings at various rates that are dependent in part on our public debt rating. As of September 27, 2008, we had no outstanding borrowings against the credit facilities.

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On May 9, 2007, our Board of Directors authorized a share repurchase program for up to $5.0 billion of our outstanding common stock. The share repurchase program was completed during 2007 through a $2.5 billion fixed dollar accelerated share repurchase agreement (the “May ASR agreement”), under which final settlement occurred in October 2007 and resulted in the repurchase of 67.5 million shares of common stock; an open market repurchase program, which concluded in November 2007 and resulted in 5.3 million shares of common stock being repurchased for $211.9 million; and a $2.3 billion dollar fixed accelerated share repurchase agreement (the “November ASR agreement”), which resulted in an initial 51.6 million shares of common stock being purchased and placed into our treasury account as of December 29, 2007. The final settlement under the November ASR agreement occurred on March 28, 2008 and resulted in us receiving an additional 5.7 million shares of common stock, which were placed into our treasury account as of March 29, 2008.

On May 7, 2008, our Board of Directors authorized, effective May 21, 2008, a share repurchase program for up to $2.0 billion of outstanding common stock. The specific timing and amount of repurchases will vary based on market conditions and other factors. From May 21, 2008 through September 27, 2008, we repurchased 0.6 million shares of common stock for $23.0 million. The shares were placed into our treasury account upon delivery. On August 12, 2008, the Company announced that it had entered into an agreement to acquire Longs. In anticipation of completing the Longs Acquisition, the Company elected to delay its share repurchase program. The Company intends to resume and complete its share repurchase program in the second half of 2009. We will continue to evaluate alternatives for optimizing our capital structure on an ongoing basis.

Our credit facilities, unsecured senior notes and Enhanced Capital Advantaged Preferred Securities contain customary restrictive financial and operating covenants. These covenants do not include a requirement for the acceleration of our debt maturities in the event of a downgrade in our credit rating. We do not believe the restrictions contained in these covenants materially affect our financial or operating flexibility.

As of September 27, 2008, our long-term debt was rated “Baa2” by Moody’s and “BBB+” by Standard & Poor’s, and our commercial paper program was rated “P-2” by Moody’s and “A-2” by Standard & Poor’s. Upon completion of the Caremark Merger in March 2007, Standard & Poor’s raised the Company’s credit watch outlook from negative to stable. On May 15, 2008, Moody’s raised the Company’s credit watch from stable to positive. In assessing our credit strength, we believe that both Moody’s and Standard & Poor’s considered, among other things, our capital structure and financial policies as well as our consolidated balance sheet, the Caremark Merger and other financial information. Although we currently believe our long-term debt ratings will remain investment grade, we cannot guarantee the future actions of Moody’s and/or Standard & Poor’s. Our debt ratings have a direct impact on our future borrowing costs, access to capital markets and new store operating lease costs.

Liquidity and Capital Resources

We anticipate that cash flows from operations, supplemented by short-term commercial paper and long-term borrowings, will continue to fund the future growth of our business.

Net cash provided by operating activities decreased to $1,392.1 million during the twenty-six weeks ended June 28, 2008, compared to $1,427.2 million during the comparable 2007 period. The decrease in net cash provided by operations during the twenty-six weeks ended June 28, 2008 primarily resulted from increased interest paid as a result of higher average debt balances and increased taxes paid resulting from increased income.

Net cash used in investing activities decreased to $0.9 billion during the twenty-six weeks ended June 28, 2008, compared to $2.7 billion during the comparable 2007 period. The decrease in net cash used in investing activities was due to less acquisition activity during 2008 as 2007 included the Caremark Merger. Gross capital expenditures totaled $955.3 million for the twenty-six weeks ended June 28, 2008, compared to $778.0 million in the comparable 2007 period. The majority of the cash used for capital expenditures in both reporting periods supported the Retail Pharmacy Segment’s real estate development program.

During the twenty-six weeks ended June 28, 2008, we opened 90 new retail pharmacy stores and closed 27 retail pharmacy stores, 2 mail order pharmacies and 1 specialty mail order pharmacy. In addition, the Company relocated 92 retail pharmacy stores and 1 specialty pharmacy store. For the remainder of 2008, we plan to open 120 – 130 new or relocated retail pharmacy stores.

Net cash used in financing activities was $1.0 billion during the twenty-six weeks ended June 28, 2008, compared to net cash provided by financing activities of $1.6 billion during the comparable 2007 period. Net cash used in financing activities was related to the payment of commercial paper and the repurchase on common stock during the twenty-six weeks ended June 28, 2008. Net cash provided by financing activities during the twenty-six weeks ended June 30, 2007, was primarily due to increased long-term borrowings to fund the Caremark Merger offset, in part, by the repayment of short-term borrowings and the repurchase of common shares through the tender offer and accelerated share repurchase program. In July 2008, our Board of Directors authorized a 15% increase in our quarterly common stock dividend to $0.069 per share on the Company’s common stock payable August 1, 2008 to holders of record on July 21, 2008. This increase equates to an annual dividend rate of $0.276 per share.

We had $980.0 million of commercial paper outstanding at a weighted average interest rate of 2.8% as of June 28, 2008. In connection with our commercial paper program, we maintain a $675 million, five-year unsecured back-up credit facility, which expires on June 11, 2009, a $675 million, five-year unsecured back-up credit facility, which expires on June 2, 2010, a $1.4 billion, five-year unsecured back-up credit facility, which expires on May 12, 2011 and a $1.3 billion, five-year unsecured back-up credit facility, which expires on March 12, 2012. The credit facilities allow for borrowings at various rates that are dependent in part on our public debt rating. As of June 28, 2008, we had no outstanding borrowings against the credit facilities.

