CVS Caremark Corporation (CVS)

Item 1A. Risk Factors

Our business is subject to various industry, economic and regulatory risks and uncertainties. These risks include those described below and may include additional risks and uncertainties not presently known to us or that we currently deem to be immaterial.

Business Risks ~ We operate in a highly competitive environment. We compete with other drugstore chains, supermarkets, discount retailers, membership clubs and Internet companies. In addition, the growth of mail order pharmacies and changes to pharmacy benefit plans requiring maintenance medications to be filled exclusively through mail order pharmacies continues to challenge our business.

Further, the continued efforts of health maintenance organizations, managed care organizations, pharmacy benefit management companies, government entities, and other third party payors to reduce prescription drug costs and pharmacy reimbursement rates may impact our profitability. In that regard, on January 1, 2006, the new Medicare Part D prescription drug program went into effect. It is anticipated that the program will increase utilization and decrease pharmacy gross margin rates as higher margin business (such as cash and state Medicaid customers) migrate to the new Medicare Part D coverage. The potential impact on pharmacy sales and gross margin rates is still undetermined due to the fact the program is in its early stages.

Further, on February 8, 2006, the President signed into law the Deficit Reduction Act of 2005 (the “Act”). The Act seeks to reduce federal spending by $3.6 billion over a five-year period by altering the Medicaid reimbursement formula for multi-source (i.e., generic) drugs. According to the Congressional Budget Office, retail pharmacies are expected to negotiate with individual states for higher dispensing fees to mitigate the adverse effect of these changes. These changes take effect January 1, 2007 and are expected to result in reduced Medicaid reimbursement rates for retail pharmacies. In addition, the President’s proposed budget for fiscal year 2007 contains further reductions in the Medicaid reimbursement formula for multi-source drugs. The extent of these reductions cannot be determined at this time.

Economic Risks ~ Our business is affected by the economy in general and in the markets we serve, including changes in consumer purchasing power and/or spending patterns. Our ability to attract, hire and retain suitable pharmacists and management personnel as well as establishing effective advertising, marketing and promotional programs is directly impacted by the economic environment. Further, interest rate fluctuations and changes in capital market conditions may affect our ability to obtain necessary financing on favorable terms.

Regulatory Risks ~ We are subject to litigation risks as well as changes in laws and regulations, including changes in accounting standards and taxation requirements, such as tax rate changes, new tax laws and revised tax law interpretations.

The foregoing is not a comprehensive listing and there can be no assurance that we have correctly identified and appropriately assessed all factors affecting the business. As such, we refer you to the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which includes our “Cautionary Statement Concerning

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Forward-Looking Statements” at the end of such section, on pages 18 through 23 of our Annual Report to Stockholders for the fiscal year ended December 31, 2005, which is incorporated by reference herein.