MedcoHealth Solutions (MHS)

Restricted Stock Units

Restricted stock units generally vest 100% after three years of service and are subject to limitations on transfer prior to vesting. The conversion of restricted stock units may be deferred in accordance with our deferred compensation policies at the election of the executive.

Restricted Stock and Restricted Stock Units

Restricted stock and restricted stock units granted to Directors and employees have vesting periods that range from one to three years. All restricted stock and restricted stock unit awards are settled in shares of Medco common stock. Upon issuance of restricted stock or restricted stock units, unearned compensation is recognized within shareholders’ equity for the cost of the stock or units. The unearned compensation is recognized as compensation expense ratably over the vesting period of the award.

The following table summarizes restricted stock and restricted stock unit activity for the years ended 2005, 2004 and 2003:

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Employee Stock Purchase Plan. The Company’s employees currently participate in the 2003 ESPP, whereby certain employees of Medco are permitted to purchase shares of Medco stock at a discount to market price. Under the terms of the 2003 ESPP, 750,000 shares of the Company’s common stock are available for issuance, and eligible employees may have up to 10% of gross pay deducted from their accumulated payroll to purchase shares of Medco common stock at 85% of the fair market value of a share of Medco stock on the last day of trading each calendar quarter. Purchases of Medco stock under the 2003 ESPP were 157,717 shares at a weighted average price of $52.69 in 2005, 237,750 shares at a weighted average price of $34.80 in 2004, and 49,800 shares at a weighted average price of $35.32 for the first three-month purchase period from October 1, 2003 to December 26, 2003. The 2003 ESPP expires the earlier of 2010 or the date as of which the maximum number of shares has been purchased.

From December 29, 2001, through June 27, 2003, the Company’s employees participated in the 2001 ESPP, whereby certain employees of Medco were permitted to purchase shares of Merck stock at a discount to market price. The terms of the 2001 ESPP were substantially the same as the 2003 ESPP. Purchases of Merck stock under the 2001 ESPP were 104,300 shares in 2003 and are not dilutive to the Company’s EPS. The Merck shares purchased under the 2001 ESPP in 2003 were at a weighted average price of $57.87. The plan terminated on June 27, 2003, to allow for the implementation of the new 2003 ESPP.