On May 9, 2007, our Board of Directors authorized a share repurchase program for up to $5.0 billion of our outstanding common stock. The share repurchase program was completed during 2007 through a $2.5 billion fixed dollar accelerated share repurchase agreement (the “May ASR agreement”), under which final settlement occurred in October 2007 and resulted in the repurchase of 67.5 million shares of common stock; an open market repurchase program, which concluded in November 2007 and resulted in 5.3 million shares of common stock being repurchased for $211.9 million; and a $2.3 billion dollar fixed accelerated share repurchase agreement (the “November ASR agreement”), which resulted in an initial 51.6 million shares of common stock being purchased and placed into our treasury account as of December 29, 2007. The final settlement under the November ASR agreement occurred on March 28, 2008 and resulted in us receiving an additional 5.7 million shares of common stock, which were placed into our treasury account as of March 29, 2008.

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On May 7, 2008, our Board of Directors authorized, effective May 21, 2008, a share repurchase program for up to $2.0 billion of outstanding common stock. The specific timing and amount of repurchases will vary based on market conditions and other factors. During the second quarter ended June 28, 2008, we repurchased 0.6 million shares of common stock for $23.0 million. The shares were placed into our treasury account upon delivery. The stock repurchase program may be modified, extended or terminated by our Board of Directors at any time. We will continue to evaluate alternatives for optimizing our capital structure on an ongoing basis.

Our credit facilities, unsecured senior notes and Enhanced Capital Advantaged Preferred Securities contain customary restrictive financial and operating covenants. These covenants do not include a requirement for the acceleration of our debt maturities in the event of a downgrade in our credit rating. We do not believe the restrictions contained in these covenants materially affect our financial or operating flexibility.

As of June 28, 2008, our long-term debt was rated “Baa2” by Moody’s and “BBB+” by Standard & Poor’s, and our commercial paper program was rated “P-2” by Moody’s and “A-2” by Standard & Poor’s. Upon completion of the Caremark Merger in March 2007, Standard & Poor’s raised the Company’s credit watch outlook from negative to stable. On May 15, 2008, Moody’s raised the Company’s credit watch from stable to positive. In assessing our credit strength, we believe that both Moody’s and Standard & Poor’s considered, among other things, our capital structure and financial policies as well as our consolidated balance sheet, the Caremark Merger and other financial information. Although we currently believe our long-term debt ratings will remain investment grade, we cannot guarantee the future actions of Moody’s and/or Standard & Poor’s. Our debt ratings have a direct impact on our future borrowing costs, access to capital markets and new store operating lease costs.

Liquidity and Capital Resources

We anticipate that cash flows from operations, supplemented by short-term commercial paper and long-term borrowings, will continue to fund the future growth of our business.

Net cash provided by operating activities increased to $740.8 million during the thirteen weeks ended March 29, 2008, compared to $707.7 million during the thirteen weeks ended March 31, 2007. The increase in net cash provided by operations during the thirteen weeks ended March 29, 2008, primarily resulted from increased cash receipts from revenues in part due to the Caremark Merger.

Net cash used in investing activities decreased to $346.8 million during the thirteen weeks ended March 29, 2008, compared to $2.3 billion during the thirteen weeks ended March 31, 2007. The decrease in net cash used in investing activities was due to less acquisition activity during 2008 as 2007 included the Caremark Merger. Gross capital expenditures totaled $400.3 million during the thirteen weeks ended March 29, 2008, compared to $311.9 million in the thirteen weeks ended March 31, 2007. The majority of the cash used for capital expenditures in both reporting periods supported the Retail Pharmacy Segment’s real estate development program.

During the thirteen weeks ended March 29, 2008, we opened 41 new retail pharmacy stores; closed 19 retail pharmacy stores, 2 mail order pharmacies and 1 specialty mail order pharmacy. In addition, the Company relocated 53 retail pharmacy stores and 1 specialty pharmacy store. For the remainder of 2008, we plan to open 200-225 new or relocated retail pharmacy stores.

Net cash used in financing activities was $632.4 million during the thirteen weeks ended March 29, 2008, compared to net cash provided by financing activities of $1.7 billion during the thirteen weeks ended March 31, 2007. Net cash used in financing activities was related to the payment of commercial paper during the thirteen weeks ended March 29, 2008. Net cash provided by financing activities during the thirteen weeks ended March 31, 2007 was primarily due to increased short-term borrowings to fund the Caremark Merger.

We had $1.3 billion of commercial paper outstanding at a weighted average interest rate of 3.1% as of March 29, 2008. In connection with our commercial paper program, we maintain a $675 million, five-year unsecured back-up credit facility, which expires on June 11, 2009, a $675 million, five-year unsecured back-up credit facility, which expires on June 2, 2010, a $1.4 billion, five-year unsecured back-up credit facility, which expires on May 12, 2011 and a $1.3 billion, five-year unsecured back-up credit facility, which expires on March 12, 2012. The credit facilities allow for borrowings at various rates that are dependent in part on our public debt rating. As of March 29, 2008, we had no outstanding borrowings against the credit facilities.

On May 9, 2007, our Board of Directors authorized a share repurchase program for up to $5.0 billion of our outstanding common stock. The share repurchase program was completed during 2007 through a $2.5 billion fixed dollar accelerated share repurchase agreement (the “May ASR agreement”), under which final settlement occurred in October 2007 and resulted in the repurchase of 67.5 million shares of common stock; an open market repurchase program, which concluded in November 2007 and resulted in 5.3 million shares of common stock being repurchased for $211.9 million; and a $2.3 billion dollar fixed accelerated share repurchase agreement (the “November ASR agreement”), which resulted in an initial 51.6 million shares of common stock being purchased and placed into our treasury account as of December 29, 2007. The final settlement under the November ASR agreement occurred on March 28, 2008 and resulted in us receiving an additional 5.7 million shares of common stock, which were placed into our treasury account as of March 29, 2008. We will continue to evaluate alternatives for optimizing our capital structure on an ongoing basis.

