CVS Caremark Corporation (CVS)

As you review our performance in this area, we believe you should consider the following important information:

·                  Total operating expenses increased $60.7 million during 2006 as a result of the adoption of the Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment.” In addition, total operating expenses increased due to costs incurred to integrate the Standalone Drug Business.

·                  Total operating expenses as a percentage of net revenues continued to be impacted by an increase in the sale of generic drugs, which typically have a lower selling price than their brand named equivalents.

·                  During the fourth quarter of 2006, we adopted Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in current Year Financial Statements” (“SAB 108”). In connection with adopting SAB 108, we recorded adjustments, which collectively reduced total operating expenses by $40.2 million (the “SAB 108 Adjustments”). Since the effects of the SAB 108 Adjustments were not material to 2006 or any previously reported fiscal year, they were recorded in the fourth quarter of 2006. For internal comparisons, management finds it useful to assess year-to-year performance excluding the SAB 108 Adjustments, which results in comparable 2006 total operating expenses as a percentage of net revenues of 21.8%.

·                  During the fourth quarter of 2004, we conformed our accounting for operating leases and leasehold improvements to the views expressed by the Office of the Chief Accountant of the Securities and Exchange Commission to the American Institute of Certified Public Accountants on February 7, 2005. As a result, we recorded a $65.9 million non-cash pre-tax adjustment to total operating expenses, which represents the cumulative effect of the adjustment for a period of approximately 20 years (the “Lease Adjustment”). Since the Lease Adjustment was not material to 2004 or any previously reported fiscal year, the cumulative effect was recorded in the fourth quarter of 2004. For internal comparisons, management finds it useful to assess year-to-year performance excluding the Lease Adjustment, which results in comparable 2004 total operating expenses as a percentage of net revenues of 21.3%.

·                  Total operating expenses as a percentage of net revenues also increased during 2004 due to integration and incremental costs as a result of the acquisition of the Acquired Businesses. In addition, the acquired stores had lower average revenues per store during 2004, increasing operating expenses as a percentage of net sales.