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Our credit facilities, unsecured senior notes and Enhanced Capital Advantaged Preferred Securities contain customary restrictive financial and operating covenants. These covenants do not include a requirement for the acceleration of our debt maturities in the event of a downgrade in our credit rating. We do not believe the restrictions contained in these covenants materially affect our financial or operating flexibility.

As of March 29, 2008, our long-term debt was rated “Baa2” by Moody’s and “BBB+” by Standard & Poor’s, and our commercial paper program was rated “P-2” by Moody’s and “A-2” by Standard & Poor’s. Upon completion of the Caremark Merger in March 2007, Standard & Poor’s raised the Company’s credit watch outlook from negative to stable. On May 21, 2007, Moody’s also raised the Company’s credit watch from negative to stable. In assessing our credit strength, we believe that both Moody’s and Standard & Poor’s considered, among other things, our capital structure and financial policies as well as our consolidated balance sheet, our acquisition of the Standalone Drug Business, the Caremark Merger and other financial information. Although we currently believe our long-term debt ratings will remain investment grade, we cannot guarantee the future actions of Moody’s and/or Standard & Poor’s. Our debt ratings have a direct impact on our future borrowing costs, access to capital markets and new store operating lease costs.

Liquidity and Capital Resources

We anticipate that cash flows from operations, supplemented by short-term commercial paper and long-term borrowings, will continue to fund the future growth of our business.

Net cash provided by operating activities increased to $1.9 billion during the thirty-nine weeks ended September 29, 2007, compared to $1.0 billion during the comparable 2006 period. The increase in net cash provided by operations during the thirty-nine weeks ended September 29, 2007 primarily resulted from increased cash receipts from revenues due, in part, to the Caremark Merger.

Net cash used in investing activities decreased to $3.1 billion during the thirty-nine weeks ended September 29, 2007, compared to $5.3 billion during the comparable 2006 period. The $3.1 billion of net cash used in investing activities during the thirty-nine weeks ended September 29, 2007 was primarily due to the Caremark Merger, which was primarily an equity transaction. The $5.3 billion used in investing activities during the thirty-nine weeks ended September 30, 2006 primarily related to the acquisition of the Standalone Drug Business. Gross capital expenditures totaled $1.2 billion for the thirty-nine weeks ended September 29, 2007, compared to $1.1 billion in the comparable 2006 period. The majority of the cash used for capital expenditures in both reporting periods supported the Retail Pharmacy Segment’s real estate development program.

During the thirty-nine weeks ended September 29, 2007, we opened 95 new stores, relocated 122 stores and closed 38 stores. In addition, as a result of the Caremark Merger we closed one mail order pharmacy. For the remainder of 2007, we plan to open 60 new or relocated retail pharmacy stores.

Net cash provided by financing activities was $1.4 billion during the thirty-nine weeks ended September 29, 2007, compared to net cash provided by financing activities of $4.2 billion during the comparable 2006 period. Net cash provided by financing activities was primarily due to increased long-term borrowings to fund the Caremark Merger offset, in part, by the repayment of short-term borrowings and the repurchase of common shares through the tender offer and accelerated share repurchase program.

We had $425.0 million of commercial paper outstanding at a weighted average interest rate of 5.4% as of September 29, 2007. In connection with our commercial paper program, we maintain a $675 million, five-year unsecured back-up credit facility, which expires on June 11, 2009, a $675 million, five-year unsecured back-up credit facility, which expires on June 2, 2010, a $1.4 billion, five-year unsecured back-up credit facility, which expires on May 12, 2011 and a $1.3 billion, five-year unsecured back-up credit facility, which expires on March 12, 2012. The credit facilities allow for borrowings at various rates that are dependent in part on our public debt rating. As of September 29, 2007, we had no freestanding derivatives in place.

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In connection with the Caremark Merger, on March 28, 2007, we commenced a tender offer to purchase up to 150 million shares, or about 10%, of our outstanding common stock at a price of $35.00 per share. The offer to purchase shares expired on April 24, 2007 and resulted in approximately 10.3 million shares being tendered. The shares were placed into our treasury account.

On May 9, 2007, our Board of Directors authorized a share repurchase program for up to $5.0 billion of our outstanding common stock. The repurchases have been or will be made through open market purchases or privately negotiated transactions subject to market conditions, applicable legal requirements and other factors.

On May 13, 2007, we entered into a $2.5 billion fixed dollar accelerated share repurchase (“ASR”) agreement with Lehman Brothers, Inc. (“Lehman”). The ASR agreement contained provisions that established the minimum and maximum number of shares to be repurchased during the term of the ASR agreement. Pursuant to the terms of the ASR agreement, on May 14, 2007, we paid $2.5 billion to Lehman in exchange for Lehman delivering 45.6 million shares of common stock to us. On June 7, 2007, upon establishment of the minimum number of shares to be repurchased, Lehman delivered an additional 16.1 million shares of common stock to us. As of September 29, 2007, the aggregate 61.7 million shares of common stock had been placed into our treasury account. The ASR program concluded on October 5, 2007 and resulted in us receiving an additional 5.8 million shares of common stock during the fourth quarter of 2007, which were placed into our treasury account upon delivery.

We will continue to evaluate alternatives for optimizing our capital structure on an ongoing basis.

On May 22, 2007, we issued $1.75 billion of Floating Rate Senior Notes due June 1, 2010, $1.75 billion of 5.75% unsecured senior notes due June 1, 2017, and $1.0 billion of 6.25% unsecured senior notes due June 1, 2027 (collectively the “Notes”). Also on May 22, 2007, we entered into an Underwriting Agreement with Lehman Brothers, Inc., Morgan Stanley & Co. Incorporated, Banc of America Securities LLC, BNY Capital Markets, Inc., and Wachovia Capital Markets, LLC, as representatives of the Underwriters pursuant to which we agreed to issue and sell $1.0 billion of Enhanced Capital Advantaged Preferred Securities (“ECAPS”) due June 1, 2062 to the underwriters. The ECAPS bear interest at 6.302% per year until June 1, 2012 at which time they will pay interest based on a floating rate. The Notes and the ECAPS pay interest semiannually and may be redeemed at any time, in whole or in part at a defined redemption price plus accrued interest. The net proceeds from the Notes and ECAPS were used to repay the bridge credit facility and commercial paper borrowings.

Our credit facilities, unsecured senior notes and ECAPS contain customary restrictive financial and operating covenants. These covenants do not include a requirement for the acceleration of our debt maturities in the event of a downgrade in our credit rating. We do not believe the restrictions contained in these covenants materially affect our financial or operating flexibility.

We believe our cash on hand and cash provided by operations, together with our ability to obtain additional short-term and long-term financing, will be sufficient to complete the integration of Caremark and to cover our working capital needs, capital expenditures, and debt service requirements for at least the next twelve months and the foreseeable future.

Our liquidity is based, in part, on maintaining investment-grade debt ratings. As of September 29, 2007, our long-term debt was rated “Baa2” by Moody’s and “BBB+” by Standard & Poor’s, and our commercial paper program was rated “P-2” by Moody’s and “A-2” by Standard & Poor’s. Upon completion of the Caremark Merger, Standard & Poor’s raised the Company’s credit watch outlook from negative to stable. On May 21, 2007, Moody’s also raised the Company’s credit watch from negative to stable. In assessing our credit strength, we believe that both Moody’s and Standard & Poor’s considered, among other things, our capital structure and financial policies as well as our consolidated balance sheet, our acquisition of the Standalone Drug Business, the Caremark Merger and other financial information. Although we currently believe our long-term debt ratings will remain investment grade, we cannot guarantee the future actions of Moody’s and/or Standard & Poor’s. Our debt ratings have a direct impact on our future borrowing costs, access to capital markets and new store operating lease costs.

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Liquidity and Capital Resources

We anticipate that cash flows from operations, supplemented by short-term commercial paper and long-term borrowings, will continue to fund the future growth of our business.

Net cash provided by operating activities increased to $1,427.2 million during the twenty-six weeks ended June 30, 2007, compared to $723.6 million during the comparable 2006 period. The increase in net cash provided by operations during the twenty-six weeks ended June 30, 2007 primarily resulted from increased cash receipts from revenues due, in part, to the Caremark Merger.

Net cash used in investing activities decreased to $2.7 billion during the twenty-six weeks ended June 30, 2007, compared to $4.6 billion during the comparable 2006 period. The $2.7 billion of net cash used in investing activities during the twenty-six weeks ended June 30, 2007 was primarily due to the Caremark Merger, which was primarily an equity transaction. The $4.6 billion used in investing activities during the twenty-six weeks ended June 30, 2006 primarily related to the acquisition of the Standalone Drug Business. Gross capital expenditures totaled $778.0 million for the twenty-six weeks ended June 30, 2007, compared to $662.8 million in the comparable 2006 period. The majority of the cash used for capital expenditures in both reporting periods supported the Retail Pharmacy Segment’s real estate development program.

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During twenty-six weeks ended June 30, 2007, we opened 58 new stores, relocated 81 stores and closed 30 stores. In addition, we added 22 specialty pharmacies as a result of the Caremark Merger. For the remainder of 2007, we plan to open 135-145 new or relocated retail pharmacy stores.

Net cash provided by financing activities was $1.6 billion during twenty-six weeks ended June 30, 2007, compared to net cash provided by financing activities of $3.9 billion during the comparable 2006 period. Net cash provided by financing activities was primarily due to increased long-term borrowings to fund the Caremark Merger offset, in part, by the repayment of short-term borrowings and the repurchase of common shares through the tender offer and accelerated share repurchase program.

We had $660.4 million of commercial paper outstanding at a weighted average interest rate of 5.4% as of June 30, 2007. In connection with our commercial paper program, we maintain a $675 million, five-year unsecured back-up credit facility, which expires on June 11, 2009, a $675 million five-year unsecured back-up credit facility, which expires on June 2, 2010, a $1.4 billion, five-year unsecured back-up credit facility, which expires on May 12, 2011 and a $1.3 billion, five-year unsecured back-up credit facility, which expires on March 12, 2012. The credit facilities allow for borrowings at various rates that are dependent in part on our public debt rating. As of June 30, 2007, we had no freestanding derivatives in place.

In connection with the Caremark Merger, on March 28, 2007, we commenced a tender offer to purchase up to 150 million shares, or about 10%, of our outstanding common stock at a price of $35.00 per share. The offer to purchase shares expired on April 24, 2007 and resulted in approximately 10.3 million shares being tendered. The shares were placed into our treasury account.

On May 9, 2007 our Board of Directors authorized a share repurchase program for up to $5.0 billion of our outstanding common stock.

On May 13, 2007, we entered into a $2.5 billion fixed dollar accelerated share repurchase (“ASR”) agreement with Lehman Brothers, Inc. (“Lehman”). The ASR agreement contains provisions that establish the minimum and maximum number of shares that will be repurchased during the term of the ASR agreement. Pursuant to the terms of the ASR agreement, on May 14, 2007, we paid $2.5 billion to Lehman in exchange for Lehman delivering 45.6 million shares of common stock to us. On June 7, 2007, upon establishment of the minimum number of shares to be repurchased, Lehman delivered an additional 16.1 million shares of common stock to us. The aggregate 61.7 million shares of common stock delivered to us by Lehman, were placed into our treasury account. We may receive up to 6.8 million additional shares of common stock, depending on the market price of the common stock over the term of the ASR program, which is currently expected to conclude during the third quarter of 2007.

We will continue to evaluate alternatives for optimizing our capital structure on an ongoing basis.

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On May 22, 2007, we issued $1.75 billion of Floating Rate Senior Notes due June 1, 2010, $1.75 billion of 5.75% unsecured senior notes due June 1, 2017, and $1.0 billion of 6.250% unsecured senior notes due June 1, 2027 (collectively the “Notes”). Also on May 22, 2007, we entered into an Underwriting Agreement with Lehman Brothers, Inc., Morgan Stanley & Co. Incorporated, Banc of America Securities LLC, BNY Capital Markets, Inc., and Wachovia Capital Markets, LLC, as representatives of the Underwriters pursuant to which we agreed to issue and sell $1.0 billion of Enhanced Capital Advantaged Preferred Securities (“ECAPS”) due June 1, 2062 to the underwriters. The ECAPS bear interest at 6.302% per year until June 1, 2012 at which time they will pay interest based on a floating rate. The Notes and the ECAPS pay interest semiannually and may be redeemed at any time, in whole or in part at a defined redemption price plus accrued interest. The net proceeds from the Notes and ECAPS were used to repay the bridge credit facility and commercial paper borrowings.

Our credit facilities, unsecured senior notes and ECAPS contain customary restrictive financial and operating covenants. These covenants do not include a requirement for the acceleration of our debt maturities in the event of a downgrade in our credit rating. We do not believe the restrictions contained in these covenants materially affect our financial or operating flexibility.

We believe our cash on hand and cash provided by operations, together with our ability to obtain additional short-term and long-term financing, will be sufficient to complete the integration of Caremark and to cover our working capital needs, capital expenditures, and debt service requirements for at least the next twelve months and the foreseeable future.

Our liquidity is based, in part, on maintaining investment-grade debt ratings. As of June 30, 2007, our long-term debt was rated “Baa2” by Moody’s and “BBB+” by Standard & Poor’s, and our commercial paper program was rated “P-2” by Moody’s and “A-2” by Standard & Poor’s. Upon completion of the Caremark Merger, Standard & Poor’s raised the Company’s credit watch outlook from negative to stable. On May 21, 2007, Moody’s also raised the Company’s credit watch from negative to stable. In assessing our credit strength, we believe that both Moody’s and Standard & Poor’s considered, among other things, our capital structure and financial policies as well as our consolidated balance sheet, our acquisition of the Standalone Drug Business, the Caremark Merger and other financial information. Although we currently believe our long-term debt ratings will remain investment grade, we cannot guarantee the future actions of Moody’s and/or Standard & Poor’s. Our debt ratings have a direct impact on our future borrowing costs, access to capital markets and new store operating lease costs.

Liquidity and Capital Resources

We anticipate that cash flows from operations, supplemented by short-term commercial paper and long-term borrowings, will continue to fund the future growth of our business.

Net cash provided by operating activities increased to $707.7 million during the first quarter of 2007, compared to $171.7 million during the first quarter of 2006. The increase in net cash provided by operations during the first quarter of 2007 primarily resulted from increased cash receipts from revenues in part due to the Caremark Merger.

Net cash used in investing activities increased to $2.3 billion during the first quarter of 2007, compared to $294.3 million during the first quarter of 2006. The increase in net cash used in investing activities was primarily due to the Caremark Merger. Gross capital expenditures totaled $311.9 million in the first quarter of 2007, compared to $283.7 million in the first quarter of 2006. The majority of the cash used for capital expenditures in both quarters supported our real estate program.

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As of March 31, 2007, we operated 6,208 retail and specialty pharmacy stores and 22 specialty pharmacies in 44 states and the District of Columbia. During the first quarter of 2007, we opened 21 new stores, relocated 51 stores and closed 15 stores. In addition, we added 22 specialty pharmacies as a result of the Caremark Merger. For the remainder of 2007, we plan to open 175-200 new or relocated retail pharmacy stores.

Net cash provided by financing activities was $1.7 billion during the first quarter of 2007, compared to net cash used in financing activities of $3.7 million during the first quarter of 2006. The increase in net cash provided by financing activities was primarily due to increased short-term borrowings to fund the Caremark Merger. In March 2007 our Board of Directors authorized a 23% increase in our quarterly common stock dividend to $0.06 per share on the Company’s common stock, payable May 4, 2007 to holders of record on April 24, 2007. This increase equates to an annual dividend rate of $0.24 per share.

We had $3.1 billion of commercial paper outstanding at a weighted average interest rate of 5.4% as of March 31, 2007. In connection with our commercial paper program, we maintain a $675 million, five-year unsecured back-up credit facility, which expires on June 11, 2009, a $675 million five-year unsecured back-up credit facility, which expires on June 2, 2010 and a $1.4 billion, five-year unsecured back-up credit facility, which expires on May 12, 2011. During the first quarter of 2007, we announced a tender offer to purchase up to 150 million shares, or about 10%, of our outstanding common stock at a price of $35.00 per share. The offer to purchase shares, which was not conditioned upon any minimum number of shares being tendered, commenced on March 28, 2007 and expired on April 24, 2007. As a result, approximately 10.3 million shares were tendered and will be placed into the Company’s treasury account during the second quarter of 2007. In preparation for the financing of the special cash dividend payable to Caremark shareholders and the share repurchase, during the first quarter, we entered into a $1.3 billion, five-year unsecured back-up credit facility, which expires on March 12, 2012, a $500 million 364 day unsecured back-up credit facility, which expires on March 10, 2008 and a $5.8 billion backup credit facility, which will act as a bridge facility terminating upon the placement of longer-term financing. The credit facilities allow for borrowings at various rates that are dependent in part on our public debt rating. As of March 31, 2007, $500 million had been borrowed against the bridge facility at an interest rate of 5.7%, with a maturity date of April 27, 2008. As of March 31, 2007, the Company had no freestanding derivatives in place.

Our credit facilities and unsecured senior notes contain customary restrictive financial and operating covenants. These covenants do not include a requirement for the acceleration of our debt maturities in the event of a downgrade in our credit rating. We do not believe that the restrictions contained in these covenants materially affect our financial or operating flexibility.

We believe that our cash on hand and cash provided by operations, together with our ability to obtain additional short-term and long-term financing, will be sufficient to complete the integration of the Caremark Merger, the integration of the Standalone Drug Business and to cover our working capital needs, capital expenditures, and debt service requirements. During the second quarter of 2007, the Company expects to re-finance a portion of the short-term borrowings that were issued to finance the special cash dividend and the tender offer with longer-term financing.

Our liquidity is based, in part, on maintaining investment-grade debt ratings. As of March 31, 2007, our long-term debt was rated “Baa2” by Moody’s and “BBB+” by Standard & Poor’s, and our commercial paper program was rated “P-2” by Moody’s and “A-2” by Standard & Poor’s. Upon completion of the merger with Caremark, Standard & Poor’s raised the Company’s credit watch outlook from negative to stable, while Moody’s maintained its ratings with a negative outlook. In assessing our credit strength, we believe that both Moody’s and Standard & Poor’s considered, among other things, our capital structure and financial policies as well as our consolidated balance sheet, our acquisition of the Standalone Drug Business, the Caremark Merger and other financial information. Although we currently believe our long-term debt ratings will remain investment grade, we cannot guarantee the future actions of Moody’s and Standard & Poor’s. Our debt ratings have a direct impact on our future borrowing costs, access to capital markets and new store operating lease costs.

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Liquidity  & Capital Resources

We anticipate that our cash flow from operations, supplemented by commercial paper and long-term borrowings, will continue to fund the future growth of our business.

Liquidity and Capital Resources

We anticipate that cash flows from operations, supplemented by commercial paper and long-term borrowings, will continue to fund the growth of our business.

Net cash provided by operating activities increased to $993.2 million during the first nine months of 2006, compared to $851.5 million during the first nine months of 2005. The increase in net cash provided by operations during the first nine months of 2006 primarily resulted from an increase in cash receipts from revenues.

Net cash used in investing activities increased to $5.3 billion during the first nine months of 2006. This compares to $908.6 million used during the first nine months of 2005. The increase in net cash used in investing activities was primarily due to the acquisition of the Standalone Drug Business.

During the first nine months of 2006, we acquired 701 stores, opened 93 new stores, relocated 95 stores and closed 108 stores. For the remainder of 2006, we plan to open approximately 75 new or relocated stores. As of September 30, 2006, we operated 6,157 retail and specialty pharmacy stores in 43 states and the District of Columbia.

Net cash provided by financing activities increased to $4.2 billion during the first nine months of 2006, compared to $33.0 million during the first nine months of 2005. The increase in net cash provided by financing activities was primarily due to the financing of the acquisition of the Standalone Drug Business, including issuance of the Notes (defined below), during the third quarter of 2006. This increase was offset partially by the repayment of the $300 million, 5.625% unsecured senior notes, which matured during the first quarter of 2006.

We believe that our cash on hand and cash provided by operations, together with our ability to obtain additional short-term and long-term financing, will be sufficient to cover our working capital needs, capital expenditures, debt service requirements and dividend requirements for at least the next twelve months and the foreseeable future.

As of September 30, 2006, we had $2.2 billion of commercial paper outstanding at a weighted average interest rate of 5.26% and $1 billion in outstanding borrowings against the bridge loan facility at a weighted average interest rate of 5.69%. In connection with our commercial paper program, we maintain a $675 million, five-year unsecured back-up credit facility, which expires on June 11, 2009, and a $675 million five-year unsecured backup credit facility, which expires on June 2, 2010. In preparation for the consummation of the acquisition of the Standalone Drug Business, we entered into a $1.4 billion, five-year unsecured back-up credit facility, which expires on May 12, 2011. We also entered into a bridge facility with an aggregate loan value of up to $1.0 billion, which will terminate on December 31, 2006. The credit facilities allow for borrowings at various rates depending on our public debt rating.

On August 15, 2006, we issued $800 million of 5.75% unsecured senior notes due August 15, 2011 and $700 million of 6.125% unsecured senior notes due August 15, 2016 (collectively the “Notes”). The Notes pay interest semi-annually and may be redeemed at any time, in whole or in part at a defined redemption price plus accrued interest. Net proceeds from the Notes were used to repay a portion of the outstanding commercial paper issued to finance the Standalone Drug Business. To manage a portion of the risk associated with potential changes in market interest rates, during the second quarter of 2006 we entered into forward starting pay fixed rate swaps (the “Swaps”), with a notional amount of $750 million. The Swaps settled in conjunction with the placement of the long-term financing. As of September 30, 2006, we had no freestanding derivatives in place.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our credit facilities and unsecured senior notes contain customary restrictive financial and operating covenants. These covenants do not include a requirement for the acceleration of our debt maturities in the event of a downgrade in our credit rating. We do not believe that the restrictions contained in these covenants materially affect our financial or operating flexibility.

Our liquidity is based, in part, on maintaining investment-grade debt ratings. As of September 30, 2006, our long-term debt was rated “Baa2” by Moody’s and “BBB+” by Standard & Poor’s, and our commercial paper program was rated “P-2” by Moody’s and “A-2” by Standard & Poor’s. On November 2, 2006, Moody’s and Standard & Poor’s affirmed our commercial paper program ratings and placed our long-term ratings on review for possible upgrade. In assessing our credit strength, we believe that both Moody’s and Standard & Poor’s considered, among other things, our capital structure and financial policies as well as our consolidated balance sheet, our acquisition of the Standalone Drug Business, the entry into a definitive agreement with Caremark and other financial information. Although we currently believe our long-term debt ratings will remain investment grade, we cannot guarantee the future actions of Moody’s and Standard & Poor’s. Our debt ratings have a direct impact on our future borrowing costs, access to capital markets and new store operating lease costs.

Liquidity and Capital Resources

We anticipate that cash flows from operations, supplemented by commercial paper and long-term borrowings, will continue to fund the growth of our business.

Net cash provided by operating activities increased to $723.6 million during the first six months of 2006, compared to $601.1 million during the first six months of 2005. The increase in net cash provided by operations during the first six months of 2006 primarily resulted from an increase in cash receipts from revenues.

Net cash used in investing activities increased to $4.6 billion during the first six months of 2006. This compares to $652.0 million used during the first six months of 2005. The increase in net cash used in investing activities was primarily due to the acquisition of the Standalone Drug Business.

During the first six months of 2006, we acquired 701 stores, opened 61 new stores, relocated 70 stores and closed 28 stores. For the remainder of 2006, we plan to open 120-145 new or relocated stores. As of July 1, 2006, we operated 6,205 retail and specialty pharmacy stores in 44 states and the District of Columbia.

Net cash provided by financing activities increased to $3.9 billion during the first six months of 2006, compared to $72.7 million during the first six months of 2005. The increase in net cash provided by financing activities was primarily due to an increase in short-term borrowings related to the financing of the acquisition of the Standalone Drug Business. This increase was offset partially by the repayment of the $300 million, 5.625% unsecured senior notes, which matured during the first quarter of 2006.

As of July 1, 2006, we had $3.5 billion of commercial paper outstanding at a weighted average interest rate of 5.3% and $1 billion in outstanding borrowings against the bridge facility at a weighted average interest rate of 5.46%. In connection with our commercial paper program, we maintain a $675 million, five-year unsecured back-up credit facility, which expires on June 11, 2009, and a $675 million five-year unsecured backup credit facility, which expires on June 2, 2010. In preparation for the consummation of the acquisition of the Standalone Drug Business, we entered into a $1.5 billion 364-day unsecured back-up credit facility, which will terminate upon the placement of longer-term financing and a $1.4 billion, five-year unsecured back-up credit facility, which expires on May 12, 2011. We also entered into a bridge facility with an aggregate loan value of up to $1.0 billion, which will terminate on December 31, 2006. The credit facilities allow for borrowings at various rates depending on our public debt rating.

Our credit facilities and unsecured senior notes contain customary restrictive financial and operating covenants. These covenants do not include a requirement for the acceleration of our debt maturities in the event of a downgrade in our credit rating. We do not believe that the restrictions contained in these covenants materially affect our financial or operating flexibility.

We believe that our cash on hand and cash provided by operations, together with our ability to obtain additional short-term and long-term financing, will be sufficient to cover our working capital needs, capital expenditures and debt service requirements for at least the next twelve months and the foreseeable future. During the third quarter of 2006, the Company expects to refinance a portion of the short-term borrowings issued to finance the acquisition of the Standalone Drug Business, with longer-term financing. To manage a portion of the risk associated with changes in market interest rates, during the second quarter of 2006, the Company entered into forward starting pay fixed rate swaps, (the “Swaps”) with a notional amount of $750 million. The Company expects to settle these Swaps during the third quarter of 2006 in conjunction with the placement of the longer-term financing. There were no hedge instruments outstanding as of December 31, 2005.

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Our liquidity is based, in part, on maintaining investment-grade debt ratings. As of July 1, 2006, our long-term debt was rated “Baa2” by Moody’s and “BBB+” by Standard & Poor’s, and our commercial paper program was rated “P-2” by Moody’s and “A-2” by Standard & Poor’s. Both Moody’s and Standard & Poor’s have placed our ratings on a stable outlook. In assessing our credit strength, we believe that both Moody’s and Standard & Poor’s considered, among other things, our capital structure and financial policies as well as our consolidated balance sheet, our acquisition of the Standalone Drug Business, and other financial information. Although we currently believe our long-term debt ratings will remain investment grade, we cannot guarantee the future actions of Moody’s and Standard & Poor’s. Our debt ratings have a direct impact on our future borrowing costs, access to capital markets and new store operating lease costs.

Liquidity and Capital Resources

We anticipate that cash flows from operations, supplemented by short-term commercial paper and long-term borrowings, will continue to fund the future growth of our business.

Net cash provided by operating activities increased to $171.7 million during the first quarter of 2006, compared to $42.8 million during the first quarter of 2005. The increase in net cash provided by operations during the first quarter of 2006 primarily resulted from increased cash receipts from sales.

Net cash used by investing activities decreased to $294.3 million during the first quarter of 2006, compared to $315.9 million during the first quarter of 2005. The decrease in net cash provided by investing activities was primarily due to a decrease in capital expenditures as the first quarter of fiscal 2005 included capital expenditures to remodel stores acquired during 2004. Gross capital expenditures totaled $283.7 million in the first quarter of 2006, compared to $313.4 million in the first quarter of 2005. The majority of cash used in investing activities in both quarters supported our real estate program.

As of April 1, 2006, we operated 5,483 retail and specialty pharmacy stores in 37 states and the District of Columbia. During the first quarter of 2006, we opened 35 new stores, relocated 40 stores and closed 23 stores.

Net cash used in financing activities was $3.7 million during the first quarter of 2006, compared to net cash provided by financing activities of $204.6 million during the first quarter of 2005. The increase in net cash used by financing activities was primarily due to the repayment of the $300 million, 5.625% unsecured senior notes, which matured during the first quarter of 2006. This increase was partially offset by an increase in short-term borrowings from year-end.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

We had $512.0 million of commercial paper outstanding at a weighted average interest rate of 4.6% as of April 1, 2006. In connection with our commercial paper program, we maintain a $650 million, five-year unsecured back-up credit facility, which expires on May 21, 2006, and a $675 million five-year unsecured backup credit facility, which expires on June 2, 2010. In addition, we maintain a $675 million five-year unsecured backup credit facility, which expires on June 11, 2009. In preparation for the consummation of the Albertson’s transaction, during the second quarter, we intend to replace the $650 million credit facility expiring in May 2006 with up to a $1.4 billion five-year unsecured backup credit facility. In addition we intend to enter into a $1.5 billion 364-day unsecured back-up credit facility, which will act as a bridge facility, terminating upon the placement of longer-term financing. Further, we plan to enter into one or more other credit facilities with an aggregate value of up to $1.0 billion, which will terminate upon the execution of a sale-leaseback transaction of a substantial portion of the owned real estate interests in the drugstores acquired. The credit facilities allow for borrowings at various rates that are dependent in part on our public debt rating. As of April 1, 2006, we had no outstanding borrowings against the credit facilities, and no freestanding derivatives in place.

Our credit facilities and unsecured senior notes contain customary restrictive financial and operating covenants. These covenants do not include a requirement for the acceleration of our debt maturities in the event of a downgrade in our credit rating. We do not believe that the restrictions contained in these covenants materially affect our financial or operating flexibility.

We believe that our cash on hand and cash provided by operations, together with our ability to obtain additional short-term and long-term financing, will be sufficient to complete the Albertson’s transaction and to cover our working capital needs, capital expenditures, and debt service requirements. During the third quarter of 2006, the Company expects to re-finance a portion of the short-term borrowings that will be issued to finance the Albertson’s transaction, with longer-term financing. To manage a portion of the risk associated with changes in market interest rates, subsequent to the end of the first quarter of 2006, the Company entered into forward starting pay fixed rate swaps, (the “Swaps”) with a notional amount of $570 million. The Swaps are expected to settle during the third quarter of 2006 in conjunction with the placement of the longer-term financing.

Our liquidity is based, in part, on maintaining investment-grade debt ratings. As of April 1, 2006, our long-term debt was rated “A3” by Moody’s and “A-” by Standard & Poor’s, and our commercial paper program was rated “P-2” by Moody’s and “A-2” by Standard & Poor’s. On April 10, 2006, Moody’s lowered our senior unsecured ratings to Baa1, while keeping our remaining ratings under review for possible downgrade. In addition, on April 25, 2006, Standard & Poor’s lowered our corporate credit and senior unsecured debt ratings to “BBB+” at the same time affirming our commercial paper rating, while placing both on a stable outlook. In assessing our credit strength, we believe that both Moody’s and Standard & Poor’s considered, among other things, our capital structure and financial policies as well as our consolidated balance sheet, our entry into an agreement with Albertson’s in January to acquire approximately 700 standalone Sav-On and Osco drugstores and related assets, and other financial information. Our debt ratings have a direct impact on our future borrowing costs, access to capital markets and new store operating lease costs. Nevertheless, our long-term debt ratings are expected to remain investment grade.

Liquidity & Capital Resources

We anticipate that our cash flow from operations, supplemented by short-term commercial paper and long-term borrowings, will continue to fund the future growth of our business.

Net cash provided by operating activities increased to $1,612.1 million in 2005. This compares to $914.2 million in 2004 and $968.9 million in 2003. The increase in net cash provided by operations during 2005 primarily resulted from increased revenues and improved inventory management. Fiscal 2004 reflected increased inventory payments as a result of higher inventory levels, and higher operating costs associated with the Acquired Businesses and investments, including the cost of extending store hours. The elevated inventory levels during 2004 were primarily the result of inventory purchased to reset the acquired stores with the CVS/pharmacy product mix.

Net cash used in investing activities decreased to $911.6 million in 2005. This compares to $3,163.3 million in 2004 and $753.6 million in 2003. The decrease in net cash used in investing activities during 2005 related to a decrease in acquisitions, as 2004 included the acquisition of the Acquired Businesses. Gross capital expenditures totaled $1,495.4 million during 2005, compared to $1,347.7 million in 2004 and $1,121.7 million in 2003. During 2005, approximately 56% of our total capital expenditures were for new store construction, 29% for store expansion and improvements and 15% for technology and other corporate initiatives, including a new distribution center in Florida, which is expected to be completed during 2006.

During 2006, we currently plan to invest over $1.4 billion in gross capital expenditures, which will include spending for approximately 250-275 new or relocated stores.